By Andrew Hurst
YUZHNO-SAKHALINSK, Russia (Reuters) - Russia’s massive
Sakhalin-1 oil and gas field started pumping oil off the
country’s Pacific coast at the weekend, the leader of the
project Exxon Mobil
"Production from the Chayvo field has commenced," Steve Terni, president of Exxon Neftegaz Ltd, the operator of the field with a 30-percent stake in venture, said.
"This is one of three fields to be developed by the Sakhalin-1 consortium," he told a news conference.
The Sakhalin-1 project is one the largest single foreign investments ever made in Russia, and about $12.8 billion is expected to be committed to developing the three fields over a lifetime spanning about 40 years.
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The field is also expected to yield $40 billion in revenues for the Russian government over the coming decade.
Initial production from Sakhalin-1, which will rise to about 50,000 barrels a day by year end, will be sold on the Russian domestic market.
Sakhalin lies off Russia’s Pacific coast and is just north of Japan, which occupied half of the island from 1905-1945.
Output from the Chayvo field is expected to rise to full capacity of 250,000 barrels per day by the end of 2006 when a pipeline linking the island to an export terminal in the Russian mainland sea port of Dekastri will also allow shipments to international markets.
Gas production from the field starting at about 1.7 million cubic metres a day and later rising to 7.1 million cubic metres, will also at first be sold only to Russian consumers in the mainland Khabarovsk region bordering China.
SUPPLIES TO CHINA
Terni said Exxon is holding talks with China on the possibility of supplying it with gas from Sakhalin. That could require construction of a pipeline, which could take up to five years to complete, he said.
Exxon had earlier hoped to strike a deal with Japan to deliver gas from the island, he said. But the Japanese market had developed less quickly than anticipated.
Global energy prices have risen sharply over the past year as demand has outstripped supply. The start-up of production from Sakhalin-1 is unlikely, at least initially, to have any impact on a tight global energy market because supplies will only be going to Russian users.
Exxon is operating the world’s biggest land-based drilling rig in Sakhalin, using the so-called "extended reach" drilling method to burrow under the seabed and tap reserves six miles (10 km) from shore, as well as using an off-shore platform.
"What it allows us is to more cost effectively recover the reserves," said Terni. "And being able to drill on-shore is more environmentally friendly technology."
But Terni said he did not expect the technique to make it possible to increase production beyond 250,000 barrels per day.
Exxon did not expect any significant cost overruns after
Royal Dutch/Shell
Shell is building a liquefied natural gas (LNG) terminal to ship gas from Sakhalin to export markets in North America and Asia. It has also announced delays in some production dates for LNG and crude oil.
Shell, in contrast to Exxon, said it had opted for LNG over pipeline delivery because it provides an opportunity to export gas more quickly to growing markets in Asia and North America.
"LNG gives us access to a growing market and flexibility to deal with a number of customers," Ian Craig, head of the shell-led Sakhalin Energy Investment Company, told reporters on Sunday.
A ceremony marking the launch of production on Sakhalin-1 was attended by Exxon’s partners in the production-sharing agreement, including Russian state oil company Rosneft, with a 20 percent stake, Japanese consortium Sodeco (30 percent) and India’s ONGC Videsh (20 percent).
Sodeco, working in partnership with the Soviet government, discovered oil off Sakhalin in the 1970s, but an agreement to develop the resources was not concluded until the mid-1990s, when Exxon joined the venture.
