Sakhalin II partners let major contracts for pipelines, platforms

Judy Clark
Associate Editor

HOUSTON, Mar. 16 -- Earlier this year, Russian authorities approved development of the Sakhalin II, Phase 2 crude oil and natural gas development project in the Sakhalin Island region of Russia's Far East just north of Hokkaido, Japan. Contractors are mobilizing for construction on the immense 4 year project, which will cost more than $2.5 billion just on the 2004 work program alone.

Sakhalin Energy Investment Co. Ltd. (SEIC), a consortium established in April 1994 to manage the project, is awarding the contracts. SEIC consists of Royal Dutch/Shell Group unit Shell Sakhalin Holdings BV 55% interest, Mitsui & Co. Ltd. subsidiary Mitsui Sakhalin Holdings BV 25%, and Mitsubishi Corp. subsidiary Diamond Gas Sakhalin BV 20%.

The project
Sakhalin II will facilitate year-round crude oil and natural gas production in northern Sakhalin Island by piping it through two large-diameter onshore oil and gas pipeline systems to ice-free ports in southern Sakhalin. It will provide a new source of gas to markets in Japan and the Asia-Pacific region.

The $10 billion Phase 2 calls for the development of Lunskoye gas and condensate field and for further development of Piltun-Astokhskoye (PA) field—an oil reservoir with associated gas located off northern Sakhalin Island. SEIC says the fields contain reserves of 1.2 billion bbl of oil and 17 tcf of gas.

Phase 2 also calls for 800 km of dual oil and gas pipelines from the fields and an LNG liquefaction plant—Russia's first—and export terminal in southern Sakhalin Island near Korsakov (See map, LNG plant design, OGJ, Oct. 1, 2001, p. 58). The LNG plant, which will have two trains with a combined production capacity of 9.6 million tonnes/year, is scheduled to begin operation in 2007. Contracts were awarded last summer for the LNG storage tanks (OGJ Online, June 27, 2003)

Upstream facilities
Russia's Itar-Tass News Agency reported in mid-February that construction had begun in Nakhodka on the reinforced concrete foundations for the two drilling platforms.

Also, GE Oil & Gas, a unit of GE Power Systems, Florence, recently won a $12 million contract to supply a 15,500 kw turbo compressor train for the offshore oil and gas production platform. The compressor package will be capable of operating in environments as cold as -39° C., GE said.

SEIC last week awarded Yokogawa Electric Corp., Tokyo, a contract to supply complete upstream measurement and control instrumentation (OGJ Online, Mar. 12, 2004). These follow earlier contracts to Yokogawa for downstream measurement and control facilities.

Consultant Royal Haskoning, Nijmegen, the Netherlands, under a $10 million contract, will head a consortium of AATA International Inc., Fort Collins, Colo.; SOS International AS, Frederiksberg, Denmark; and Oslo-based Det Norske Veritas in a Health, Safety, Environment, and Security operation to ensure that all Russian, international, and Shell environmental and safety standards are met.

Pipeline construction
The pipeline contract, worth $1.2 billion, involves the engineering, procurement (excluding line pipe), and construction of the two onshore oil and gas pipeline systems. One system of 20-24-in. pipeline and pumping stations will deliver crude oil from the northern production areas to an oil export facility in southern Sakhalin where it will be shipped to utility customers in Asia-Pacific and beyond. The second system, a 48-in. transmission pipeline and series of compressor stations, will deliver natural gas to the planned LNG liquefaction plant.

A consortium led by the Russian contractor Starstroi Ltd.—a joint-venture of the Russian OAO Lukoil-Neftegazstroi, the Italian company Saipem SA, and Paris-based Amec Spie Capag—is constructing the pipelines, work on which began in late January. The oil pipeline is scheduled for completion in late 2005 and the gas pipeline, by yearend 2006.

The consortium is employing six Russian pipeline construction companies as subcontractors: SMU-4, Kubanneftegasstroi, Lizingstroimash, the Svarochno-montazhnyi Trust, Omsknefteprovoidstroi, and Vostoknefteprovoidstroi. Houston-based CRC Evans Automatic Welding will supply ten spreads of welding equipment for the project.

Manpower on Phase 2 major contracts will be 77% Russian, with materials and equipment, 74% Russian, said SEIC CEO Steve McVeigh.

SEIC requested tenders in December 2003 for an LNG carrier, which is to be built by third quarter 2007 a schedule aligned with the LNG plant start-up. The bid incorporates an option for a possible second carrier as well.

Primorsk Shipping Co. has secured a $60 million loan for construction of an icebreaker for use in the northern fields, which are covered by floating ice 6 months of the year. A construction contract has been awarded to the Finnish Kvaener Masa Yards Inc. to construct that vessel. Announcement of successful bidders for another three icebreakers are expected shortly.

Phase 1
The Sakhalin II development represents the largest single foreign direct investment project under way in Russia, necessary because of the difficulty of development and the need for expensive, advanced technologies for the area, which is prone to extremely harsh winter weather conditions, fall typhoons, and seismic activity (OGJ, June 17, 2002, p. 41).

Sakhalin II is the first production-sharing agreement signed in Russia and the first PSA to go into operation following commencement of oil production under Phase 1 of the project. It has been estimated that as much as $100 billion may be expended on the project in a series of phases over a period of 40 years.

In Phase 1 of the Sakhalin II project, oil began producing from the Vityaz complex off Sakhalin in July 1999. The complex, on the Astokh feature of the PA reservoir off Sakhalin, consists of the Molikpaq production platform, a single-leg anchored mooring buoy, and the Okha floating storage and offloading vessel. The Molikpaq is the first offshore oil production platform in Russia.

Production during 2002, currently limited to the ice-free summer months, was 10.8 million bbl of oil, which was exported to Japan, China, and South Korea.

Molikpaq's fifth production season, 2003, has just completed, resulting in production of 10.3 million bbl of crude oil—about 70,000 b/d—which was shipped to those three countries plus the Philippines, Taiwan, and the US West Coast. This represents a reduction in volume over previous seasons because of natural pressure reduction in the reservoir. A water-injection pressure maintenance project is under way to boost production to 90,000 b/d.

Contact Judy Clark at Judyrc@ogjonline.com.

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