Publication: Eurasia Daily Monitor Volume: 3 Issue: 158

Apart from preparing to build the Altai gas pipeline from Western Siberia, Russian authorities have also indicated plans to build a new gas pipeline from Sakhalin to neighboring China along a network of gas pipelines to supply domestic consumers in Russia’s Far East.

After meeting with Exxon Neftegaz Limited head Stephen Terni, Khabarovsk region’s governor Viktor Ishayev said that local authorities were considering a new gas pipeline to China. The proposed Okha-Komsomolsk-on-Amur-Khabarovsk-China export pipeline, running from the island of Sakhalin off Russia’s Pacific coast via the Russian mainland to China, would have a projected capacity of 8 billion cubic meters (bcm) per year. The governor said the pipeline could be built in parallel with the nearly completed Sakhalin-Komsomolsk-on-Amur-Khabarovsk domestic pipeline, which is due to reach Khabarovsk in late 2006 (RIA-Novosti, August 2).

Exxon Neftegaz Limited holds a 30% stake in the Sakhalin-1 project, the largest foreign direct investment project in Russia. The Sakhalin-1 estimated reserves are 2.3 billion barrels (307 million tons) of oil and 485 bcm (some 17 trillion cubic feet) of natural gas. Sakhalin-1 began oil production in 2005 and expects to begin large-scale oil shipments by the end of the year.

Ishayev said the new gas pipeline could be built within five years, but the project should first be approved by the Russian government. He said that under existing contracts, Exxon would supply 2 bcm of gas per year to the Khabarovsk region, adding that the maximum capacity of the Sakhalin-Komsomolsk-on-Amur-Khabarovsk pipeline would be 4.5 bcm (RIA-Novosti, August 2).

Last June, the Khabarovsk regional government announced that the Okha-Komsomolsk-on-Amur-Khabarovsk pipeline was 95% completed and gas supplies to Khabarovsk were due in August. The Khabarovsk region’s total demand is currently estimated at about 3 bcm of gas per year.

In January 2006, Khabarovsk governor Ishayev and Gazprom deputy CEO Alexander Ananenkov signed an agreement on natural gas supplies to the region via Sakhalin-Komsomolsk-on-Amur-Khabarovsk. Ananenkov also indicated plans to build a Khabarovsk-Vladivostok gas pipeline by 2010, which could be potentially used for gas supplies to China.

In April, Gazprom indicated plans to acquire both the Sakhalin-Komsomolsk-on-Amur gas pipeline, controlled by Rosneft-Sakhalinmorneftegaz, as well as the 420-kilometer Komsomolsk-on-Amur-Khabarovsk section. In June Ananenkov announced an agreement with Daltransgaz to acquire the Komsomolsk-on-Amur-Khabarovsk pipeline. He also reiterated a readiness to buy the Sakhalin-Komsomolsk-on-Amur pipeline from Rosneft.

Meanwhile, the partners in the Sakhalin-1 oil and gas project have been considering natural gas exports to China for quite some time. For example, Rosneft CEO Sergei Bogdanchikov first indicated plans for China-bound gas supplies back in July 2005. In May 2006, Rosneft disclosed plans to build a petrochemical complex at the Komsomolsky oil refinery in Russia’s Far East, which would also export its products to China.

Commercial production in the Sakhalin-1 project has been trailing that of Sakhalin-2. One of Russia’s major offshore projects, Sakhalin-2 has reserves of some 150 million tons of oil and 500 bcm of gas. Oil production at Sakhalin-2 started in 1999. The second stage includes gas production and liquefaction at a new liquefied natural gas (LNG) plant on Sakhalin with projected annual capacity of 9.6 million tons.

State-owned Rosneft has a 12% stake in Sakhalin-1, while Russia’s gas monopoly Gazprom has been in negotiations to acquire a 25% stake in Sakhalin-2 in an asset swap with Shell. In July 2005, Royal Dutch/Shell nearly doubled cost estimates for Sakhalin-2 up to $20 billion and postponed the first liquefied natural gas shipment from the end of 2007 to summer 2008.

Earlier this year, Gazprom was reportedly planning to buy all gas from Sakhalin-1 for re-export to China. Although Gazprom has so far refrained from commenting on the reports, its intention to take over the Okha-Komsomolsk-on-Amur-Khabarovsk gas pipeline arguably indicates that Gazprom would prefer to buy all gas from Sakhalin-1 and then re-export the gas to China to make sure it remains the sole Russian gas exporter.

Now China is understood to be a major potential market for gas from Sakhalin-1. Japan is unlikely to consume any significant amount of natural gas from Sakhalin-1 before 2013, as this market appears oversupplied with imported LNG, Kommersant pointed out. South Korea is also an unlikely client because a gas pipeline through North Korea remains impossible, therefore China is an obvious option for gas exports, the daily wrote (Kommersant, August 3).

Apart from gas, Khabarovsk region also has the lucrative oil transit business under consideration. Ishayev said construction of the De-Kastri oil terminal in Khabarovsk region had also been discussed at the meeting, and that the terminal, from which oil would be exported to the Asia Pacific region, is due to be launched on October 4 (RIA-Novosti, August 2).