OTC: Russia relying on offshore for future production

May 3, 2006
Sakhalin Island currently is the oil and gas growth engine for Russia, which will rely on offshore regions for new production after 2010, according to an OTC speaker.

Paula Dittrick
Senior Staff Writer

HOUSTON, May 3 -- Sakhalin Island currently is the oil and gas growth engine for Russia, which will rely on offshore regions for new production after 2010, Julia Nanay, senior director, PFC Energy, said at an Offshore Technology Conference breakfast.

By 2020, offshore fields could account for 20% of Russia's total oil and gas output, Nanay said, citing a draft strategy from the Russia Ministry of Natural Resources. A ministry representative was on the agenda but was not at the conference.

Two thirds of Russia's future offshore production is expected to come from the Barents Sea and Kara Sea, Nanay said.

Russia must implement regulations and taxes before its offshore oil and gas assets can be developed, she noted, adding that offshore royalty issues remain largely unaddressed.

Russian law
The Russian Duma is working on the Mineral Extraction Law and on a new subsoil law, she said. The Russian government's anticipated shift to holding auctions for oil and gas blocks instead of tenders now appears unlikely.

International oil and gas companies operating in Russia probably will be prevented from taking more than 49% interest in offshore fields, Nanay said. Two-stage tender offers are expected by 2010, involving 32 blocks in the Barents, Okhotsk, and Pechora seas.

"Foreign companies will have to enter into joint ventures with Russian companies having more than 50% interest," Nanay said.

Jonathan Russin, managing partner of Russin & Vecchi's Russian Practice Group in the law firm's Moscow office, noted that contractors should realize that the Sakhalin production-sharing agreements are unique to Sakhalin.

"PSAs are unlikely in future projects," Russin said of Russia. He provides advice to the PSA operators and their contractors working on Sakhalin projects.

"Russia is an exciting legal environment for me as a lawyer," Russin said. "It is sometimes a frustrating environment for my clients. It will be an adventure for you in Russia."

Shtokman field
OAO Gazprom plans to liquefy gas in Russia from Shtokman gas and condensate field, awaiting development in the Barents Sea. Partners for Shtokman have yet to be announced.

Regarding Shtokman, Nanay declined to speculate as to whether it might be on stream during 2011-15.

"The lesson of Sakhalin II is what is going to happen in Shtokman," Nanay said. "The timing is always going to be later, and the costs are always going to be more" than initial estimates.

Royal Dutch Shell PLC, parent of Sakhalin Energy Investment Co. Ltd.'s lead partner, has said costs for the Sakhalin II Phase 2 might reach $20 billion, twice the original estimate for the entire Sakhalin II project (OGJ, July 25, 2005, p. 26). The project also has encountered delays related to environmental issues (OGJ, Aug. 8, 2005, p. 30).

Shell plans to start year-round oil production, which depends on pipeline construction, in late 2007 and LNG sales in the summer of 2008. Sakhalin II produces about 80,000 b/d during summer, with oil moving to Japan via tanker.

Nanay said the involvement of international oil companies and service companies will be essential for development off Russia, adding that Russian companies lack extensive offshore experience.

"Nothing has moved very quickly for foreign companies in Russia," Nanay noted.

Contact Paula Dittrick at [email protected].