Sakhalin II Phase 2 cost estimate rising

By OGJ editors
HOUSTON, July 14 -- Sakhalin Energy Investment Co. (SEIC) has warned of sharply higher costs for Phase 2 of the Sakhalin II project in Russia's Far East, according to Royal Dutch/Shell Group, parent of the lead partner.

SEIC said Phase 2 costs might reach $20 billion, twice its earlier estimate for costs of the entire Sakhalin II project.

The estimates remain subject to review by SEIC and its shareholders, which "are focused on aggressively pursuing mitigation options," Shell said.

SEIC comprises Shell Sakhalin Holdings BV 55%, Mitsui Sakhalin Holdings BV 25%, and Mitsubishi Corp. subsidiary Diamond Gas Sakhalin BV 20%.

The $20 billion estimate covers all planned development activity, including drilling through 2014, and LNG deliveries starting in the summer of 2008. SEIC is working with Russian authorities to review revised plans and budgets, Shell said.

"SEIC currently has over 75% of its LNG capacity sold under long-term contracts and is in negotiation with buyers for the balance of production capacity," Shell said.

Sakhalin II's reserves are estimated at 17.3 tcf of gas and 1 billion bbl of oil. SEIC's provisional cost revisions mean a project development cost of $5-6/boe and include the LNG plant.

SEIC's earlier cost estimate came in a May 15, 2003, statement that said, "The Sakhalin II development represents the largest single foreign direct investment project in Russia, requiring an investment of approximately $10 billion."

Project details
Sakhalin II will facilitate year-round oil and 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 (OGJ, Apr. 26, 2004, p. 22).

Phase 2 involves development of Lunskoye gas and condensate field and further development of Piltun-Astokhskoye (PA) field—an oil reservoir with associated gas off northern Sakhalin Island.

In addition, Phase 2 includes 800 km of dual oil and gas pipelines from the fields, a liquefaction plant—Russia's first—and an LNG export terminal in southern Sakhalin Island near Korsakov.

The LNG plant will have two trains with a combined production capacity of 9.6 million tonnes/year. It is scheduled to begin operation in 2007.

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