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Reuters: Sakhalin energy project warms to icy challenge

By Ikuko Kao
YUZHNO SAKHALINSK, Russia, March 1 (Reuters) – Earthquakes, rare whales and bitter cold have presented Royal Dutch Shell with high hurdles for its giant Russian Sakhalin energy project. Yet the company can count itself lucky.
Even with further project delays and cost increases possible, it is making steady progress on Sakhalin 2, one of only two developments underway in a region officials say holds more crude oil and natural gas than Europe's North Sea.
A jetty stretching into the icy waters off Russia's far east coast looks forlorn but is a footstep of progress made by Shell , as it tries to challenge nature to ship liquefied natural gas (LNG) to countries enamoured with the clean fuel.
By summer 2008, LNG will start flowing from the jetty on tankers heading around the Pacific, relieving energy markets stretched by surging gas demand for residential and industrial use from Asian and U.S. consumers.
The Anglo-Dutch oil major and its partners, Japan's Mitsui & Co. and Mitsubishi Corp. , missed an initial November 2007 target for the first LNG shipment from Sakhalin 2 by six months because of ecological obstacles and repeated postponements by Russian authorities over expenditure.
Project costs have doubled to $20 billion.
And there may still be a risk of further delays, though the world's largest LNG project is progressing at the quickest pace out of nine energy projects in Sakhalin.
“The project is just over 60 percent complete at the moment,” Sakhalin Energy's chief executive Ian Craig said.
Shell plans to start year-round crude oil production in 2007, Craig said. Its oil production is now suspended for about six months in the year because of drift ice shutting ports.
Sakhalin 2 consists of gigantic offshore platforms, oil and gas pipelines with a total length of 800 kilometres (497 miles), as well as terminals with two LNG trains that chill natural gas to a liquid form for transport.
Sakhalin, an island about the size of Scotland, has a population of around 530,000 and holds an estimated 45 billion barrels equivalent of recoverable oil and gas reserves.
But the biggest challenge is the island's harsh if beautiful natural environment.
In addition to frigid weather that sees temperatures plunge to minus 30 degrees Celsius on winter nights, the land has numerous seismic faults as part of the Pacific's rim of fire.
Pipeline crossing points at active faults at the southern part were still under design, engineer Samar Slim told Reuters.
He has to use the costly technique of horizontal drilling to avoid damaging rivers where salmon come to lay eggs in summer.
“It is a lot more expensive than normal methods (to build pipelines). In my understanding, 10 times more,” Slim said.
The dark waters of the Sea of Okhotsk provide a rich marine environment, harbouring feeding grounds for the endangered Western Gray Whale that environmentalists fear have been disrupted by the project.
Shell says it is working to safeguard the species, with Sakhalin Energy spending about $7 million on whale research from 1997 to 2005 and agreeing last year to reroute offshore pipelines.
Humans are also an endangered species on Sakhalin.
Construction workers at Sakhalin 2's Prigorodnoye terminal in the south, where the two giant LNG trains reside, are bundled up in padded clothes like skiers to protect their bodies from heavy snow, only their frost-crusted eyes visible from outside.
The workers have to warm up machinery parts in tents — not to mention themselves — before putting them into action, a practice hardly necessary in warmer energy producers such as Saudi Arabia, and one adding to the project's time and cost.
“Usually, it takes about 36 months to complete construction works of this kind of facility. But here in Sakhalin, the first train takes 51 months,” said Frank Fletcher, project manager at the plant.
The jetty, chilled by wind from Aniva Bay and still not connected to land like England's fire-wrecked old Brighton pier, is still waiting for spring and the return of more workers, whose numbers rise from 6,000 in winter to 8,000 in summer.
Up to 5,000 construction workers live in a camp just next to the plant. The main office's walls are full of cautious advice: “Drugs don't relax you. It kills you… Alcohol doesn't build friendship, it destroys it… Safe sex, or no sex.”
Shell has sold about 75 percent of its planned 9.6 million tonnes a year of LNG from Sakhalin 2 on long-term supply contracts to Japan, South Korea and the U.S. West Coast.
But Sakhalin 2 is only developing about 10 percent of the area's resources and Shell is not the only one eyeing the riches.
Russia's gas monopoly Gazprom is negotiating with Shell to take 25 percent of Sakhalin 2.
There are eight other new energy projects, including Sakhalin 1 led by U.S. oil giant Exxon Mobil Corp .
Sakhalin 1 started commercial crude oil production in October, but Exxon has not begun to build gas facilities since it first needs a buyer; unlike Shell it plans to transfer gas from Sakhalin 1 to a single customer, possibly China, via a pipeline.
Exxon had hoped to develop Sakhalin 3, under a previous deal scrapped by the government. The field is expected to be auctioned later this year.
“The rest of the projects just have numbers,” an industry official said.

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