RUSSIA - Focus On Asia.

In 2002 the Kremlin appointed Gazprom as co-ordinator of east Siberian gas E&P and export projects. By implication this includes the Sakhalin island and its offshore oil/gas E&P and export projects, as Gazprom has been trying to get into some of these ventures. To the Kremlin, the focus on Asia is of geo-strategic importance. Asian demand for LNG is forecast to rise from 87m t/y in 2005 to 116m t/y by 2010 and 138m t/y by 2015.

Ventures off Sakhalin island will be producing oil and gas in partnership with foreign companies, with a Shell-led Sakhalin venture already exporting oil. Most of the gas would be sold to Japan, by pipeline and in LNG form. The huge gas reserves of Irkutsk and Yakutia (Sakha republic) are to be developed for their closest non-FSU markets: China, Korea and Japan, to be supplied by pipeline.

Sakhalin Island, a former penal colony located off Russia's eastern shore, is home to five big oil and gas projects, each operated by a unique international consortium.

The Sakhalin-I is led by ExxonMobil (30%) in partnership with Sodeco of Japan (30%), Rosneft (20%) and ONGC Videsh of India (20%). The group began light crude oil in 2005. The output will plateau at 250,000 b/d. The oil will be piped to the port of De-Kastri and pumped into the Russian system. Sakhalin-I's gas awaits a big market as ExxonMobil cannot secure Japan via a proposed pipeline. Sakhalin-I early this month began supplying 2 BCM/y to the nearby Khabarovsk region, with the volume later to reach 4.5 BCM/y, under a deal to 2009. Sakhalin-I, on the island's north-eastern shelf, is developing Chaivo, Odoptu and Arkutun-Dagi oil and gas fields, having 2.3 bn barrels of oil and 484 BCM (17.1 TCF) of gas recoverable.

In a bid to reduce its dependence on Middle Eastern oil, Nippon Oil  is buying 700,000 barrels of Sakhalin-1 crude oil on spot basis. The purchase from October will mark the first time Japan's largest refiner has bought oil from Sakhalin-1. Nippon Oil says it will consider a long-term contract with Sakhalin-1 after it has evaluated the crude's yield of fuels. Nippon Oil processes about 1m b/d. In winter when heating oil demand is highest, Sakhalin-1 will be a conveniently located source of additional supplies to Nippon Oil. It usually takes about 20 days to ship crude from the Middle East to Japan; Sahkalin-to-Tokyo takes three days. This will cut transportation costs in addition to saving time.

Nippon Oil already buys crude from the nearby Sakhalin-2 JV, but that oil and gas source is unable to ship during winter as it lacks a pipeline linking it to a southern port. Sakhalin-2 will start shipping in winter in late 2007. Sakhalin-2 is run by a consortium of Shell (55%). Mitsubishi Corp. (20%) and Mitsui (25%). Nippon Oil has bought of 5m barrels of crude oil from Sakhalin 2 since June 2004.

Business daily Kommersant on Aug. 4 quoted a source at Gazprom as saying Gazprom will oppose a plan by ExxonMobil to build a major gas pipeline from Sakhalin-1 to China, adding that Exxon's plan was directly competing with Gazprom's own project to build a twin gas pipeline system to China (see above).

Sakhalin-II (Sakhalin Energy) entails Russia's first LNG facility, being built on the southern tip of the island near the town of Prigorodnoye in a project which is costing the Shell-led group $20 bn. Construction of the two-train plant, 9.6m t/y, began in spring 2003 and will be completed in the second half of 2008. Almost all of this capacity has been sold. The group has room for a third 4.8m t/y LNG train. The buyers include Japanese utilities, and Shell-Sempra Energy which will take LNG to a re-gasification terminal being built at Ensenada, Mexico, with the gas to be marketed in Mexico and California (see Vol. 63, Gas Market Trends 9). Among the latest buyers of Sakhalin-2 LNG is Chubu Electric of Japan which last month signed an initial accord for 500,000 t/y for 15 years, with deliveries to begin in April 2011.

Sakhalin Energy is negotiating with Gazprom to swap a 25%-plus-1 stake in the Sakhalin-2 JV for access to the Zapolyarnoye-Neocomian field, the world's fifth-largest gas deposit. But Gazprom says the JV's cost increase to $20 bn, from an initial $12 bn, has diminished the value of the stake and wants to reduce the assets it is offering in the swap deal.