HIGH COST OF FIELD DEVELOPMENT OFF SAKHALIN ISLAND JOLTS RUSSIANS

Russian petroleum industry officials reportedly "went into shock" when they got their first look at the recently delivered feasibility study on development of Piltun-Astokhskoye and Lunskoye oil and gas fields in the Sea of Okhotsk off Sakhalin Island's northeast coast.

Feb. 23, 1993

4 min read

Moscow's Izvestia newspaper said the Russian specialists named to review the study were amazed to learn that the estimated cost to develop the fields has rocketed by almost $1 billion above the figure "promised" by the MMM (Marathon, McDermott, Mitsui) combine early last year. But Izvestia asserted that the "gigantic" cost hike should be blamed on changes in the Russian government's tax policies, not on erroneous initial estimates made by the combine now known as MMNMS (Marathon, McDermott, Mitsui, Mitsubishi, and Shell).

Izvestia said when MMM won the bidding to conduct the study, many tax rates were much lower than they are now. It said the "land use tax" for the areas where the fields are located didn't exist when the tender competition was decided.

BIG BURDEN

"The additional $1 billion cost is a heavy burden on the offshore Sakhalin project's economics," Izvestia reported. "All hopes of Russian and foreign participants in the Sakhalin shelf development venture now depend on the recent promises of Prime Minister Viktor Chernomyrdin to assist in every possible way in carrying out the project and helping settle the taxation problems.

"Conflicts also have arisen regarding ecological matters between personnel who drew up the feasibility study and Russian experts.

"MMM consortium specialists, in developing their criteria, used both American and generally accepted world ecological standards. But we, 'in trying to be more holy than the Roman pope,' drew up our own standards, which are more strict than global environmental protection norms."

Izvestia said the feasibility study presented by the MMNMS group is being evaluated by members of two Russian commissions, one under the government's Ministry of the Economy and the other an ecological team. Serious disagreement regarding optimum but attainable ecological standards is not expected.

FURTHER DEVELOPMENT?

Izvestia warned that major problems will remain regarding overall development of Sakhalin Island's shelf even after difficulties involving the Piltun-Astokhskoye and Lunskoye feasibility study are resolved. Attention will then focus on development of the offshore Chaivo and Odoptu fields to the north.

Reporters are asking why these "very rich" deposits aren't being put up for international tender competition, Izvestia said. The newspaper explained that Sakhalin authorities believe Japan's Sodeco firm has well founded prior claims to Chaivo and Odoptu development rights.

The former U.S.S.R.'s Ministry of Foreign Trade signed an agreement with Sodeco regarding cooperation in Sakhalin shelf oil and gas exploration in January 1975. Sodeco reportedly spent $200-280 million on the project.

But a clause in the agreement said if feasibility studies showed development of Chaivo and Odoptu would be unprofitable, Japan's credits to finance the exploration, along with interest on the loans, need not be repaid. Russian and Sakhalin authorities reportedly believe if their full interests are now taken into consideration, "which they weren't initially," placing the two fields on production would be unprofitable.

Izvestia said the Japanese realize this and are considering a better offer for rights to develop Chaivo and Odoptu fields. This could involve payment of a bonus and investment in developing Sakhalin's infrastructure.

New talks were then scheduled.

But Izvestia noted that South Korea and other foreign interests compete with Sodeco for development rights to Chaivo and Odoptu. During a recent visit to Seoul, Sakhalin officials were told that development of the island's shelf fits in ideally with South Korea's nationwide gasification program.

South Korean firms would have their government's strong backing if they present an offshore Sakhalin petroleum development proposal, Izvestia reported.