Asahi Shimbun (Japan): Despite delays and mushrooming costs, investors are confident that the Sakhalin II energy project in the Russian Far East will succeed…

PRIGORODNOYE, Russia–Despite delays and mushrooming costs, investors are confident that the Sakhalin II energy project in the Russian Far East will succeed because of a global shift to liquefied natural gas from crude oil.
Apr 01, 2006
The costs are now estimated at $20 billion (about 2.3 trillion yen), almost double the initial projection, due mainly to surging prices of construction materials and environment protection measures
In February, some 6,000 people from about 20 countries were working on construction of a natural gas liquefaction plant, one of the largest in the world, on a 520-hectare site in Prigorodnoye on the southern coast of Sakhalin island
Natural gas taken from two fields off the northeastern shore of the island will be transported through an 800-kilometer pipeline to Prigorodnoye, where it will be liquefied and shipped to Japan, South Korea and the United States
Shipment will start sometime between November 2007 and summer of 2008. Crude oil production began in 1999
The port of Prigorodnoye is not completely frozen during winter, enabling use of tankers with reinforced hulls. However, the temperature sometimes drops to minus 30 degrees, and ice floes halt work on offshore piers and other facilities
An official of project operator Sakhalin Energy Investment Co. said that because of Sakhalin's harsh environment the project will take 51 months to complete, compared with 36 months for a similar-size plant under normal conditions
More than 60 percent of the project has been completed, according to Sakhalin Energy. Completion rates for the LNG plant and the pipeline are 66 percent and 53 percent, respectively
In an environmental protection effort, a major cause of delays, Sakhalin Energy decided to reroute the pipeline to bypass the habitat of endangered western gray whales. Environmentalists are also watching the project for possible impact on Steller's sea eagles and other creatures
Winter's cold isn't the only weather obstacle. The pipeline sometimes runs under riverbeds, but installation has to be suspended between May and November to protect salmon and trout, which go upstream for spawning
A source close to the project said the operator had been too optimistic about the problems with Sakhalin's natural environment
Three shareholders in Sakhalin Energy–Royal Dutch/Shell Group, Mitsui & Co. and Mitsubishi Corp.–will be hit with huge cost overruns
Shell, which holds the largest 55-percent stake, plans to transfer some of the shares to Russian natural gas supplier Gazprom by swapping them for part of the latter's share in a gas field in western Siberia
The two Japanese trading houses expect participation by the Russian state-owned company to accelerate the project, although they will also have to relinquish part of their stakes
There have been suggestions in Russia of an alliance with the Sakhalin I gas and oil project led by Exxon Mobil Corp. of the United States, Itochu Corp., Marubeni Corp., Japan Petroleum Exploration Co. and others.
Under the project, natural gas will be delivered to Japan and China through undersea pipelines. However, the project has stalled because of compensation to the fishery industry and other problems
If the alliance is formed, natural gas from the Sakhalin I project will be liquefied at the Sakhalin II plant for delivery by tankers
However, many observers say the possibility is remote. “As two majors, pride will not allow Exxon and Shell to tie up,” a source said
Despite adversities, Sakhalin Energy is considering expansion
The plant under construction in Prigorodnoye, which consists of two production units, will have an annual capacity of 9.6 million tons of LNG. Retrofitting is expected to increase the capacity by more than 20 percent
Sakhalin Energy President Ian Craig has a more ambitious vision. He said the company is considering adding another unit in 2013, saying that the required land has been purchased
Behind his confidence is the geographical advantage of Sakhalin. It takes only two to three days by ship from Sakhalin to Japan, compared with about two weeks from the Middle East
A large number of expensive LNG tankers will be needed for delivery from distant producers. A ton of LNG from Sakhalin is expected to be $10 cheaper than that from the Middle East
The island, which has estimated natural gas reserves of about 500 billion cubic meters, might serve as a stable energy supplier to Japan as the North Sea is to Britain
Almost all annual gas output from the Sakhalin II project has found purchasers, including Japanese electric power and gas companies and a South Korean public gas company.
Copyright 2006. Asahi Shimbun