Production and Crude Delivery Pipeline Coming Together for $12 Billion Sakhalin I Project

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Researched by Industrialinfo.com (Industrial Information Resources Incorporated; Houston, Texas). The massive $12 billion plus Sakhalin I oil and gas project is now scheduled to start early production of oil and natural gas this summer. A pipeline to carry crude oil to the Russian mainland, on which construction started in the last quarter of 2004, is scheduled for completion by the end of 2005.

Exxon Ventures Vice President Glen Waller, head of the company's Moscow office said, "We hope to start producing oil and gas this summer, to be supplied to the domestic market in Khabarovsk territory and Sakhalin region. The Sakhalin 1 consortium is currently in talks with domestic gas consumers in the region, and some agreements with local authorities have already been signed.

Waller added that a decision had not yet been reached on exports of oil and natural gas, but that talks are underway with Japan and China. The majority of hydrocarbon product produced at Sakhalin will be exported. More specifically Sergei Bogdanchikov, President of Rosneft, said in February that a consortium of companies is planning a contract to supply China with up to ten billion cubic meters of natural gas a year, and that an initial document to this effect had been signed in China at the end of 2004.

At full capacity, production should be about 12.5 million tons of oil and ten billion cubic meters of gas par annum. Over the forty-year life of the project, total production should amount to 2.3 billion barrels of oil (307 million tons) and 485 billion cubic meters (17.1 trillion cubic feet) of gas.

Companies participating in the Sakhalin I consortium are Exxon Neftegaz Limited (NYSE:XOM ) (Irving, Texas), which operates the project and owns a 30% stake; Rosneft (XETRA:ROGRy) (Moscow, Russia), which owns 20%; Japan's Sakhalin Oil and Gas Development Company (SODECO)(Tokyo), which owns 30%; and India's ONGC Videsh (BOMBAY:ONGC), which owns 20%. The initial phase of the project focuses on the Chayvo field and will be followed by the development of the Odoptu and Arkutum Dagi fields to maintain the production plateau.

The 225-kilometer pipeline will transport Chayvo crude west across Sakhalin Island and the Tatar Strait to the DeKastri Terminal in the Khabarovsk Krai. The design capacity of the pipeline is about 250,000 barrels per day (twelve million tons a year).

To ensure safe operations on the pipeline, in a harsh and unusual environment, special technologies are being used. These include directional drilling for subsurface crossing of water bodies, automated shut-off valves in emergencies, and a state-of-the-art, software-based leak detection system, which has been validated by ten years of experience by ExxonMobil and the oil industry world-wide.

Nippon Steel Corporation (TSE:5401) and its Russian affiliate, NS Nephtegaztroy, and two other Russian companies, Neftegaztroy and SMU-4, are constructing the line, and more than 80% of the pipe is supplied by Russia's Vyska Metallurgical Plant (Nizhny Novgorod, Russia)

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