Lagniappe

 

 

Andrew Neff : Sakhalin-1 Under the Microscope

 

 

When officials from Rosprirodnadzor, the Russian environmental watchdog agency, last year launched a barrage of criticism about violations of the country's environmental regulations by foreign consortia operating oil and gas projects on Sakhalin Island in Russia's Far East, the main target was the Sakhalin-2 project, at the time led by Dutch/U.K. supermajor Shell. The subsequent pressure campaign against Sakhalin-2 eventually prompted Shell and its Japanese partners to concede by selling a 50% stake in the project to Gazprom in December (see "Related Articles").

TNK-BP, which holds the rights to the 1.9-Tcm Kovykta gas field in eastern Siberia via its controlling stake in RUSIA Petroleum, and Total, the operator of the Kharyaga production-sharing agreement (PSA) in northern Siberia, are also facing heavy pressure from the authorities. BP is still hoping to salvage TNK-BP's hold on Kovykta—and potentially expand its presence in Russia—as part of a wider deal with Gazprom and/or Rosneft, while Total was fined late last week by Rosprirodnadzor after the latest in a series of checks showed breaches of environmental legislation, as well as insufficient oil production. Oleg Mitvol, deputy head of Rosprirodnadzor, said that he would not recommend revoking Total's Kharyaga licence after the recently completed inspection, although he suggested to Itar-TASS that this was only a matter of time if the situation did not improve.

Meanwhile, the ExxonMobil-led multi-billion-dollar Sakhalin-1 project has continued as normal. In February, the U.S. supermajor said that Sakhalin-1 had boosted output to its planned Phase-One capacity of 250,000 b/d of oil. The project would have hit the output target earlier, except that the planned launch of the onshore DeKastri terminal was delayed last October by Rostekhnadzor, Russia's technical standards agency, over a minor glitch. Sakhalin-1 has been relatively untroubled by pesky environmental inspectors—until now. Mitvol said last week that Rosprirodnadzor has begun the paperwork for a formal probe, with a physical inspection slated for May. However, despite an apparent precedent having been set for Sakhalin, there are several indications that this environmental probe will have a different outcome.

What Kind of Ending?

The campaign has begun in the same way, with accusations of environmental regulations from academics in Far Eastern scientific institutes. The head of the Sakhalin branch of the Far Eastern Geological Institute said last week that sections of a pipeline operated by Sakhalin-1 were threatened by soil erosion. That may serve as the pretext for Rosprirodnadzor's inspection, and doubtless the watchdog agency will find more faults. However, aside from the same issues of cost overruns under its own PSA, the Sakhalin-1 project's similarities with the Sakhalin-2 project appear to end there.

Unlike Shell, ExxonMobil does not have a controlling stake in the project, merely a 30% one, though it holds the operatorship. Moreover, Shell was engaged at the time in an asset swap plan with the state gas giant Gazprom, and this deal became entangled with the government's annoyance over Shell's attempt to double the budget for the project. ExxonMobil neither has pending asset swap deals with any Russian company, nor has it delivered any surprise announcement of cost overruns. Indeed, the Sakhalin-1 project's cost overruns are known, and while these are sure to be an issue still, a different approach to securing Russian approval for an increased budget through better communication in advance and behind the scenes appears to herald a different outcome for discussions on the matter.

In addition, unlike in Sakhalin-2, Kovykta, or Kharyaga, one of Russia's "Big Two" state-owned energy companies, Rosneft, already holds a 20% stake in Sakhalin-1 via two subsidiaries, meaning Rosneft—and, by extension, the state—is already aware of any issues that ExxonMobil has been confronting in pushing the project forward. Rosneft may still increase its stake in Sakhalin-1, perhaps by buying out India's Oil and Natural Gas Corp. (ONGC, which holds a 20% stake), but appears content for now in sitting back while ExxonMobil does most of the heavy lifting (and investing) in the project.

Finally, there are a number of intangibles that will benefit the outcome of the Sakhalin-1 inspection. For one, the project is now producing 250,000 b/d; any move to halt it would take this oil off the market. In contrast, the start date for Sakhalin-2's LNG production and exports had already been pushed to mid-2008, meaning a halt to operations had little short-term effect (and the approximate 70,000 b/d of oil output from Sakhalin-2 is shut in over winter months in any case). Also, Sakhalin-2 has faced widespread criticism from non-governmental organisations over its impact on the habitat of the rare grey whale; Sakhalin-1 has not. This is perhaps unfair, the product of the fact that—until recently—Sakhalin-2's progress was much further advanced than Sakhalin-1, making Shell the public target of criticism for all the environmental impacts from the various Sakhalin oil and gas projects. As Shell has learned, however, sometimes luck is not on your side.

Outlook and Implications

ExxonMobil, meanwhile, would surely point out that it has taken its share of lumps in Russia as well, having seen its rights to three blocks in the Sakhalin-3 project cancelled in January 2004. Whether the U.S. supermajor escapes the imminent environmental inspection unscathed remains to be seen, but it nevertheless appears that the company is in for less of a rough ride than Shell. Having seen Russia's international reputation tarnished by the campaign against Sakhalin-2, officials may be less willing to go down that same road once more.

On the other hand, however, the presidential administration (the Kremlin) appears less concerned with how it is perceived by others and more with securing state control over key oil and gas projects. Furthermore, Gazprom's securing of control over the Sakhalin-2 project appears to have been just what the Kremlin wanted, so the temptation to take the same approach with Sakhalin-1 remains. However, since Rosneft already has a stake in Sakhalin-1, it seems that any environmental campaign against it will have a different goal; namely, to convince ExxonMobil to agree to concede to Gazprom a role in marketing gas from the project.

The Russian gas giant's position in Sakhalin-2 gives it the perfect perch from which to pressure ExxonMobil on a joint marketing plan, likely entailing the liquefaction of Sakhalin-1 gas via an expanded LNG plant at Prigorodnoye. Already, SODECO (the Japanese consortium that holds the other 30% stake in Sakhalin-1), ONGC, the Japanese government, and the governor of Sakhalin have expressed a preference to see gas from Sakhalin-1 liquefied for export, allowing the consortium to market gas to South Korea, India, China, Japan, and others. ExxonMobil, however, has signed a preliminary deal to supply gas to the China National Petroleum Corp. (CNPC) via an as-yet-unbuilt pipeline.

Rosneft has yet to take a strong position on gas marketing from Sakhalin-1, but Gazprom, eager to protect its export monopoly and keen to ensure that Sakhalin-1 gas does not compete with Gazprom's own plans for gas exports to China, clearly has an interest in prodding ExxonMobil to join forces and market Sakhalin-1 gas as LNG. Thus, the Rosprirodnadzor environmental inspection at Sakhalin-1 could end up a pressure campaign to get ExxonMobil to re-orient its gas export plans to align with Gazprom's desires.

 

Andrew Neff is an energy analyst with Global Insight.Petroleumworld not necessarily share these views.

Editor's note :This commentary was originally published by Global Insight, on April 2, 2007. Global Insight is a leading analysis and forecasting independent company providing the most comprehensive economic, financial, and political coverage of countries, regions, and industries available from any source. (www.globalinsight.com). Petroleumworld reprint this article in the interest of our readers.

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Petroleumworld News 04/03/07

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