Sakhalin-II

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The Sakhalin II (Сахалин-2) project, like its sister project Sakhalin-I, is an oil and gas development project on Sakhalin Island and immediately offshore, in the Sea of Okhotsk, from two fields: Piltun-Astokhskoye and Lunskoye. Piltun-Astokhskoye is primarily an oil field, and Lunskoye is primarily a gas field. The project has been met with heavy criticism over the potential environmental impact, which could include driving the world's last 100 remaining Western Pacific gray whales to extinction. The project is managed and operated by Gazprom lead consortium Sakhalin Energy Investment Company Ltd. (Sakhalin Energy).

The first ever Production Sharing Agreement (PSA) was completed with Russia in 1994, with the signing of the Sakhalin II project consortium. In the Piltun-Astokhskoye field in July of 1999 production began from the Molikpaq platform, Vityaz Complex, and in September of 1999 the first crude was exported.

Contents 1 Technical features 1.1 LNG 1.2 Oil export terminal 1.3 Platforms 1.4 Onshore processing facility 1.5 Pipeline 1.6 Offshore pipelines 1.7 Infrastructure upgrade projects 2 Environmental issues 2.1 General demand 2.2 Gray whale conservation 2.3 Pipeline 2.4 Fisheries 2.5 Access to information and public participation 2.6 Socio-economic issues and financial responsibility 2.7 Visible impacts on rivers/streams 2.8 Plagiarism controversy over Sakhalin-2 motivational email 3 References 4 External links

[edit] Technical features

The two fields contain an estimated 1.2 billion barrels (190,000,000 m³) of crude oil and 500 billion cubic meters (18 trillion cubic feet) of natural gas; 9.6 million tonnes of liquefied natural gas a year and about 180,000 barrels per day (29,000 m³/d) (29,000 m³/d) of oil will be produced. The total project cost until 2014 was originally estimated by Shell to be between $9 and $11 billion US dollars. However, the costs turned out to be substantially underestimated and in July 2005 Shell revised the estimate upwards to $20 billion, causing much consternation among analysts and Russian business partners alike. There are six main phases to the project: field development in the Piltun-Astokhskoye oil field, field development in the Lunskoye gas field, upgrading infrastructure on the island (IUP — Infrastructure Upgrade Project) which includes building a pipeline to Prigorodnoye on Aniva Bay, building an onshore processing facility (OPF), building an oil export terminal (OET), and building a liquid natural gas (LNG) plant and terminal.

[edit] LNG

This will be the first ever LNG plant built in Russia. Royal Dutch Shell estimates that the LNG plant will have the ability to meet eight percent of the world’s current LNG demand, 9.6 million tonnes of LNG per year, at the new plant, which will be in Prigorodnoye on Aniva Bay on the southern tip of Sakhalin, 13 kilometers east of Korsakov, on 4.9 km². Two trains will have an annual capacity of 4.8 million tones each. The consortium is examining the possibility of adding another train.^[1]

The LNG plant will have two LNG storage tanks of 100,000 cubic meter net capacity each and LNG will be exported via an 805-metre jetty in Aniva Bay. The jetty will have two loading arms and one boil-off gas return arm, with ship loading expected to take between six and sixteen hours depending on the size of the cargo.

An important step for the project has been to have LNG contracts in place with major customers. The first shipments of LNG are projected to be summer of 2007. So far Sakhalin Energy has signed up three LNG agreements:

• Tokyo Gas: 1.1 million t/year - 24 years (May 2003)
• Tokyo Electric Power Company: 1.5 million t/year - 22 years (May 2003)
• Kyushu Electric Power Company: 0.5 million t/year - 21 years (2003).

The LNG plant construction consortium is awarded to two Russian companies, OAO Nipigaspererabothka (Nipigas) and the KhimEnergo consortium, together with two Japanese companies Chiyoda Corporation and Toyo Engineering.^[2]

[edit] Oil export terminal

Located on Aniva Bay, 500 meters east of the LNG plant, its total storage capacity will be 1.2 million barrels (190,000 m³) in two tanks (about six days pipeline throughput). A underwater pipeline to a tanker-loading unit (TLU), which is located about five kilometers offshore in the bay can load oil at a rate of 50,000 barrels (7,900 m³) per hour (8,000 m³/h).

[edit] Platforms

• The Molikpaq Platform (PA-A)
  • Originally a drilling rig from Arctic Canadian waters
  • Built to operate in severe ice conditions
  • 16 km offshore
  • 120 m wide
  • Weight 37,523 t
  • 150 personnel
  • Ballast 278,000 m³ sand
  • Temperatures offshore: down to -70 °C wind chill

• Piltun Astokhskoye Platform (PA-B)
  • Four legged concrete gravity substructure engineered and constructed by Aker Kværner Technology AS and Quattrogemini OY
  • Topsides designed by AMEC, construction by Samsung Heavy Industries, transported and installed by Saipem by float-over method. At 28,000 tonnes, one of the largest floatover installations ever.
  • Construction began - 4Q 2003
  • Start of production expected – 4Q 2007
  • Water depth 32 m
  • Living quarters for 100 permanent & 40 temporary personal
  • Capacity:
    • Oil approximately 70,000 barrel/d (11,000 m³/d)
    • Associated gas 100,000,000 ft³/d (2,800,000 m³/d)
  • PA-B platform was installed by SAIPEM on 5 July 2007 by float-over method.

• Lunskoye Platform (LUN-A)
  • Four legged concrete gravity substructure engineered and constructed by Aker Kvaerner Technology AS and Quattrogemini OY
  • Topsides designed by AMEC, construction by Samsung Heavy Industries, Transported and Installed by SAIPEM by float-over method.
  • Construction began - 3Q 2003
  • Start of production expected – 1Q 2007
  • 15 km offshore
  • Water depth 48 m
  • 90 permanent & 36 temporary personnel
  • Capacity:
    • Gas approximately 52 million m³/d (1,800,000,000 ft³/d)
    • Peak liquids and condensate about 8,000 m³/d (34,000 barrel/d)
    • Peak oil 2,500 m³/d (16,000 barrel/d)
  • LUN-A platform was installed by SAIPEM on 23 June 6 by float-over method.

[edit] Onshore processing facility

• 7 km inland inline with Lunskoye
• Construction: BETS joint venture:
  • Technostroyexport (Russia)
  • Enka (Turkey)
  • Bechtel (US)
• Cost: $250 million (US)
• Construction commenced 2nd half 2003
• Production start-up - Q4 2005 to Q4 2006.
• 100 MW power plant
• Capacity
  • Gas: 1,800 million standard cubic feet per day (51,000,000 m³/d)
  • Condensate/oil: 60,000 barrels per day (9,500 m³/d) (9,500 m³/d)

[edit] Pipeline

Phase two in the project is the construction of two 800 kilometres (500 mi) pipeline systems from the fields on the northeastern edge of the island to a Liquefied Natural Gas (LNG) and an Oil Export Terminal (OET) at the south end. The US$1.2 billion pipeline was awarded to a consortium of two Russian companies Starstroi and LUKoil-Neftegazstroi together with two European companies Saipem SA and AMEC Spie Capag. The project is estimated to employ between 5,000 and 6,000 people from design to completion in December 2006.

The pipeline includes:

• 126 kilometres (78 mi) of swamp crossings
• 110 kilometres (68 mi) over mountainous routes
• 1,000-plus (mainly small) river crossings
• 18 rail crossings
• 10 road crossings.
• Trench buried (with 0.8 to 1 m cover on top of pipe)
• Block valves: 51 gas; 108 oil; 6 multiphase (all remotely operated)

[edit] Offshore pipelines

The offshore pipelines will be installed by Saipem. The total overall length is 165 kilometres (103 mi). The system includes:

• Two 42 kilometres (26 mi) x 356 millimetres (14 in) pipelines from Piltun-Astokhskoye B platform (PA-B) to shore.
• Two 17.5 kilometres (10.9 mi) x 356 millimetres (14 in) pipelines from Piltun-Astokhskoye A platform (PA-A or Molikpaq) to shore.
• Two 13.5 kilometres (8.4 mi) x 114 millimetres (4 in) pipelines from Lunskoye Platform (LUN-A) to the shore.
• One 13.5 kilometres (8.4 mi) x 762 millimetres (30 in) pipeline from shore to LUN-A to provide gas to the facility.
• One 5.5 kilometres (3.4 mi) x 752 millimetres (30 in) tanker loading line from the OET (Oil Export Terminal) to the TLU (Tanker Loading Unit) in Aniva Bay.

[edit] Infrastructure upgrade projects

Sakhalin II will create permanent work for up to 2,400 people and jobs for an estimated 10,500 more during the construction period. Together with Sakhalin-I, unemployment should remain low and island improvements greatly expanded. To complete the plants and pipeline, Sakhalin Energy will spend $300 million (US) to upgrade the islands infrastructure: roads, bridges, waste management sites, airports (including one at Nogliki), railways and ports, at more than 50 construction sites.

• Sakhalin Western Marine Port: To allow for the inbound receipt of Phase 2 construction materials including pipeline and Onshore Processing Facility cargo, the Port of Kholmsk, on the southwest part of the island, has been upgraded. Work includes: dredging works, quayside works, installation of rail sidings, access roads, 4 x 20 t and 1 x 32 t gantry cranes erected, Berth 5 has been refurbished, final works at the port including office and warehouse upgrades are currently ongoing.
• Federal Roads and Bridges: 39 bridges & bridge approaches, bridge and culvert construction, 16 km of federal roads are being reconstructed, and a further 12 km of federal carriageway is being asphalted.
• Onshore Processing Facility (OPF) Site Works: Temporary site works at the Onshore Processing Facility (OPF) site, including construction of an 115,000 m² Site Construction Camp Area and a 70,000 m² Temporary Works Area, 6 km Beach Access Road (BAR) and an 11,000 m² Beach Laydown Area (BLA) at near-by Lunskoye beach.
• Onshore Processing Facility Southern Access Road (SAR): 76 km of access roads to the OPF facility. Including the SAR (0-57 km) project, involving redesigning and upgrading 57 km of road including 13 bridges, the SAR (57 to 76 km), involves the construction of 20 km of new road.
• Railways: Railway upgrades, 9 separate rail sidings, and 2 new passing loops on the main line (west coast).
• Phase 2 Project Office: 250-person, 3-story project office facility in Yuzhno-Sakhalinsk
• Phase 2 Accommodation Facility: 13 two-story apartment buildings (104 units), accommodation facilities near Zima Highlands, a multi-use recreation facility, a mechanical and electrical building and a free-standing security building.
• LNG Site Works: general site clearance, archaeological works, demolition works and the removal of submarine cables from Aniva Bay.
• Municipal Works: Road and bridge upgrades for 7 Island’s Municipalities: Dolinsk, Kholmsk, Korsakov, Makarov, Nogliki, Poronaysk and Yuzhno-Sakhalinsk.

[edit] Environmental issues

The project has been dogged by environmental and social criticism and opposition from numerous environmental groups including Sakhalin Environment Watch, World Wide Fund for Nature, Friends of the Earth, Bankwatch, Pacific Environment, IUCN, as well as from residents of Sakhalin and independent scientists.

One key concern is that the project will push the world's last 100 or so Western Pacific gray whales into extinction.^[3]

Other concerns are that the project will threaten the livelihood of tens of thousands of fishermen, destroy the key salmon fishing area off the island by dumping one million tons of dredging spoil waste into the sea, and imply a long-time threat of a large oil spill in the Sea of Okhotsk and Sea of Japan.^[4]

The key NGOs demands in this regard are as mentioned below.^[5]

[edit] General demand

• Use of best technology.
• All companies must comply with highest global environmental standards, norms, and rules.
• All companies must comply with Russian law, especially environmental protection law.

[edit] Gray whale conservation

• Any anthropogenic activity that could potentially disturb gray whales, or deleteriously impact the ecosystems in which they feed or migrate, should fully protect gray whale habitat and should be mitigated to eliminate disturbance while feeding and protecting this critically endangered species.
• The new proposed platform for the Piltun-Astokhskoye field for Sakhalin-2 Phase 2 should be moved at least 12 nautical miles (22 km) from shore in order to ensure that the platform does not harm the habitat of the critically endangered western grey whale.
• All underwater pipelines should be constructed and routed outside of the gray whale feeding habitat to ensure their safety.
• Any disruption of the seabed must be avoided year-round in the feeding area of gray whales or within 12 miles (19 km) of gray whale habitat.
• Avoid any construction activities in gray whale feeding habitat and in a 30 km zone around that habitat as well as in migration lanes during those portions of the year when Gray whales are found in these areas.

[edit] Pipeline

• Should take care of seismic activity and can withstand earthquake of 9 magnitude on richter scale.
• Aggressive and effective measures in order to prevent oil spills and to be prepared for their clean up.
• Pipeline crossings across all spawning rivers and streams on Sakhalin Island must be made with a bridge over the river, on specially designed suspension systems, to avoid damage to the streambed and water channels.

[edit] Fisheries

• Sakhalin Energy - must fully estimate damage to commercial and non-commercial fisheries resources, to spawning grounds, to migratory fish populations (salmonids), to terrestrial flora and fauna that is caused during construction and operations.
• Discharge of any wastes into Aniva Bay should not be allowed.
• Special routes and safety corridors must be set up for all tankers transporting oil along the eastern shore of Sakhalin Island and through the Tatar Strait, as well as in the Sea of Japan.

[edit] Access to information and public participation

Sakhalin Energy must provide complete access to all information on the status and protection of the environment, and in particular, all data on environmental monitoring

[edit] Socio-economic issues and financial responsibility

Environmental organizations believe that the oil companies, in order to solve a very serious energy crisis on Sakhalin, must sell extracted natural gas on the local market for heat and electricity at domestic Russian prices and not at world prices as is now planned by Sakhalin Energy - Shell.

Criticism has also come from other sides. In 2005, the European Bank for Reconstruction and Development, a potential financier of the project deemed Sakhalin-II 'unfit for purpose' due to environmental concerns.^[6] The project, many argued, was in direct violation of the Equator Principles, a set of voluntarily guidelines adopted by the world’s leading banks, and a number of Equator Principles banks have already indicated that they will not fund Sakhalin II.

Shell has responded to these concerns saying that the project meets lenders' policies and that environmental and that social issues have been met.

In the summer of 2005 Sakhalin Energy, the project operator, doubled its estimated capital costs to around $20 billion and LNG production was delayed until 2008.^{[citation needed]} Shell expressed surprise at this huge increase. Environmental reasons accounted for part of the budgetary errors. Pipeline routes from the platforms to the island had to be changed to avoid the feeding grounds of an endangered species of whale and redesign was needed to prevent the onshore pipelines from damaging the environment. The local community on the island has protested about damage to fishing and to reindeer herding, their most important economic activities.

Around the same time (July 2005), a Russian court upheld the appeal of environmentalists who claimed in a petition that the Environmental Impact Assessment of the company’s parent body, the Sakhalin Energy Investment Company, was inadequate. Sakhalin Energy however denied the claims and stated them as vague and inaccurate.^[7]

The environmental and social concerns came to a head at the end of November 2005 when the Chief Executive of WWF, Robert Napier, said that it would have a "negative impact on Sakhalin's people and environment". The timing of this attack was difficult for Shell and the other consortium partners as they were seeking financing for the project from the European Bank for Reconstruction and Development (EBRD) at that time. WWF has asserted that Sakhalin-2 threatens marine life as well as potentially damaging the local communities in the region. The EBRD is required to adhere to the "Equator Principles" that require all lendings it makes to meet ethical guidelines. Shell has commented on WWF's assertion by saying that the project meets lenders' policies and that environmental and social issues have been met.^[8]

In September 2006, Oleg Mitvol, the deputy head of the Russian Federal Service for the Oversight of Natural Resources, called for construction work to be halted and threatened to revoke environmental authorisation for Sakhalin II pipeline installation. The grounds given for the possible revocation included alleged negligent installation work, safety breaches and violation of the pipeline route plan. Mitvol alleged that damage already caused to the environment would cost $50 billion to repair. The move was supported by President Vladimir Putin, said to be furious that the estimated project cost had doubled to $20 billion. The increased cost will delay the date that revenues flow to the state under a Production Sharing Agreement (PSA). NGOs concerned about the impact of the project on the endangered Western Gray Whale population supported a related re-evaluation process by the Russian environmental ministry.

Energy analysts believe alleged violations of the environmental regulations are in fact a pretext by the Russian government to pressure Sakhalin Energy to sell a large stake to the state gas monopoly, Gazprom. It is also possible that Russia wishes to renegotiate the PSA, because PSA's were signed in 1990's when the Russian govt. and the economy were weak, and the energy sector was desperate for western expertise. With its economy in a better shape than in 1990's the Russian govt. perhaps now believe that their predecessors have signed away country's asset at knock-down prices. The uncertainty generated by Russian ministry announcements and comments attributed to President Putin has created an international furore with high level protests from many governments, including the USA, the UK and Japan. The EBRD has put back a decision on project funding pending clarification of the situation, including a threat by the Russian authorities to launch legal proceedings against Sakhalin Energy. On 11 January 2007, EBRD withdrew its consideration of financing for Sakhalin II, claiming that Gazprom’s acquisition of the controlling share of Sakhalin II resulted in a significant material change to the project making it is unfeasible for the EBRD to pursue the current project. Meanwhile, environmental organizations contend that Sakhalin II had chronically and substantially violated EBRD’s environmental policy.

The spiralling project costs have continued to undermine confidence in Shell's reputation for project manangement. On 22 October 2006 an article in The Observer reported that a leaked internal report by the Russian government estimated that the final cost would now reach $28 billion. Alfred Donovan and his son John Donovan, the owners of a website Royaldutchshellplc.com outspokenly critical of Shell management, claimed to have supplied important information to the Russian government since September 2005 concerning Sakhalin II project costs and environmental issuesincluding leaked internal correspondence between senior Shell managers. Recipients of the information purportedly included Oleg Mitvol, the aforementioned Deputy Head of RosPrirodNadzor, vividly described in a Guardian newspaper article as a “Kremlin attack dog” - “6 ft 2 in and dressed in a black coat”. In November 2006, Oleg Mitvol confirmed in an interview published in "This Week in Argus FSU Energy", that the evidence on which a prosecution against Sakhalin Energy claiming $10 billion in damages was being mounted, was supplied by John Donovan of royaldutchshellplc.com. [1]

Amid all these controversies on December 21, 2006, Gazprom took control over a 50%-plus-one-share stake in the project by signing an agreement with Royal Dutch Shell. Russian President Vladimir Putin attended the signing ceremony in Moscow and indicated that environmental issues had been resolved. This suggested that the Russian government used environment as a pretext to negotiate a better deal for itself. In a news report on December 23, 2006, The Sunday Telegraph claimed that Shell had been bullied into the deal by the Russian authorities. [2] It has been pointed out [3] that the Russian moves on Sakhalin are as much nationalist and stragetic as they are economic. The Russians have effectively nationalised this previously private sector project (albeit with compensation).

No wonder on 29 March 2007, in an article published by Kommersant under the headline "Russian Authorities Pull Out of Dispute with Sakhalin Energy", Mitvol was quoted as saying that RosPrirodNadzor would not be taking any action in the courts in relation to environmental violations by Sakhalin Energy. The decision was made on the basis that Sakhalin Energy "is willing to solve the problems" which Gazprom would be asked to fund.

On 9 October 2007, an independent firm of consultants (AEA) acting on behalf of potential lenders to the Sakhalin II project published a report with an Executive Summary which concluded that the project was largely in compliance with all the relevant environmental requirements. Where instances of non-compliance had been identified, these were either minor or plans to rectify these were already underway.^[9] However, environmental organizations subsequently produced a critique of the AEA report which concludes that the Executive Summary does not accurately reflect a large number of non-complianceswith relevant environmental requirements that are documented deeper in the 300+ page report.

In early March, 2008, Environmental Finance reported that SEIC has withdrawn its applications for nearly a billion dollars in financing from the public export credit agencies of the United States and the United Kingdom. SEIC claimed that its withdrawal of its financing applications was due to the drawn-out and uncertain decision making process by these banks. However, environmental groups contend that the drawn-out process was due to the fact that for five years the company failed to demonstrate compliance with these public banks’ environmental policies. Environmental groups also say that the absence of public financing from EBRD, Ex-Im Bank and ECGD for Sakhalin II greatly increases the political, financial and reputational risks of any other bank that has, or is still considering financing for the controversial project, including the Royal Bank of Scotland, and the Japan Bank for International Cooperation, respectively.

[edit] Visible impacts on rivers/streams

• Pilenga River: Erosion control is visible on one bank but not on the other bank of the as of April 2006.
• Mereya River: Active slope erosion and water pollution as of July 2005.
• Woskresenkovka River: The clear river is threatened by the creation of a junction of two pipeline trenches filled with mud as of December 2005.
• Golubichnaya River: Normally this river would not be frozen solid in winter but the digging of the trench has provoked the complete lack of river flow as of December 2005.
• Bystraya River: The river ice is covered by soil as a result of the river crossing, which will result in additional contamination when the ice melts as of December 2005.
• Stolichnyi stream: Ploughed-up channel of spawning stream and active erosion and silted processes as of August 2005.^[10]

[edit] Plagiarism controversy over Sakhalin-2 motivational email

Main article: Controversies surrounding Royal Dutch Shell#Plagiarism controversy over Sakhalin-2 motivational memo

On 6 June 2007, the Financial Times published a front page article under the headline: "Pipeliners All!’ Shell’s memo to Sakhalin

The article was about a leaked motivational memo in the form of an email from David Greer, the Deputy Chief Executive of Sakhalin Energy. It was circulated to Sakhalin-2 staff. The article stated that "The memo was leaked to the website www.royaldutchshellplc.com, which has long been a thorn in Shell’s side. Shell confirmed the e-mail was genuine but was reluctant to discuss it further". The article quoted extensively from the memo. The entire content of the leaked memo was published by the FT on the same date. The FT also conducted a separate online poll asking the question: "Is this the worst motivational memo ever?"

Some keen eyed readers noticed that inspirational passages were appropriated from a famous speech given by the U.S. General George S Patton, on 5 June 1944 on the eve of D-Day the Sixth of June. On 7 June 2007, a quarter page follow-up article was published in the Financial Times newspaper and on the FT.com website, under the headline: "Sakhalin motivational memo borrows heavily from Patton”.

On 9 June 2007, The Moscow Times published a front page article under the heading: Sakhalin Pep Talk From 'Old Blood and Guts' The article said: “Greer's memo, which was leaked to an anti-Shell web site, Royaldutchshellplc.com, appears to show the pressure that he and his fellow managers have been under, as it talks of "the risk of becoming a team that doesn't want to fight and lacks confidence in its own ability." The Moscow Times article contained forthright comments by the Russian environmental watchdog, Oleg Mitvol, about the email.

On Monday 11 June 2007, the Financial Times published a further article on the subject, this time headlined: “Motivational memos must make their message clear”. One of the opening paragraphs stated: “The memo (www.ft.com/shell) is crass, poorly punctuated and most of it wasn't even written by its author, David Greer, deputy chief executive of Royal Dutch Shell's Sakhalin Energy Investment Company. He had lifted the words of General George S. Patton with no attribution, and clumsily adapted them to spur on his team of recalcitrant pipeline engineers”.

On Friday 22 June 2007, The Moscow Times published a front page story with the headline: "Sakhalin Energy's Greer Steps Down". The newspaper reported that "David Greer, the Sakhalin Energy deputy CEO running the giant Sakhalin-2 oil and gas project, has left the company unexpectedly just weeks after a leaked e-mail he wrote revealed the pressure that managers working there were facing". The article said that Greer had been a 27-year Shell veteran and was leaving to pursue other business interests.

[edit] References

[edit] External links

• Sakhalin-2 Project website
• The Sakhalin II Project: Latest News and information @ Shell.com
• Sakhalin Factsheet @ the Department of Energy's Energy Information Administration
• Yuzno.com: Sakhalin Projects News (English)
• Sakhalin Environment Watch An NGO campaigning against the Sakhalin-II
• World Wide Fund for Nature
• Sakhalin II problems postpone liquid gas supplies to the USA
• Discovery Channel: Build It Bigger: SAKHALIN OIL AND ICE
• [4]
• [5]
• [6]
• [7]
• Friends of the Earth report: "Sakhalin II - A Production 'Non-Sharing' Agreement, An Analysis of Revenue Distribution" by Dr. Ian Rutledge