Sakhalin Continues to Pump Big Contracts for Russians, ABB, and Majors

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Researched by Industrialinfo.com (Industrial Information Resources, Incorporated; Houston, Texas). A $987 million contract to develop onshore oil and gas processing and well-site support facilities on Russia's Sakhalin Island in the Sea of Okhotsk has been signed by ABB (NYSE:ABB) (Zurich, Switzerland) with Exxon Neftegas Limited, a division of ExxonMobil (NYSE:XOM) (Irving, Texas).

ABB Lummus Global Moscow and VIPINeft, a leading Russian design institute and an ABB affiliate, will be responsible for onshore facilities design in coordination with other Russian design institutes for translation, procurement, and construction.

ABB will subcontract the majority of the work associated with the project to Russian companies, working with project operator ENL to pre-qualify Russian sub-contractors. The Sakhalin 1 order is in line with ABB's focus on projects with both higher engineering content and a higher proportion of reimbursable, rather than fixed, price contracts. The first oil from the project should be produced in 2005 and will thereafter reach a daily plateau of around 250,000 barrels.

Since the Sakhalin project began in 1996, the total value of contracts awarded to Russian contractors and suppliers is estimated to total more than $530 million. In May of this year, ENL awarded a $140 million fixed price contract for the Orlan platform refurbishment project to Amur Shipbuilding Plant (ASP), which has recently expanded its business focus to take advantage of potential oil and gas developments in the region. ASP has been building naval and commercial vessels since the 1930s.

The contract includes engineering and design, procurement of equipment and materials, and the construction of onshore production and support facilities for three well sites. The Sakhalin 1 project is the largest foreign direct investment project in Russia and has recoverable resources of approximately 2.3 billion barrels of oil and 17 trillion cubic feet of gas.

ENL is the operator for the multinational Sakhalin 1 consortium with a 30% working interest. The consortium plans to develop the project in four phases. The first phase, with development costs of around $4 billion, will focus on planned oil production, with limited gas supplies available to help meet Russian domestic demand. Gas market development and sales are a high priority for the project and discussions with potential export customers are ongoing, parallel to a framework for developing commercial gas sales to Russian domestic purchasers.

Exxon Neftegas Project Services opened a Tokyo office in August to strengthen its commitment to developing gas supplies from Sakhalin 1 for the Japanese market. Following a feasibility study, a company is being formed to own, build, and operate the Japanese segment of a pipeline from Sakhalin, with Japanese partners. The study showed that 26/28 inch pipeline with the capacity to deliver 800 million cubic ft/day (8 billion cu m annually) is both technically and commercially feasible.

The Japanese segment of the pipeline, which would connect with the Sakhalin 1 pipeline, would stretch about 1,440 km from offshore Cape Soya, Hokkaido to the suburbs of Tokyo or, in another option, would cover 1,120 km to Nigita on the west coast of Japan. Gas delivery would start five years after the project passes regulatory reviews and customers commit to purchasing significant gas volumes allowing engineering procurement and construction to begin.

In July, BP (LSE:BP.L) (London, United Kingdom) and Russia's state oil company Rosneft announced that they would set up a joint venture to explore and develop a second project titled Sakhalin 5. The venture will work on the Kaigansk-Vasyugansk area for which Rosneft recently acquired a license from the natural resources ministry. This development will boost BP's position in Sakhalin which has been weak compared to that of rival oil majors. Preliminary reserves in this project area are estimated at 4.4 billion barrels of oil and 540 billion cubic meters of gas.

Last year Rosneft and BP agreed to develop the Sakhalin 4 project holding 51% and 49% respectively in both Sakhalin 4 and 5. BP is fully financing the exploration costs. This project area is estimated to hold 880 million barrels of oil and 540 billion cubic meters of gas.

Shell (LSE: SHEL.L) (London, United Kingdom), which has been producing oil in the area since 1999, is planning to build the world's biggest LNG plant by 2006, with Japanese partners, as part of its Sakhalin 2 project.