JUNE 2003
 

SUMMARY

The Sakhalin oil and gas projects, which have grown into one of the largest direct investments in the Russian economy, involve the participation of a large number of Russian and foreign suppliers, manufacturers, construction and design companies and accompanying service providers. The operators of the Sakhalin projects seek to increase the Russian content by contracting with as many Russian companies as possible. Several Khabarovsk Krai (territory) companies have successfully won tenders and obtained contracts to work on the Sakhalin projects. However, many other Khabarovsk companies fall short of becoming contractors, subcontractors, and suppliers because they fail to meet high safety, environmental, standardization and other requirements set by the project operators. Finding a suitable U.S. partner could substantially increase the chances of Khabarovsk Krai companies winning contracts for supply of machinery, parts, or services and, at the same time, could help an American company to enter this market.

SAKHALIN PROJECTS OVERVIEW

The Sakhalin oil and gas projects were the first in Russia to employ production-sharing agreements (PSAs). This approach attracted a huge amount of foreign investment by providing favorable tax procedures (substitution of the majority of federal and local taxes with product sharing) and guaranties of stability for the whole period of the project implementation activities (30-40 years). This, in turn, allowed for the successful development of these large-scale projects in harsh environmental and climatic conditions.

Sakhalin-1

Sakhalin-1 is the second project implemented under a PSA on the Sakhalin shelf. The estimated recoverable reserves of Chaivo, Arkutun-Dagi, and Odoptu deposits total 307 million tons of oil and 485 billion cub. m. of gas. The expected daily oil production amounts to 250,000 barrels (33,000 tons per day). Sakhalin-1 project intends to develop these oil and gas resources in phases, using both offshore and onshore wells. The first phase of development will focus on the Chayvo and Odoptu fields, with first oil expected from Chayvo at the end of 2005 and from Odoptu in early 2007. The oil will be exported via pipeline to a marine tanker terminal at DeKastri (in Khabarovsk Krai). Limited gas production will be available in this initial phase to help meet Russian domestic demand. Future phases of development envision construction of a natural gas pipeline to Japan and development of the Arkutun-Dagi field.

The consortium developing Sakhalin-1 comprises U.S., Russian, Indian and Japanese companies, which will invest as much as $12 billion throughout the life of the project. The members of the consortium are Exxon Neftegas Limited, USA (30 percent shareholder), ONGC Videsh Limited, India (20 percent); RN-Astra, Russia (8.5 percent); Sakhalinmorneftegas-Shelf, Russia (11.5 percent); and Sakhalin Oil and Gas Development Co., Ltd., Japan (30 percent). Exxon Neftegas Limited, a subsidiary of U.S.-based Exxon Mobil Corporation, is the operator of the project.

According to Neil Daffin, the President of Exxon Mobil Limited, once the Sakhalin-1 project has proceeded to the exploitation stage, the projects' costs increased considerably. Russian companies are winning an increasing number of tenders. In 2002, many Russian businesses obtained large contracts, and the overall value of contracts signed with Russian suppliers and contractors exceeded $1 billion.

Sakhalin-2

Sakhalin-2 was the first Russian project to be implemented under the PSA regime. The total calculated recoverable reserves of the two offshore deposits, Piltun-Astohoonskoye (oil deposit) and Lunskoye (gas deposit), are estimated at 150 million tons of oil and 642 billion cub. m. of natural gas. The operator of Sakhalin-2 project is the Sakhalin Energy Investment Company Ltd. (SEIC), composed of Mitsui (Japan) - 25 percent share, Mitsubishi (Japan) - 20 percent, and Royal Dutch/Shell (UK/Netherlands) - 55 percent. During 1996-2001, approximately $2 billion was allocated for the project implementation. The direct profit of the Russian side, including bonuses, payments to the Fund for Sakhalin Development, reimbursement of the preliminary Russian expenditures for the exploration activities was $181 million; Sakhalin Oblast received $154 million.

The Sakhain-2 project is responsible for the development of the local industrial infrastructure needed oil and gas production. The approved Complex Plan for the project development envisions total capital investment exceeding $8 billion. Once the production facilities reach their pre-planned production capacities, the annual extraction of oil and condensate within the Sakhalin-2 project will amount to 8.5 million tons; natural gas - 19 billion cub. m.

Sakhalin-3

Sakhalin-3 project encompasses the development of two independent projects: Kirinskiy Perspective Block  (roughly 687 million tons of oil and condensate, 873 billion cub. m. of natural gas) and Vostochno-Odoptinskiy & Ayashskiy Perspective block (roughly 160 million tons of oil and condensate, 67 billion cub. m. of natural gas). Both projects require geological and exploration research to determine the exact volume of recoverable oil reserves and exact location of oil and gas deposits. The operator and investor of the first project is PegaStar (USA); its founders are Mobil Russia Ventures Inc, Texaco Exploration Sakhalin Inc, NK Rosneft and Rosneft-Sakhalinmorneftegas JSC. The investors of the second project are Exxon Neftegas Ltd, NK Rosneft and Rosneft-Sakhalinmorneftegas JSC.
 

PARTICIPATION OF KHABAROVSK KRAI COMPANIES IN SAKHALIN PROJECTS
While striving to maximize Russian content and contract as many local companies as possible, the operators of Sakhalin-1 and 2 keep in mind a number of requirements when evaluating candidates and selecting eligible contractors and suppliers. Safe operation, compliance with environmental regulations and existing legislation, competitiveness of costs and the ability to deliver the requirements on schedule are among the primary demands.

The Sakhalin-1 project operator Exxon Neftegas Limited has been successfully working with the Sakhalin Oblast Administration and the Russian Ministry of Economic Development and Trade to establish a Joint Committee on Russian Content. In order to inform Russian suppliers and subcontractors about the project objectives, standards, and bidding procedures and to increase their competitiveness, special Russian supplier seminars were held in Khabarovsk, Yuzhno-Sakhalinsk, and Moscow. Russian and English-language websites (www.sakhalin1.com and www.sakhalin1.ru) were launched to inform potential contractors and vendors about major contracting opportunities and upcoming tenders.

Activation of the Sakhalin oil and gas projects during the last 3 years resulted in an increase of the Khabarovsk Krai companies' participation. As of early 2003, six major contracts were signed with the Khabarovsk Krai companies worth some $200 million. Current Sakhalin contractors are Amurskiy Shipbuilding Yard (Komsomolsk-on-Amur), Vostok airline (Khabarovsk), and Dalmostostroy (Khabarovsk). Three Khabarovsk Krai design institutes-- DalTISIz, Dalaeroproekt, and Dalgidrovodokhoz--have also been extensively involved in the projects.

Transportation Companies

On June 2003, Exxon Neftegas Limited signed its second 5-year contract with Vostok airlines JSC from the Khabarovsk Krai. The company was established in 1945 and in 1993. Fifty-one percent of the airline's shares belong to the federal government, 22.75 to the Krai government, and 26.25 percent to private shareholders. Vostok's primary fleet consists of seven Mi-8MTV helicopters, Mi-8T, six An-28 planes, and three An-38-100 planes. Since 2001, Vostok is an official provider of airline services for the United Nations in East Timor.

Vostok obtained its first Sakhalin contract for the provision of air transportation services in 1997, surpassing four competitors. Although this was the airline's first exposure to the contractors' selection system, it was able to comply with tough requirements of the project operator, which included the availability of the fully prepared aircraft, flight safety management systems, and qualified aircrew and technical personnel. Especially strong attention was paid to personnel discipline. In order to be eligible for participation in the Sakhalin-1 project, Vostok airline had to obtain some specialized certificates.

Construction Companies

In autumn 2002, Exxon Neftegas Limited contracted with Dalmostostroy JSC (Far Eastern Bridge Construction Company, Khabarovsk) for the construction of Chaivonskiy Bridge. The 830-meter bridge will connect the drilling site on the Chaivo Island with the coastal product-processing complex. The passage will first be used to transport heavy (600 tons) production equipment, and after production begins will serve for the daily transportation of personnel and cargo to the drilling site.

Construction of the Chaivo bridge is one of several projects recently passed over to Russian subcontractors by ABB Lummus Global (Moscow) as a part of the company's own contract for the detail planning, logistics support, and construction of coastal facilities for Sakhalin-1 project. The other projects involve SakhNIPImorneft (design) and Sakhalinmorneftemontazh JSC (general construction) Sakhalin companies and Amurskiy Shipbuilding Yard (Komsomolsk-on-Amur, Khabarovsk Krai). The shipyard was contracted for the construction of 54 reservoirs for storage of diesel fuel and hydrocarbon base for drilling liquid.

In 1996, Amurskiy Shipbuilding Yard JSC became a prime contractor of Sakhalin Energy to modernize Moliqpak, an offshore oil-drilling platform. In 2002, the shipyard and Exxon Neftegas Ltd signed a contract on refitting and modernization of Orlan, an oil-drilling platform in the framework of Sakhalin-1 Project. Other parties of the $140 million contract include Hyundai (Republic of Korea) and Natchik (USA). As a result of the shipyard's new contract to refurbish the Orlan platform, its partner, FIAS (USA) obtained a $ 31 million contract to act as the procurement company - procuring all parts of equipment and dealing with certification, inspection, and logistics.

The shipyard intends to expand its participation in Sakhalin projects and plans to lease working premises at the Severny shipyard (Sovgavan). The shipyard's primary business activity is production of machinery (propellers, shaft, steering gear, winches, capstans, ladders, bridge bearings, screws, etc.). In general, the yard comprises hull, assembly and welding, pipe assembly, machinery, metallurgical, heat treatment production, a testing center, and electroplating shops. The enterprise produces sea and river vessels, vessels with air pillow maintenance, vessels with hydrofoil wings, ocean trawlers and refrigerators, and others.

Over 60 Khabarovsk Krai companies have submitted applications for participation in upcoming Sakhalin tenders. Even a larger number of Krai enterprises wish to become suppliers or contractors of the Sakhalin oil and gas projects. The primary reasons why many Khabarovsk Krai companies failed to win tenders are lack of international business experience; failure to produce equipment that meets the environmental, climatic, technical or ergonomic requirements; failure to ensure stable on-time delivery of their products and/or services to the destination site; poor safety records; and a lack of quality and standards certifications.

Many of Khabarovsk Krai enterprises are willing to establish joint ventures with U.S. companies so that they can expand their services and improve the quality of their products to meet higher international quality requirements. At the same time, the U.S. companies could also benefit from such partnership and become subcontractors to their Russian partner or win subsequent tenders to supply equipment, machinery, parts, services, etc.
 

CONSORTIUM OF THE RFE ENTERPRISES

In order to promote the participation of Khabarovsk Krai companies in Sakhalin oil and gas projects and increase their competitiveness through informational and legal support, the Krai Government and a number of large manufacturers, suppliers, services providers, transportation companies and design institutes seek to establish a consortium of Russian Far East companies. The consortium will obtain the legal entity status once it receives state registration. Its headquarters will be located at Amurskiy Shipbuilding Yard JSC, and the shipyard's director will be responsible for the organization of the consortium structure and attraction of Khabarovsk manufacturers and suppliers to participate in the construction of the Orlan platform.

The consortium will assist its members in completing tender application documents for the preliminary competition and selection stages and organize and conduct specialized training seminars and courses for the top managers of the companies. It will also provide informational services, including compiling of databases, conduct and participate in symposiums, conferences, exhibitions and other events. The members of the consortium seek to develop partnerships with similar foreign and international organizations to share experience. The consortium's activities are expected to increase Khabarovsk firms' chances of obtaining contracts.

CONTACT INFORMATION

U.S. Consulate General Vladivostok
U.S. Commercial Service
32 Pushkinskaya St., Vladivostok, Russia
Tel: (7-4232) 49-93-81
Fax: (7-4232) 30-00-92
Email: William.Lawton@mail.doc.gov
Contact: William S. Lawton, Principal Commercial Officer

BISNIS in Khabarovsk
18 Muravyeva-Amurskiy Street, office 307
Khabarovsk 680000, Russia
Tel/Fax: (7-4212) 305-757
Email: bisnis@vasandr.kht.ru
www.bisnis.doc.gov
www.bisnis-eurasia.org
Contact: Andrei Vasenyov, BISNIS representative