By Michael Allen & Elena Sabirova
Russia is about to make its initial foray into offshore development in the icy Sea of Okhotsk, which geologists believe could hold the huge gas and oil reserves needed by booming Northeast Asian economies in the next century. The jumping‑off point is the northeast coast of Sakhalin Island, and no less than five transnational consortia are in various stages of the pioneering developments. These multibillion-dollar projects are the engines expected to drive opportunities for U.S. companies, not only in the oil and gas industry, but in other areas that should develop as a result of the tremendous amount of foreign investment in the region.
Recently, the expected pace of development of Sakhalin oil and gas projects has slowed as a result of both internal and external factors—low oil prices, the financial crisis in Russia, and the need for continued work on production sharing agreement legislation. However, none of the major players have been deterred enough to exit the region. Companies interested in getting involved should closely and regularly monitor changes in development plans.
Leading Offshore Projects
The Sakhalin‑2 project is the farthest down the development line, with first oil expected in July 1999. The operator, Sakhalin Energy Investment Co., Ltd. (Marathon, Mitsubishi, Mitsui, and Royal/Dutch Shell), was the first to sign a production sharing agreement (PSA) with the Russian Government, and the first to declare commerciality on a Sakhalin shelf project.
Sakhalin‑1 (Exxon, Japanese consortium Sodeco, Rosneft, and Rosneft‑Sakhalinmorneftegaz (SMNG)) signed a PSA not long after Sakhalin Energy. The two were poised to become pipeline partners until Exxon drilled a dry hole in the Arkutun‑Dagi offshore field in summer 1997, finding a much more complicated reserve structure than previously supposed. That, combined with better‑than‑expected 3‑D seismic results from the Chayvo field, has gradually changed Sakhalin‑1’s focus toward a longer term gas project. (Exxon is expected to drill an appraisal well in Chayvo this summer to confirm.)
This shift in focus changes offshore development dynamics radically because of the significant difference between the two consortia in their approach to gas marketing. Sakhalin‑2 shareholder Shell is a world leader in LNG (liquid natural gas) and tanker technology, while Sakhalin‑1 talks of sending gas by pipeline to north China and/or Japan’s West Coast. The first project to find a willing gas buyer and sign a long‑term contract will clearly be in the lead on pipeline and production infrastructure development. Exxon has already announced formation of a company to do a feasibility study of the Japan undersea pipeline option.
Mergers
The recent merger of Exxon and Mobil may provide Sakhalin‑1 with a new strategic ally: the Pegastar consortium (Mobil, Texaco, and Rosneft‑SMNG), which will have rights to the Kirin block of Sakhalin‑3, an unexplored but potentially enormous gas field. A bill granting Sakhalin‑3 the right to conclude a PSA sailed through the Duma in April.
Mergers will play a role in the future of two other projects: Sakhalin‑4 (ARCO and Rosneft‑SMNG) and Sakhalin‑5 (BP‑Amoco and Rosneft‑SMNG). Despite high hopes for a fast start, the Sakhalin‑4 partners failed to agree on a joint appraisal-drilling program for summer 1999. Sakhalin-5 is still in the discussion stage. However, an agreed merger of ARCO and BP‑Amoco could change the situation.
Opportunities on Sakhalin
Despite shifts in strategy and slower development timelines, there is sufficient activity in the region to warrant a close look. Opportunities can be found directly in the oil and gas industry, such as in oil/gas support services, drilling, and camp catering. With virtually no infrastructure in place on Sakhalin, engineering, construction, and a wide variety of other services are also needed to support the Sakhalin projects and the expatriate community. Additionally, as projects declare commerciality, they will begin making promised bonus payments to the Sakhalin regional budget. These funds will be used for much-needed infrastructure development.
The Sakhalin oil and gas projects have committed to a high level of Russian content in their development. Successful U.S. companies here have already discovered that joint venturing with a Russian partner gives them an enormous competitive advantage in gaining contracts and obtaining local permits. Experienced Russia hands (and the oil companies) know that the process of partnering, training, and proving a joint venture’s reliability takes time and commitment. Some companies are partnering with Russian firms now to seek work on infrastructure or other projects, if only to gain experience and position themselves now for prequalification on later oil and gas work, expected two and three years down the road.
Sakhalin also boasts opportunities for U.S. companies in the areas of fishing, fishing vessel leasing, fish processing; timber and timber processing; and adventure tourism.
The American Business Center Yuzhno‑Sakhalinsk (ABC) assists U.S. companies in surveying the market for their product or service, identifies opportunities and key contacts, and provides other business support services as the opportunity develops into a contract or ongoing joint venture relationship. In Russia, contact the ABC by telephone at +7 (4242)72‑71‑24, or by email at abcsakh@fraec.org. In the United States, call 206‑443‑1935 or write sghayem@fraec.org.
For more information on Sakhalin, visit BISNIS Online at www.mac.doc.gov/bisnis/country/regions.html#FarEast.
Michael Allen in Director of the American Business Center in Yuzhno-Sakhalinsk.
Elena Sabirova represents BISNIS in Yuzhno-Sakhalinsk, and is collocated with the American Business Center.