Gazprom Begins Construction of Sakhalin-Khabarovsk-Vladivostok Gas Pipeline

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Researched by Industrial Info Resources (Sugar Land, Texas)--Russia's state-controlled OAO Gazprom (OTC:OGZPY) (Moscow) has started construction of the proposed 1,800-kilometer gas pipeline network, which will connect the gas fields around the island of Sakhalin to Vladivostok on the coast of the Pacific Ocean. Construction of the Sakhalin-Khabarovsk-Vladivostok pipeline was inaugurated last week in the Khabarovsk region, located in the eastern part of the country, in the presence of Russian Prime Minister Vladimir Putin. The project is expected to be completed ahead of the Asia-Pacific Economic Cooperation Summit, which will be held in Vladivostok in 2012. The total expenditure for the entire project is estimated to be $11 billion.

The Sakhalin-Khabarovsk-Vladivostok pipeline is critical to meet domestic energy demand in eastern Siberia and other far-eastern areas of Russia. While Russia did not rule out the possibility of exports through this pipeline, Putin reiterated that the first priority would be to meet local demand. Eventually, after catering to domestic energy requirements, the pipeline is expected to export Russian gas to East Asian countries, mainly energy-starved Japan.

The pipeline network will have an initial capacity to transport 6 billon cubic meters of gas, which will later be enhanced to 30 billion cubic meters. The first phase of the project will include 1,350 kilometers of pipeline construction, which will be ready for operations by the first quarter of 2011. Gazprom is expected to require between 8 billion and 10 billion cubic meters of gas for the pipeline. Industry experts state that Russia is likely to put pressure on Exxon Mobil Corporation (NYSE:XOM) (Irving, Texas) to secure supplies for the pipeline. Russia will require gas supplies from the Sakhalin-1 gas field, operated by Exxon Mobil, for this project. However, sources indicate that no agreement has been signed for gas supplies with Exxon Mobil.

The Sakhalin-1 gas field has been developed by Exxon Mobil in association with ONGC Videsh Limited (New Delhi), a fully owned subsidiary of Oil & Natural Gas Corporation Limited (BSE:500312) (Dehradun, Uttarakhand); a consortium of Japanese companies including Marubeni Corporation (TYO:8002) (Tokyo, Japan) and Itochu Corporation (TYO:8001) (Osaka, Japan); RN-Astra, a subsidiary of Rosneft (Moscow); and Sakhalin Morneft-Shelf (Moscow). While Exxon Mobil and the Japanese consortium hold stakes of 30% each in this venture, ONGC Videsh, Sakhalin Morneft-Shelf, and RN-Astra hold stakes of 20%, 11.5% and 8.5%, respectively. The Sakhalin-1 project consists of three gas fields--Oduptu, Arkutu and Chayvo--with proven reserves of 485 billion cubic meters of gas and 307 million tons of oil. The offshore fields presently produce 200,000 barrels per day of oil.

Gazprom also intends to build a liquefied natural gas (LNG) plant at Vladivostok, close to the pipeline terminal, to produce gas for exports in the future. Early this year, Russia commenced operations at its first LNG plant, with feedstock from the Sakhalin-2 field. The Sakhalin-2 field, which is now controlled by Gazprom, was earlier developed by Royal Dutch Shell plc (NYSE:RDS.A) (The Hague, Netherlands). Shell conceded its rights to develop the gas fields after environmental agencies in Russia threatened to impose large fines on the company on the grounds of ecological damage.

In the early 1990s, Exxon Mobil signed a Production Sharing Agreement (PSA) with Russia. The agreement is expected to continue irrespective of legislative or political changes. Russia claims that the PSA, which was signed during a period of low oil prices, is not valid in today's scenario.

The Sakhalin-Khabarovsk-Vladivostok pipeline is also expected to supply gas for the new car assembly facility set up by Sollers OAO (MCX:SVAV) (Cherepovets, Russia). The company recently received a loan of $158 million from Vnesheconombank (Moscow) for capital expenditure projects. However, Gazprom has indicated that it may not have enough gas supplies to cater to Sollers' energy needs. Russia receives 1.6 billion cubic meters of gas as royalty from the Sakhalin-1 gas field, but Gazprom states that this supply is not sufficient to meet energy demand in the region. The Sakhalin power station is estimated to require 500 million cubic meters of gas, while 1.2 billion cubic meters of gas will be required for power generation in Vladivostok. Exxon Mobil is still exploring various options to sell the gas and has reportedly not committed to supply gas for the project.

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