The Russian Far East and Northeast Asia:Aspect of Energy Demand and Supply Cooperation(5)

"Economic Development and the Environment"
on the Sakhalin Offshore Oil and Gas Fields II

The Russian Far East and Northeast Asia:
Aspects of Energy Demand and Supply Cooperation

Victor D. Kalashnikov

The Sakhalin Projects as a Positive Example of the Integration of the RFE Energy Sector's Comparative Advantages and the Ramifications for Northeast Asian Energy Supply-Demand

A brief outline of the Sakhalin projects:

At the present time, there are three major projects at different stages of development in the northeastern sector of the Sakhalin shelf, which are to be implemented under the "Production Sharing Legislation Regime".

Sakhalin-1 Project: At present, the investor's interests in the Sakhalin-1 Project agreement are represented by a consortium of four companies: Sodeco, a Japanese company; Exxon, an American company; and Rosneft' and Rosneft' - Sakhalinmorneftegas, Russian companies. The contract covers three oil, gas, and condensate deposits (Chaivo, Odoptu, Arkutun-Daginskoe) with overall estimated oil and condensate reserves of 320 million tonnes, and 420 billion m³ of gas.

The project's strategy calls for three stages. The first stage calls for the preparation of marketing agreements and additional study of the deposits with the aim of precisely estimating reserves' amount and structure. The second stage will initially extract oil from the most promising part of the Arkutun-Daginskoe deposit (presumably, from the year 2000). The third stage will be the project's full development. The prospective volume of fixed asset investment in the project is about 20 billion USD.

Sakhalin-2 Project: This contract covers the Lunskoe deposit (mostly gas, estimated reserves of 495 billion m³) and the Piltun-Astokhskoe deposit (mostly oil, estimated reserves of 100 million tonnes). The investor's interests (Sakhalin Energy Investment Company) in the Agreement are represented by a consortium of four foreign companies: Mitsui, Mitsubishi, Marathon, and Royal/Dutch Shell. The project's strategy calls for two stages. During the first stage, oil will be extracted through development of the Piltun-Astokhskoe deposit. The second stage calls for the project's full development. The prospective volume of fixed asset investment in the project is 15 billion USD.

The Sakhalin-2 Project is closer to practical development. Currently, the first offshore platform in the Piltun-Astokhskoe License Area has already been installed. The primary complex for extracting oil, named "Vityaz", comprises of a marine drilling platform, "Molikpaq", a floating oil storage and offloading tanker, and a sub-sea pipeline. This year, three production wells are planned and oil production will be initiated (up to 1 million tonnes per year).

Some of the figures for the Sakhalin-1 and Sakhalin-2 projects are shown in Table 10.

Table 10. Sakhalin-1 and Sakhalin-2 Status and Projected Figures

	Sakhalin-1	Sakhalin-2
License Areas	Chaivo, Odoptu, Arkutun-Daginskoe	Lunskoe, Piltun-Astokhskoe
Shareholders and Interest	Exxon Neftegas Limited ?30%, Japan's Sakhalin Oil and Gas Development Company (SODECO) - 30%, Rosneft' - Sakhalin - 23%, Sakhalinmorneftegas-Shelf - 17%	Marathon Sakhalin Ltd. - 37.5%, Mitsui Sakhalin Development Company Ltd. - 25%, Shell Sakhalin Holdings B.V. - 25%, Diamond Gas Sakhalin B.V. - 12.5%
Projected Recoverable Reserves	Oil+condensate - 324 million tonnes; Gas - 421 billion m ³	Oil+condensate - 100 mlln. tonnes Gas - 494 billion m ³
Maximum production per year 1 stage Total development	Oil+condensate - 5.3 million tonnes. Oil+condensate - 24.1 mlln tones, Gas - 19.7 billion m ³	Oil+condensate - 2.1 mlln tonnes Oil+condensate - 7.9 mlln tonnes Gas - 16.4 billion m ³
Estimated total cost	20 billion USD	15 billion USD
Actual investments and subsidies (1996-1998)	Approximately 535 million USD	Approximately 1 billion USD

Source: Data from JSC "Rosneft', - Sakhalinmorneftegas". S. Stefanopoulos, 1998. The Oil and Gas Industry of Sakhalin Island. An Introduction. Russian Far East Update and Pacific Russia Oil and Gas Report. Elisa Miller, editor and publisher. Seattle, USA.

Sakhalin-3 Project: Overall, the Sakhalin-3 Project covers three license areas. In May 1999, a Federal law was enacted permitting the development of the Kirinskiy Area under a PSL Regime. At present, the investors' interests in the Kirinskiy License Area are represented by four companies: Mobil, Texaco, Rosneft' and Rosneft' - Sakhalinmorneftegas. The consortium is called "Pegastar"; each company has a 33.3 percent interest ^*12 . The Kirinskii License Area covers six fields. All the fields are prospective only; there are no discovered deposits. Seismic data indicates that the Kirinskiy Area potentially contains oil and condensate deposits of 100 million tonnes, and 700 billion m³ of natural gas. The project's agreement is still in the preparatory stage and requires ratification by a special Federal law.

The estimated natural gas and oil production levels and supply schedules to domestic and NEA markets for Sakhalin-1, Sakhalin-2, and Sakhalin-3 are given in Table 11.

Table 11. Projected Hydrocarbon Extraction and Distribution under Sakhalin-1, Sakhalin-2, and Sakhalin-3

	Oil and condensate*, million tonnes			Natural gas, billion m ³
	Extraction	Export	Domestic	Extraction	Export	Domestic
1997 (actual)** 2000 2005 2010 2016 2020	1.7 2.7 14 25.5 16.0 7	1.0 2.5 9 20.5 11 2	0.7 0.2 5 5 5 5	1.8 0 27.2 36.3 45.2 46.0	0 0 14.4 19.0 24.3 24.3	1.8 0 12.8 17.3 20.9 21.7

*- Data for Sakhalin-1&2 only.

**- Current hydrocarbon production from on-shore Sakhalin

Source: Data from JSC "Sakhalinmorneftegas".

The Sakhalin-1, Sakhalin-2, and Sakhalin-3 projects have unique economic and energy ramifications, not only for the Russian Far East, but also for Russia as a whole.

Firstly, the Sakhalin projects represent a recognition of the RFE's comparative advantages. Secondly, despite the persistent political and legal risks, for the first time in the post-Communist era, Russia has managed to receive billions of dollars in foreign investment (about 25 to 35 billion USD just for the Sakhalin-1 and Sakhalin-2 projects). It has managed to attract this investment without direct financial guarantees from the Russian government. Foreign direct investment in the RFE's economy between 1988-1996 amounted to approximately 600 million dollars (in Russia as a whole, it was approximately 6 billion USD between 1992-1998).

The Sakhalin projects are well suited for the "3 Essential E's" of energy cooperation in Northeast Asia.

Energy Security Option:

The Sakhalin projects undoubtedly contribute to the key strategy of the diversification of energy sources. Key alternative fuels which can contribute to energy security in Northeast Asia are nuclear energy and natural gas. The possibility of natural gas deliveries from the Russian Far East will maintain the incentives for increasing the substitution of coal and oil by natural gas in the region.

The Sakhalin projects' positive effect in terms of reinforcing energy security is demonstrated in the general and international diversification of the technological pattern of energy resource deliveries in the region. The strategy for the realization of natural gas, extracted under the Sakhalin projects, has no single resolution yet. Within the strategy framework, several variants are currently being considered, among which overlapping combinations are quite possible:

1)	An traditional orientation towards LNG delivery technology in the region (by means of constructing a LNG plant south of Sakhalin);
2)	The relatively short distances from natural gas extraction sites to sites of possible use (primarily Japan and China) promotes trunk pipeline technology. For example, investors under the Sakhalin-1 Project are examining a strategy of constructing export pipelines from Sakhalin to Hokkaido and Honshu and from Sakhalin to China's northeastern provinces;
3)	The use of natural gas from the Sakhalin shelf for electricity generation, with further transportation of electricity to Japan, China and North Korea. This variant, offered by the JSC "Unified Power Grid of Russia" (RAO "EES Rossii"), envisages the construction of two major modern electric power plants on Sakhalin Island with a combined output of 24 billion kWh, as well as the unification of the electric power systems of the Russian Far East, Japan, China and North Korea.

Diversification of energy supplies: 85-90 percent of the crude oil imports from outside the NEA region will be from the Middle East. This dependence will make the Northeast Asian economies vulnerable to sharp oil price increases; as well, instability in the Middle East or along transport routes could threaten the very security of their supply.

The development of oil-and-gas projects on the Sakhalin shelf expands oil and gas production in the NEA region. The consumption/production ratios in the leading countries of Northeast Asia (Japan, China, South Korea) show their high dependence on imports of primary energy resources - oil, natural gas, and coal. So far, the RFE's role in supplying energy resources to the NEA countries has been symbolic. The development of oil and gas projects on the Sakhalin shelf will make it possible to increase current annual crude oil export volumes from the Russian Far East by 10 to 20 times, opening a new area of natural gas exports inside NEA.

Economic Development Option:

The Sakhalin shelf projects require broad international cooperation in a general economic context for the following reasons:

1)	The absence of oil and gas demand in the RFE comparative with a scale of profitable output of Sakhalin projects;
2)	A large volume of investments, the absence of sources in Russia for their financing;
3)	The lack of sufficient international authority and image in Russian companies for successful competition in international markets for capital;
4)	The absence of effective and ecologically safe technologies, facilities and services for the extraction of hydrocarbons in complex natural conditions and ice conditions from the sea shelf in Russia. This refers to the lack of experience and necessary organization skills necessary for work in the sea shelf's complex natural conditions.

These reasons are at the same time international exchange trends for the realization of the Sakhalin projects for economic development in the region.

Efficiency and Environmental Sustainability Option:

The extraction of oil and, especially, natural gas on the Sakhalin shelf, and its inclusion in the NEA's regional energy balance meet the Kyoto Agreement's challenge of reducing greenhouse emissions, primarily carbon dioxide emissions, from fossil fuel combustion. Also, the natural gas supplied from Sakhalin offshore production will help alleviate the problem of acid rain.

Natural gas is the most efficient and environmentally sound energy source among the fossil fuels. Natural gas is much better as a fuel source because of its cleanness. Natural gas does not contain sulfur. CO₂ emissions from natural gas combustion are almost half of coal and two-thirds of oil combustion as shown in Table 12.

Table 12. Cleanness of Natural Gas Compared to Other Fuels

	Natural Gas	Oil (Sulfur content 1%)	Coal (Sulfur content 1%)
SO _x (kg/ ton of oil equiv.)	0	20.0	29.2
NO _x (kg/ ton of oil equiv.)	2.3-4.3	8.2	11.5
CO ₂ (kg C/ GJ)	13.78	19.94	24.12

Source: M. Hirata, 1998. Asian Pipeline Research Society of Japan. Prospects of Natural Gas Demand in Asia Based on Advanced Power Generation Technologies to Reduce CO2 Emissions. In: Eastern Energy Policy of Russia and Problems of Integration into the Energy Space of the Asia-Pacific Region. Proceedings of Conference. Irkutsk, Russia.

Providing for the diversification of energy sources, natural gas will have a positive influence on the solutions to the problems of greenhouse gas emissions from countries in the region, as well as trans-boundary acid rain.

Next