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Russia to Become Key Player in World LNG Over Next 10 Years


July 6, 2008

Russia to Become Key Player in World LNG Over Next 10 Years

?onstruction works on the centrepiece of the huge oil and gas Sakhalin II development – the LNG plant – are nearing completion.

By Yagmur Kurbanov

Russia to Become Key Player in World LNG Over Next 10 Years

Yagmur Kurbanov

?onstruction works on the centrepiece of the huge oil and gas Sakhalin II development – the LNG plant – are nearing completion. Viktor Snegir, commercial director of Sakhalin Energy and Bert Christoffels, Prigorodnoye asset manager talked to Oil&Gas Eurasia about the future perspectives of the first Russian LNG plant.


Oil&Gas Eurasia: What is the production capacity of the LNG plant at the start of operations and what is the highest volume that will be produced?

Bert Christoffels: We will first start with one LNG train and it will take us roughly four to five months to start it up from zero to the full production capacity of the train. Almost in parallel but just about two months after the first train is brought into operation, we will start-up the second train.

There will be two identical LNG production trains of 4.8 million tons per year at the LNG site. The design capacity of the LNG plant is 9.6 million tons of LNG per year. However, increasing the production is the normal practice for LNG plants worldwide. Our earlier experience shows that once people are trained and we know exactly how to manage our maintenance stops you will see production slightly increasing by one to two percent per year. Of course, we talk here about the whole value chain from the Lunskaya platform, via the OPF, pipelines to the LNG plant. We have already started working on it to increase the annual capacity. 
Today, Quatar is really going ahead with 77 millions tons, and Australia goes up to 20 million tons now. Yet, with companies like Gazprom, I believe that that in the next 10 years Russia will become one of the key LNG players. 

We have reserved plot space for possible construction of the third train in the future. If you look at other large LNG projects – for example, in Australia – they started with two trains and have now extended the project to five trains. In Nigeria they started with two trains; today they have already started up the sixth train, and the seventh train is being constructed. So it’s normal if you are in a certain place with sufficient reserves to make a decision (done by the by shareholders, of course) to extend such a complex with a new LNG train.

OGE: How many LNG storage facilities will be installed at the plant? What are their storage facilities capacities?

Christoffels: We have one storage area at the LNG Plant. In this area are two LNG tanks of 100,000 cu. m each.

OGE: How will QHSE (quality, health, safety and environment) will be implemented on the plant?
Christoffels: This project was started with very good results in safety. In 2007 we registered 20 million man-hours without lost time injury and at the moment the project has reached another milestone of 15 million. We are very proud of that, it is very hard work by the main contractor CTSD, their subcontractors and the SEIC staff. We talk here of world class performance, done here on Sakhalin – Prigorodnoye. Let me elaborate on this milestone. On Oct. 16, 2007 on Shell Safety Day, the new prestigious annual Shell Chief Executive’s HSE Award was presented to the Sakhalin Energy LNG/OET Project Team. This was for our efforts to manage LNG HSE performance in 2006–2007 and the magnificent milestone of 20 million hours without a lost time injury. The Prigorodnoye LNG team was ultimately judged the best nomination out of 240 worldwide and as such took one of the top prizes in this global Shell competition. So we do have the culture of working safely. Our smaller permanent team has achieved our first million man-hours LTI free and of that, we are very proud. 

I arrived on Sakhalin Island in March 2004 charged with the task of building up the organization and making everything ready for the start-up of the oil terminal and the LNG trains to design throughput. We’re now four years down the road and I must say we just had an audit that confirmed we’re almost ready, though we still have to do some work. The audit was on “Process Safety” where people look at all your processes: do you have your maintenance system in place, is your organization ready, are the people trained, is your emergency response done and etc. We were judged as being satisfactory. Of course Russian authorities are looking to us in an equal way. Bodies such as RTN and MChS are judging us on our state of readiness and will provide us permission to introduce hydrocarbons, when we have fulfilled all Russian legislation. 

Quality is based on international ISO standards but also on Russian GOST standards. For example, our laboratory has been already accredited to ISO standards and Russian GOST standards before start-up, a milestone achieved. We’re very proud of our lab people. We also work on ISO 9000 series and ISO 14001 for environmental certification. And then we will be internationally recognised as an environmentally friendly company. We are fully convinced that once we have the pipeline gas we can start-up the plant in a safe way and controlled way.

OGE: Are there any programs for associated gas utilization at the plant and how it will be realized?
Christoffels: We don’t have associated gas, but we produce condensate from the natural gas when in our cool down process the temperature is dropped. Condensate will be injected in the crude oil.

OGE: Would you please give me some examples of using any outside experience on the LNG plant (e.g. technology, shipping etc.)?

Christoffels: The technology that we use is called DMR (Double Mixed Refrigerant) process designed by our licensor Shell. This is the first time this technology will be used. It was specially designed for Arctic conditions of Sakhalin. 

Another innovation applied in Prigorodnoye is LNG import. As an alternative to pipeline gas, LNG was imported to the LNG plant to allow commissioning and start up. Usage of the imported gas allowed the project to carry out the required commissioning and start-up of the plant in parallel with the final construction stages of Sakhalin II facilities. 

We have put a lot of experience from other projects into the design and the way we operate this plant. For example, we said that we want at least 100 years of LNG experience per shift and we have that at the moment. We also use the knowledge of other projects. For example, our contractor building the LNG plant – Chiyoda has been involved in another successful LNG project in Oman. So we use a lot of experience and “lessons learned” in this project. 

As for myself, I was involved in other LNG projects and what I’ve learnt there I apply now for operations and maintenance.

OGE: What is your opinion about a number of staff working at the plant and on the jetty? How many Russians will be there?

Christoffels: For building up the organization, for identifying how many people we need, we use the benchmarking techniques. We looked over the LNG plants both in and outside of Shell in order to build our organization for the steady state operations and to fulfil our strategy of building up a strong Russian workforce. Our plan is to have well over 90 percent Russian staff after the first major shut down of the second train.

 We spent a lot of time on the job training, sending staff to courses and on familiarization visits to other LNG plants I must say that our Russian staff is picking up very quickly and we can already see some people, some talents coming to the higher ranks in the organization. So we are in some cases, exchanging expatriates out for Russian colleagues earlier than anticipated.

If you look at our own Sakhalin Energy organization we will be starting with roughly 310 people and the plan is to go down in the coming 10 years for some 190 people. In 10 years time our employees will be more than 95 percent of Russians. However there will always be a few foreigners because some Russians will go to other plants in the world. At the moment we have recruited 180 Russian specialists. Our strategy is to take out the expatriates as soon as the Russian staff is competent to take over the responsibilities.

Sakhalin Energy LNG To Account for 5-6 Percent of Future World Output


Oil and Gas Eurasia: What is the contracting status of the LNG to be produced by Sakhalin Energy’s plant in Prigorodnoye? 

Viktor Snegir: Buyer commitments have been received for 98 percent of the future output of the LNG Plant. Long-term contracts have been signed with 11 buyers for gas deliveries to Japan, Korea, Mexico and the United States. 

With the growing demand for clean types of energy, one of which is LNG, Sakhalin Energy has succeeded in offering competitive LNG deals to its buyers. It will take only three days to deliver LNG from the Sakhalin II plant to Japan and Korea. Sakhalin is also the closest source in Asia for LNG supplies to the U.S. West Coast. 

This allows the buyers to diversify their LNG portfolios for higher energy security, as well as cut shipping costs, make their planning more efficient and employ their LNG fleets. Sakhalin Energy’s ability to supply more LNG in winter because of Sakhalin’s severe climate is particularly attractive for meeting winter peak demand. 

It is worth noting that at full capacity our LNG plant will produce 5-6 percent of the world LNG output. 
A feature of the LNG contracts is that they lay a basis for long-term relationships between the buyer and the seller. To market our LNG we used the buyer engagement experience we have accumulated since 1999, the year when the project shipped first Russian oil to the Asia-Pacific market. Gazprom has a robust track record as a stable gas supplier to Western Europe, and Russia is again proving itself in the Asia Pacific region via Sakhalin II. 

There is no doubt that the Sakhalin II experience, including the LNG production-to-marketing cycle, will be a good basis for future Russian LNG projects, which are already on the agenda. 

OGE: How will Sakhalin II LNG delivered to the buyers? 

Snegir: It gives me great pleasure to share with you that on April 8, a new LNG carrier that will deliver this environmentally friendly fuel to buyers was named in a special ceremony held at the Mitsui Engineering and Shipbuilding yard in Chiba, near Tokyo. 

It was named Grand Mereya for the River Mereya, which borders the LNG plant. This is the third LNG carrier built for the project. The first two – Grand Elena and Grand Aniva – built by Mitsubishi Heavy Industries have been handed over to Sakhalin Energy. 

The three vessels – Grand Aniva, Grand Elena and Grand Mereya – are the first LNG carriers that will be used by Sakhalin Energy to transport gas to buyers. 

These LNG carriers were built by the Russian-Japanese consortia, which combined the Japanese expertise of the LNG fleet construction and operation and the Russian ice navigation experience contributed by the leading companies Sovcomflot and PRISCO. 

These LNG carriers will ship around 20 percent of our LNG on a Delivered Ex-Ship (“DES”) basis. According to these contracts, it is Sakhalin Energy’s responsibility to handle the delivery of LNG cargoes to the buyers’ terminals. 

Apart from that, we have also signed a number of LNG FOB contracts. To support the LNG supplies under these contracts, our buyers undertake to build LNG carriers with a capacity to call year-round at Prigorodnoye port, Russia’s first special port for LNG/oil export, which was built within the Sakhalin II project.

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