Sakhalin Island: oil's newest frontier

Burt Herman, Business Times 21 Nov 07;
Sakhalin-2 is the world's largest oil and gas project with a US$20b price tag

Dmitry Lisitsyn, chairman of Sakhalin Environment Watch: 'It's not a question of if the pipeline will rupture but when'

BRAVING a new frontier of oil exploration around Russia's remote Sakhalin Island means conquering ice-locked seas, frequent earthquakes and muddy swamps fed by melting snow in the rapid springtime thaw. Executives at the world's largest oil and gas project, known as Sakhalin-2, say they are nearing the finish line as they aim to open up a vast new energy source for the nearby Asian economic powerhouses of Japan and South Korea along with the United States and others.

The waters of the Sea of Okhotsk around Sakhalin Island are believed to hold total estimated reserves of at least 45 billion barrels of oil and gas equivalents - an amount similar to the resources remaining in the Gulf of Mexico or the North Sea.

One of the most formidable challenges to unlocking those riches proved to be the Moscow government itself. It won a tug-of-war with foreign investors that left Russia's state-controlled OAO Gazprom gas giant in control and reduced the Netherlands' Royal Dutch Shell PLC and Japanese partners to minority shareholders in Sakhalin Energy, the international consortium running the project.

Moscow threatened last year to pull the project's operating licence citing problems in compliance with environmental regulations. The risk of losing the entire project pressured Shell and other founders to cede majority control to Gazprom in April for US$7.45 billion.

Shell now holds 27.5 per cent of Sakhalin Energy, along with Japanese firms Mitsui & Co at 12.5 per cent and Mitsubishi Corp at 10 per cent.

After the switch in control, the Moscow government last month gave its tentative approval for the project and said environmental compliance had improved.

'At the present time, we are speaking the same language and the company is focused not only on receiving commercial returns from the project but on following the Russian laws and the protection of our natural environment,' Natural Resources Minister Yuri Trutnev said on Oct 26 in a meeting with executives at Sakhalin Energy.

Sakhalin Energy has already been exporting limited oil from a single offshore platform since 2003 that can only operate half of the year, when seas aren't frozen. But the next phase of the project set to be completed by the end of 2008 will see the opening of two more offshore platforms along with pipelines bringing oil and gas to the island's warmer southern shore.

To export the gas, the company is building Russia's first-ever liquefied natural gas plant, which converts the gas to a liquid by cooling it to a temperature of minus 161 degrees Celsius so that it can be transported by ship. Customers in Japan, South Korea and the US have already bought all the gas to be produced here for more than the next 20 years.

When completed, Sakhalin Energy will be able to export oil and gas year-round from the fields where it is licensed to operate. They hold about a tenth of the island's total reserves, or 4.5 billion barrels of gas and oil equivalents.

'We are busy knocking off the milestones,' said Jim Niven, the British external affairs manager for Sakhalin Energy.

By several measures, Sakhalin-2 is the world's largest oil and gas project. With a US$20 billion price tag, it is the most expensive. With 25,000 employees, it has the most workers.

And it uses more steel, aluminium and concrete than any other similar undertaking.

Much of the environmental issues have focused on the 800-km onshore pipelines that will take oil and gas from fields off the island's northern coast down the length of the fish-shaped island to a warmer southern port, where ships can operate all year.

Stephen Burt, manager of construction for one nearly 200-km section of the parallel underground oil and gas pipelines, said Sakhalin presents engineers with an encyclopedia of challenges: swamps, mountains, fault crossings, mudslides, severe winters and short summers. 'Here you've got everything,' he said.

While the environmental issue was widely viewed as an excuse to justify Moscow's oil grab, environmentalists say the alleged violations were very real. They warn of the lingering threat of pipeline leaks and other risks to the island's delicate habitats that they say remain unaddressed despite the Kremlin's recent change of heart.

'It did have a basis in reality whether or not it was politically motivated,' said David Gordon, executive director of Pacific Environment, a San Francisco-based environmental advocacy group that regularly works in the Far East.

Sakhalin Energy insists it is following international standards and addressing alleged violations. For example, the company rerouted offshore pipelines to avoid feeding grounds for the endangered western gray whale, of which only 124 remain.

A local official in charge of environmental inspections said Sakhalin Energy's attitude has changed with the Gazprom takeover.

'The company is more attentive to the problems,' said Roman Mishenin, head of the environmental watchdog of the natural resources ministry in the Sakhalin region.

But the most prominent local environmental group, which conducts regular inspections along the pipelines, faults the company for not always taking adequate measures to halt erosion and landslides.

Falling dirt can contaminate salmon habitats or, worse, lead to a possible pipeline rupture and resulting oil leak.

Wading through streams in thigh-high boots with digital camera in hand to document alleged violations, Dmitry Lisitsyn, chairman of Sakhalin Environment Watch, said the company is responsive to his reports and corrects problems in areas drawn to their attention. But he argues they could do more.

'Why is it that they only do things when we point it out?' he asked. 'It could be worse regarding environmental impact, but it must be much better.' Mr Gordon said the pipeline presents serious risks if the problems are not addressed.

'It's not a question of if the pipeline will rupture but when,' he said\. \-- AP

Links

Could New Russian Line Leak? a video on National Geographic News