It's those whales again. The last time we talked about the Sakhalin-II project, plans called for the installation of the PA-B platform while a new pipeline route would bypass a breeding ground for 100 Pacific gray whales (OGJ, Apr. 11, 2005, p. 30).
Well, year-round oil production at the project, which was due to start at the end of 2006, is now expected to be postponed at least until summer 2008, allowing time to reroute the pipeline around the whales’ area.
Sakhalin II has been producing around 80,000 b/d of crude oil during the summer over the past 6 years, shipping the oil largely to Japan via tankers. During the cold months, oil is not produced because ships cannot negotiate the iced waters.
Initial plans called for the construction of oil and natural gas pipelines totaling about 800 km. The idea was to produce oil year-round starting at the end of 2006, with 180,000 b/d to be shipped.
Environmental pressure
But environmentalist pressures forced the project managers to change the pipeline route to avoid the whales, and that will delay completion of the pipelines. To date, only about half of the pipelines have been finished.
A few weeks ago, the European Bank for Reconstruction and Development said the project lacks “environmental awareness.”
The EBRD reportedly had been considering funding Sakhalin II but called on Sakhalin Energy Investment Co. (SEIC), the operator, to improve environmental protection measures after conducting inspections at project sites.
The EBRD said that the problems could be resolved but that, if they weren’t, other banks might follow its lead and refuse to issue loans for the project.
Shell, an SEIC shareholder, has reported that Sakhalin II Phase 2 project costs “are anticipated to be of the order of $20 billion” instead of the earlier figure of around $10 billion (OGJ, July 25, 2005, p. 26).
Serious blow
The huge cost increase and delays at the project could deal a serious blow to a number of Japanese companies, not least Mitsui & Co. and Mitsubishi Corp., which hold, respectively, 25% and 20% stakes in the project.
The increased costs will be passed on to them as well, resulting in an additional 450 billion yen or so based on the proportions of their stakes in the project.
Rerouting the pipeline to avoid the whale breeding area-the main reason behind the enormous cost increase-will clearly push back the beginning of LNG production until the latter half of 2008 or even later.
Unless other supplies can be sourced, however, such delays could also mean major problems for Tokyo Electric Power Co., Tokyo Gas Co., and other Japanese firms, which have signed long-term supply contracts, guaranteeing nearly 80% of the project’s LNG output.
As we said before, it’s a whale of a story in a sea of trouble. ✦
