RUSSIA EYES GREATER STATE CONTROL OVER SAKHALIN HYDROCARBON PROJECTS

Gazprom’s efforts to merge with the state-owned oil firm Rosneft appear to be part of a larger strategy to boost state-control over Russia’s energy sector.

The Gazprom-Rosneft merger, which likely will wrap up before Gazprom’s June shareholder meeting, will raise the government’s stake in Gazprom from 38% to a controlling 51%. Simultaneously, the deal will also make Gazprom a major player on Sakhalin Island in the Russian Far East.

Rosneft, which acts as the government’s agent in foreign oil projects in Russia, is involved in five out of six Sakhalin projects, potentially among the largest in the 21st century. Sakhalin crude oil and natural gas could be sent to nearby East Asian markets. Neighboring Japan is counting on Sakhalin to cut its dependence on Middle Eastern oil.

Yet even without waiting for its merger with Rosneft, Gazprom is seeking a bigger role in Sakhalin. Gazprom is close to agreeing on a deal to acquire a 25% stake in the $10 billion Sakhalin-2 project, according to Alexander Medvedev, head of Gazprom’s Gazeksport unit. The deal would give Shell a 50% stake in Zapolyarnoye in the arctic north of Western Siberia. Gazprom and Shell would become joint operators of Sakhalin-2 (RIA-Novosti, April 12).

Sakhalin-2 is the island’s most successful project to date. It has been producing oil since 1999 and is planning to build the world’s largest liquefied natural gas (LNG) plant by 2006. Not surprisingly, Gazprom has secured strong government backing. The Russian Industry and Energy Ministry said it would support Gazprom’s moves to join Sakhalin projects (RIA-Novosti, April 20).

Sakhalin Energy, of which 55% is controlled by Royal Dutch/Shell, already has agreements to sell most of its annual LNG output, (nearly 10 million tons), which it plans to start loading in November 2007. Japan’s Mitsui and Mitsubishi are minority shareholders in Sakhalin-2, with 25% and 20%, respectively.

Russia has sought Japanese funding to finance its own ambitious Sakhalin projects. According to Sakhalin governor Ivan Malakhov, the Japanese Bank for International Cooperation (JBIC) is willing to invest up to $4 billion in Sakhalin-2. “This is the largest Sakhalin-bound credit line from this bank so far,” he noted (Regnum, April 28).

Malakhov also indicated that the Sakhalin administration has taken steps toward launching a holding company to export energy resources to Japan. Initially, the holding would focus on selling Sakhalin’s coal to Japanese consumers (RIA-Novosti, April 27).

Sakhalin Energy Investment Corp. is also in talks with JBIC to finance gas projects. Sakhalin Energy reportedly aims at securing $5 billion to develop Sakhalin-2 (RIA-Novosti, April 28).

However, some Sakhalin oil and gas projects have not lived up to their ambitious projections. In December 2003, Rosneft announced it would halt work due to poor exploration results on Sakhalin-4, known as the Astrakhan bloc. The $2.5 billion project was previously believed to hold up to 100 billion cubic meters of gas.

In January 2004, Rosneft also announced withdrawal from Sakhalin-6. Rosneft was disappointed by the results of exploration on this bloc, which was initially believed to contain up to 2.2 billion barrels of oil.

Last year, Rosneft reportedly asked British Petroleum for an extra $5 billion over the next decade to tap their Sakhalin-5 venture. In 1998, Rosneft formed an alliance with BP to complete the Sakhalin-5 project. The deal gave BP 49% in an exploration venture for Sakhalin-5, while operator Rosneft held 51%.

Sakhalin-5 is potentially one of the largest projects, with an oil and gas condensate output forecast at more than 700,000 barrels per day, nearly as much as OPEC member Qatar. The hypothetical recoverable reserves of oil amount to 433 million tons. The estimated total cost of the project is $30 billion, while gross income estimates exceed $100 billion. Rosneft has said it expects first oil in 2010.

The most-advanced production sharing agreements (PSA) to date involve Sakhalin-1 and Sakhalin-2. They are estimated to require a combined $22 billion in investment. ExxonMobil is operating the $12 billion Sakhalin-1 project with a 30% stake, while the Japanese consortium Sodeco has another 30%. Affiliates of Rosneft have the remaining 20%. Sakhalin-1 includes three offshore fields: Chayvo, Odoptu, and Arkutun Dagi with potential recoverable resources at 2.3 billion barrels oil and 17.3 trillion cubic feet of gas.

Meanwhile, Russia has been moving towards abandoning the production-sharing system that guarantees investors stable taxes over the lifespan of a project. Only three advanced PSA projects survived, including Sakhalin-1 and Sakhalin-2, and a third in Siberia. Dozens of other less-advanced PSAs have been scrapped, including Sakhalin-3.

In January 2004, the Russian government annulled the results of the Sakhalin-3 tender, which had been won by a consortium led by ExxonMobil back in 1993. Sakhalin-3 consists of three blocs, Ayashsky, Kirinsky, and Odoptinsky, on the shelf of Sakhalin with combined estimated reserves 4.6 billion barrels (620 million tons) of oil and 770 billion cubic meters of gas.

In a move towards stronger state control in the energy sector, earlier this year the Russian government said that no foreign-controlled companies would be able to participate in the auctions of “strategically important” oil fields. In April 2005, Sakhalin-3 was mentioned as one of the “strategically important” deposits.