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Rosneft skeptical about viability of Sakhalin-5

Russian President Vladimir Putin has ordered his advisors to draft a detailed plan to develop Sakhalin Island’s infrastructure in the wake of a major earthquake there earlier this year. The situation in Sakhalin "should be radically improved," Putin told a cabinet meeting on October.

In the meantime, Russia's state-controlled oil company, Rosneft, questioned the commercial relevance of one Sakhalin offshore project. The East Kaigan deposit was discovered within the framework of the Sakhalin-5 project, but reserves there are yet to be proven large enough to be considered commercially viable, according to Rosneft CEO Sergei Bogdanchikov. Consequently, Bogdanchikov urged the government to introduce tax holidays for companies exploring shelf deposits in the Arctic and Far East.

The Sakhalin-5 project includes the Kaigan-Vasyukan and East Schmidt blocs. In May 2007 Rosneft announced that East Kaigan was estimated to contain 56 million tons of oil and 30 billion cubic meters of gas. The project is operated by Elvari Neftegaz, a joint venture with BP in which Rosneft has a 51% stake. Rosneft said it had invested nearly $200 million in the Sakhalin-5 project.

Yet despite its doubts, Rosneft has signaled plans to invest in Sakhalin infrastructure development. At a meeting with Sakhalin regional governor Alexander Khoroshavin, Bogdanchikov pledged to invest 1 billion rubles ($40 million) in regional social programs. In response, the Sakhalin regional government promised Rosneft that it would cut some local taxes.

Russia's gas monopoly, Gazprom, has indicated similar plans. On September 28, Mezhregiongaz CEO Kyril Seleznev pledged to add Sakhalin to Gazprom's program of "gasification." He also indicated plans to include the Krasnoyarsk, Sakha-Yakutiya, and Khabarovsk regions in the program. Earlier in 2007, Gazprom added five more regions to the "gasification" program, which are aimed at developing Gazprom's retail distribution networks in 58 Russian regions.

The country's power grid, Unified Energy Systems (UES) acted accordingly. On September 28, UES announced plans to hold three issues of new shares of Sakhalinenergo in 2008-2013 in order to attract strategic investors. Sakhalin's energy consumption is expected to grow by some 2% per year until 2020, and the region will need some 450 mWt of new generation capacities by 2020, according to UES officials.

Apart from domestic investments, Russia has also been trying to invite Chinese companies to develop Sakhalin. In July 2005, Rosneft and Sinopec, a subsidiary of the China National Petroleum Corporation, concluded an agreement to launch a joint company for geological exploration of the Veninsky deposit, part of the Sakhalin-3 project. In May 2006, China's State Bank of Development announced it had begun financing Chinese companies in Sakhalin.

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. Now state-owned Rosneft holds a 75% stake in Sakhalin-3. Gazprom has indicated plans to join the Sakhalin-3 project and to spend $10-15 million on a geological survey in 2007, aiming to start gas production there in 2013-2014.

On October 1 Russian Natural Resources Minister Yuri Trutnev indicated plans to classify the Sakhalin-3 as a strategic deposit and auction it accordingly (Interfax, October 1). Russia is currently drafting a bill on strategic deposits that would limit foreign investment in the development of such projects. If declared a “strategic deposit,” Sakhalin-3 will presumably be acquired by Russia's state-run energy giants.

Earlier this year, Gazprom became the major shareholder in the $20 billion Sakhalin-2 oil and gas project, now 80% complete. Gazprom acquired a 50% stake in Sakhalin-2 from Royal Dutch Shell, Mitsui, and Mitsubishi for $7.5 billion.

However, Gazprom's involvement has done little to speed up Sakhalin-2 development. On September 25, Sakhalin Energy said it would put off all-season exports of oil until the first half of 2008, while it was previously expected by the end of this year. But the company said that LNG exports would start as planned, in the second half of 2008.

Simultaneously, Gazprom and Rosneft were reported to disagree on Sakhalin gas export policies. While Rosneft has backed natural gas supplies to China from Sakhalin-1, Gazprom was said to oppose these plans, thus causing some uneasiness among Chinese officials.

Therefore, Russian officials have been keen to reassure their Chinese counterparts. On September 28, Russian Deputy Prime Minister Alexander Zhukov told his Chinese counterparts that Russia had honored its energy export commitments, including pledges to build an oil pipeline from Skovorodino to China's border. During talks in Hanzhou, he also pledged to develop joint refinery and gas-chemical projects and said that Russian companies should speed up negotiations on gas exports to China.

However, even Russia's official media sounded critical, and Zhukov proved unable to dismiss Chinese doubts. According to the official Rossiiskaya gazeta newspaper, “Chinese comrades are losing hope" that oil and gas from Sakhalin-1 could be supplied to China any time soon, as Gazprom opposes plans to export Sakhalin gas to China, it wrote. Gazprom and the Chinese remain divided over gas prices, and Zhukov's visit did not change that situation.

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