Published on 23 February 2016 by Maria Kutuzova
At the start of 2016, Gazprom held an Investor Day in New York. The Russian company plans to optimise expenditure and refocus investment flows. Its capital investment programme will be significantly reduced this year, at 842 billion roubles (11 billion dollars at the current exchange rate) compared to 1,083 trillion roubles (18 billion dollars) the previous year.
Investment flows will be directed towards the projects “Power of Siberia”: resources will be used to develop various West Siberian fields and construct a pipeline exporting gas to China; and “Nord Stream I”: production at the Yamal fields and a new pipeline project towards Western Europe. Gazprom, holding fast to the glimmer of hope that the conflict with Turkey will be settled, has kept the “Turkish Stream” project on its list of priorities. According to the new plans, it will have only two lines, rather than four as previously planned. The project timeline will be decided once a Russia-Turkey intergovernmental agreement has been signed.
The major new production projects confirmed include the start-up dates for supplies along Power of Siberia from the Chayandinskoye (2018) and Kovykta (2022) fields. Exploration of the Cenomanian-Aptian deposits at the Kharasaveyskoye field is being postponed from 2019-2022 to 2021-2025 and the Neocomian-Jurassic deposits from 2024-2025 to 2024-2027. Production of the Neocomian-Jurassic deposits at Bovanenkovo will start in 2023-2026 instead of 2022-2024. Gazprom’s offshore projects in the Arctic are also being postponed into the distant future. This means that the start-up of the Kruzenshternskoye field will be delayed from 2025-2026 to 2025-2029; Kamennomysskoye-Sea from 2021-2023 to 2023-2028; and Severo-Kamennomysskoye from 2023-2025 to 2025-2030.
Despite announcing its hopes to optimise capital investment and strengthen its position on key export markets in Europe, including at the expense of a more flexible approach to pricing and other commercial conditions of supply, Gazprom is focusing on costly pipeline projects while also delaying implementation of most LNG projects. Only one project expanding LNG production capacity within Sakhalin II has been announced for implementation in the near future.
The start date of the Baltic LNG project, on which Gazprom also plans to collaborate with Shell, has been postponed from 2020 to 2021. Start-up of the Yuzhno-Kirinskoye field on the Sakhalin shelf has been postponed from 2019 to 2021. The gas production targets at Yuzhno-Kirinskoye have been increased from 16 to 21 billion cubic metres per annum. Experts claim that the decision is the result of various factors, primarily the consequences of sanctions such as restricted opportunities to attract funding on both Russian and Western financial markets and the restricted resource base for LNG plants in the Far East due to the sanctions regime on the Yuzhno-Kirinskoye field. Gazprom may be unable to access the full range of technological solutions and equipment. This field was previously considered as the resource base for several LNG projects.
Furthermore, Gazprom decided to turn down Gazprombank’s services attracting investors to the liquefied gas projects. Even in February 2014, the company agreed with banks that it would receive a 25% stake in each Baltic LNG and Vladivostok LNG, each of which has LNG capacity of 10 million tons. Gazprombank must take responsibility for arranging project funding and for the majority of costs until investment decisions have been approved. Due to sanctions imposed against Gazprombank by the USA and EU in 2014, Gazprom has now changed the agreement, removing the section regarding the bank’s involvement in the charter capital of LNG projects. Vladivostok LNG has been now called off and the outlook for Baltic LNG is gloomy, despite the fact that negotiations with Shell are progressing well. In particular, at the start of this year Gazprom Chairman Alexey Miller discussed implementation of the project and the exchange of assets with members of the Shell Executive Committee, Harry Brekelmans, Maarten Wetselaar and Ronan Cassidy. Various experts doubt the economic efficiency of this project, since LNG from the Russian company has to compete with numerous other suppliers in a climate of low prices. However, Gazprom is still involved in the project since part of its infrastructure has already been created.
At the start of August 2015, the United States imposed sanctions against the major Gazprom fields on the Sakhalin shelf, which were meant to supply gas to the first, and as yet only, LNG plant in Russia under the Sakhalin II project. It had previously been announced that the Kirinskoye and Yuzhno-Kirinskoye fields in the Sea of Okhotsk would become the resource base for the liquefied gas plant in Vladivostok. However, this plan was abandoned due to reviewed assessments of the hydrocarbon potential at Sakhalin III.
The Yuzhno-Kirinskoye field was included in the updated list of US sanctions against Russia. In a notice published in the US Federal Register, exports, re-exports and transfers of all items subject to the export regulation to this field by any person without first obtaining a licence from the Bureau of Industry and Security (part of the US Department of Commerce) risk violating sector sanctions against the Russian Federation. According to the US Government statement, American companies are forbidden from offering new deep sea drilling and oil prospecting technologies at this field. The US restrictions had previously been extended to sites located deeper than 152m.
Despite the sanctions, Gazprom does not plan to cease exploration activities at Yuzhno-Kirinskoye. This information is also confirmed by the Russian Ministry of Natural Resources. Yuzhno-Kirinskoye is currently Gazprom’s largest asset on the Sakhalin shelf. According to representatives of the Russian company and various experts, the unique geological structure of the field means that Yuzhno-Kirinskoye cannot be explored without the involvement of foreign partners who have the relevant competencies.
The Yuzhno-Kirinskoye gas and condensate field is located approximately 35 km north-east of Sakhalin Island. It forms part of the Gazprom project Sakhalin III, which is currently being implemented with its own resources. As far back as 2009, the Russian Government decided to transfer to Gazprom the licences for the Kirinsky, East-Odoptu and Ayashsky blocks in the Sea of Okhotsk. The huge Yuzhno-Kirinskoye field was discovered on the Kirinsky block in 2010. The category C1+C2 gas reserves amount to 636.6 billion cubic metres and gas condensate to 97.3 million tons.
The Kirinskoye field is the first on the Russian shelf where production is carried out using a subsea production facility but without a platform or other above-water structures. In 2010-2015, Gazprom invested more than 260 billion roubles in creating gas production and transportation facilities on Sakhalin, the majority of which was intended to develop the Kirinskoye gas and condensate field. In 2016, Gazprom will set aside approximately 19.5 billion roubles for this purpose, principally for the ongoing construction of production wells at the Kirinskoye field.
In 2014, Gazprom Geologorazvedka successfully finished drilling the prospecting wells at the Yuzhno-Kirinskoye field ahead of schedule: commercial inflows of raw hydrocarbons (mainly oil) were obtained, which significantly increased the field’s resource base. Gazprom has not disclosed final data for the oil reserves. However, according to provisional assessments, the Yuzhno-Kirinskoye reserves may be one of the largest fields in Russia. According to the Russian Minister of Energy, Alexander Novak, it has 464 million tons of oil. Expert assessments state that, due to the presence of large-scale oil reserves, Gazprom must change the way it develops Yuzhno-Kirinskoye.
It is planned that the project will be reviewed and amended, even for Kirinskoye which started operation in winter 2014. The category C1 field reserves amount to 162.5 billion cubic metres of gas and 19.1 million tons of gas condensate. The gas production target is set at 5.5 billion cubic metres of gas per year. For the first time in Russian practice, a subsea production facility which can operate in difficult ice conditions is being used. A manifold is installed at the bottom of the sea, with several pipelines anchored to the same foundation, configured at high pressure and connected following a specific diagram. A cable is laid along the bottom of the ocean to guide the subsea facility to land. The subsea section of the pipeline is 28 km in length and the distance from the production site to the gas processing facility is 44 km.
According to the Deputy Chairman of Gazprom’s Management Committee, Vitaly Markelov, production there was stopped in summer 2015, since gas extraction is stopped over summer period for technological reasons. The Head of Department 307 at Gazprom, Vsevolod Cherepanov, explained that Kirinskoye operates “as needed”: recovery of approximately 700 million cubic metres was planned for the end of 2015 and more than 1 billion cubic metres in 2016.
In autumn 2015, VNIPIGAZDOBYCHA started the large-scale project “Construction of Kirinskoye GCF” commissioned by Gazprom Dobycha Shelf Yuzhno-Sakhalinsk at a cost of 476 million roubles. By the end of June 2016, the company must amend the field exploration project and also design various offshore and onshore sites for its construction. By way of a reminder, all equipment for the subsea production facility at Kirinskoye is supplied by the Norwegian company FMC. Norway imposed sanctions on Russia just last year, after Russia had refused a supply of Norwegian fish products. The attitude in Norway towards continued business with Russian companies is now one of suspicion, to put it mildly. Furthermore, Norwegian oil and gas equipment manufacturers depend on supplies to the USA, where one of their main markets – the Gulf of Mexico – is located. The Russian market, on the other hand, did not constitute more than 2% of the total sales volume of oil and gas equipment and services offered even before the sanctions were imposed.
According to the plans of Gazprom Dobycha Shelf Yuzhno-Sakhalinsk, the next stage in exploration of the Sakhalin shelf will be entry into operation of the Yuzhno-Kirinskoye and Mynginskoye fields. Exploration of Kirinskoye (162.5 billion cubic metres of reserves) and Mynginskoye (20 billion cubic metres) within Sakhalin III must yield 8-9 billion cubic metres per year at their peak. Plans are underway to develop fields in the Ayashsky and East-Odoptu blocks once their reserves have been described by geological surveys.
According to Gazprom’s Deputy Chairman, Alexander Medvedev, Yuzhno-Kirinskoye is on the list of assets to be exchanged with Shell since Europe did not impose sanctions on Sakhalin III. Shell and Gazprom had greater plans for Yuzhno-Kirinskoye. Gas from this field was intended to supply the third liquefied gas plant under the joint project of the Sakhalin II companies. The capacity of the first Russian LNG plant is now approximately 10 million tons. The third train, to be completed by 2021, will comprise one more production line with output capacity of 5 million tons. The companies have not ruled out the option of commissioning a fourth train.
The aforementioned deal will be completed once the British BG Group and the UK-Dutch company have merged. “The exchange of assets will not be restricted to the Sakhalin III project. The assets in the deal are strategic and comparable in terms of quality and importance,” commented Alexander Medvedev on the forthcoming exchange. During the St Petersburg International Economic Forum, Gazprom and Shell signed a cooperation agreement on the development of a partnership to implement gas projects in all segments: from exploration and production to refining and marketing. A “potential” exchange of assets was announced. It is clear that, despite the sanctions, the Russian and UK-Dutch companies have made considerable progress in discussing specific conditions of the agreement signed in June.
The partnership between Gazprom and Shell is developing well. Alongside projects on Sakhalin, the UK-Dutch company has already joined a consortium to construct two new Nord Stream lines. Gazprom also invited Shell to become a partner in the Baltic LNG project. One of the group’s priorities is to develop gas reserves and build up its share on the global liquefied natural gas market. In early summer this year, Shell also signed a contract with NOVATEK to supply 0.9 million tons of LNG per annum over 20 years, which will be produced under the Yamal LNG project. According to Shell CEO, Ben van Beurden, 25% of global gas reserves are concentrated in the Russian Federation and are located very close to markets well-known by Shell.
The Russian Minister of Energy, Alexander Novak, speaking at the Eastern Economic Forum, remarked that Gazprom can get by without the technology affected by sanctions and will continue to operate at the Yuzhno-Kirinskoye field using equipment which is already being developed. The minister also stated that Russia has other foreign suppliers of the required equipment and import substitution programmes are already being run in the country. According to plans of the Russian Ministry of Industry and Trade, the proportion of imported equipment for offshore projects must be reduced to 60-70% by 2020. However, Russian experts and politicians had justifiable doubts that these targets could be realistically achieved.
The Deputy Prime Minister, Alexander Khloponin, held the opposite point of view. In his opinion, Russia missed out on the substitution of imported shelf equipment a long time ago. Russian companies must “integrate” with foreign companies which have experience in this area. At the meeting of the Government Committee on Import Substitution held in Sochi in early October, the Russian Prime Minister, Dmitry Medvedev, honestly admitted that Russia would work towards import substitution if the government “lacks money” but, in his words, we cannot wait until the situation improves.
According to Gazprom’s Head of the Directorate of Engineering and Offshore Field Development, Vadim Petrenko, in the current conditions Russia must build up a wide range of its own technical resources and equipment to work on the shelf, including supply vessels, helicopters, the platform and other equipment. In this case, particular attention must be paid to unique Western technologies, such as the construction of subsea production facilities, submersible wellhead equipment and high-tech services.
According to Petrenko, new projects for large-scale exploration of offshore hydrocarbon fields on the Russian shelf are essential in order to develop the country’s oil and gas industry in a robust way. “Offshore is considerably different to other areas, mainly because its key parts are located at the crossroads of the industry’s high-tech sectors. Offshore equipment is unique. In the current geopolitical conditions, we have to build up a broad range of our own technologies and equipment, including supply vessels, helicopters, floating drilling facilities and the full range of equipment. A distinction must be made between subsea production equipment and high-tech service equipment. Reducing dependence on imports is not the work of a particular group or even a company; instead it’s a task on a national scale. This is necessary so that the Russian economy returns in the direction we are used to,” Petrenko explains.
In Petrenko’s opinion, in order to implement offshore projects, serial production of equipment must get underway. “Comprehensive solutions are needed for these projects: it is not possible to replace one riser or preventer. Some areas are now 97-100% dependent on imports, in terms of both project solutions and competencies for the construction of topsides. Discussing individual key parts does not make sense nowadays. Of Russian businesses, Corall in Sevastopol is most competent in terms of designing offshore technologies and it has a wealth of experience both in Black Sea and international projects. It is the only business which could, from both a scientific and practical perspective and owing to its knowledge of technologies available in the Russian Federation, be suited to serial production of the required equipment,” he remarked.
Sakhalin II: new plans and force majeure
In December this year, Sakhalin Energy signed an agreement to develop documentation for a project constructing the plant’s third LNG train within Sakhalin II, which will be implemented by Shell Global Solutions and the Russian design institute “Giprogazcentr”. All work will be undertaken in accordance with the requirements of Russian legislation and international standards to ensure that the government expert report and all necessary permits for the project’s construction phase continue to receive approval. According to the company’s plans, construction and commissioning of the third LNG train will strengthen Russia’s role as a leading producer of energy resources and its position on the Asia-Pacific market. Sakhalin Energy constructed the first and as yet only LNG production plant in the country exporting Russian LNG to international markets. Despite the decrease in hydrocarbon prices, ongoing efforts with customers have provided the company with favourable conditions for oil and gas sales.
Europe and Asia are the main importers of Russian gas. It is expected that LNG production plants will start up in Australia and Indonesia in 2016-2017. In terms of Russian projects, the new train at Sakhalin II might only start operating in 2021. According to the plans, Yamal LNG should be constructed by 2017-2018. However, according to specialists, it is highly likely that the production of liquefied gas will not start there before 2020. By that time, Australia, with its high-capacity LNG projects, will have taken second place after Qatar in terms of LNG output.
At the end of January, Sakhalin Energy announced technical issues on LNG export terminals. The issues arose at the power station of one of the plant compressors due to the plant’s power supply being disconnected, which resulted in damage to the equipment on one of the production trains. Production consequently decreased by 50%. According to the project operator, force majeure conditions caused the LNG spot prices on the Asia-Pacific market to rise. At the start of February, the cost of LNG increased by an average of 30 cents to 5.35 dollars per million British thermal units (BTU). Several permanent customers, such as the South Korean company Kogas and a number of Japanese LNG consumers, decided to supplement their LNG reserves as a precaution. According to a statement by Sakhalin Energy, repairs on the LNG production plant will continue until March.
The current total planned capacity of the Sakhalin Energy plant is 10-11 million tons per year. However, Sakhalin II has all technical capabilities at its disposal to expand and increase the plant’s productivity to more than 15 million tons of LNG per year. At present the company is producing oil and gas at three production platforms in the Sea of Okhotsk to the north-east of the island. Average production per day is more than 15,000 tons of oil and condensate and more than 50 million cubic metres of natural and associated gas.
One of the clearest examples of partnership between Sakhalin Energy and Russian contractors is the agreement with Sovcomflot to construct and operate icebreaking vessels within the Sakhalin II project. An industrial park is currently under construction in Sakhalin Region to provide maintenance and repair services for equipment used at production sites, both by oil and gas project operators and by other businesses in the region. The existence on the island of an oil services cluster capable of providing these services will cover a large proportion of the work required on Sakhalin and increase Russian involvement in oil and gas projects. According to Sakhalin Energy’s head of the sector developing Russian involvement, Alexander Lapin, the company is actively searching for and attracting Russian companies and contractors to the project. At present, Russian involvement in the Sakhalin II project constitutes only 60% of the required 70%, but Sakhalin Energy has grand plans upstream, including the construction of a third LNG production train.
At the end of 2015, the production of gas under the Sakhalin projects increased by 0.3% to 28.1 billion cubic metres. It is planned that this will increase to 30.4 billion cubic metres in 2016. Growth is forecast for all projects implemented on Sakhalin: Sakhalin I, Sakhalin II and Sakhalin III. Gas will be intended for gasification of populated areas, energy production and heating facilities in the region and also for export.