As the first pipe is being laid for an oil pipeline for the Sakhalin 1 project, lead owner ExxonMobil is admitting that it may have to consider shipping gas from the field to market in the form of liquefied natural gas, the Financial Times reported.
Various scenarios have been popping up recently for ExxonMobil’s Sakhalin gas, as China, Japan and Russia maneuver to support each country’s divergent interests. The oil company owners have their own interests and ideas as well.
Originally, Sakhalin 1 was to have moved its gas to market in Japan via a 1,000-mile undersea pipeline. But the Financial Times reported Nov. 5 that ExxonMobil Chairman Lee Raymond now says the Sakhalin consortium is considering the LNG option, as well as pipelines to Japan or to China.
Japanese market iffy
A Japanese joint venture, Sakhalin Oil and Gas Development Co. Ltd., holds a 30 percent share of Sakhalin 1, the same percentage as operator ExxonMobil. But without long-term contracts from Japanese electric utilities, it would be tough to finance the pipeline, since Japan doesn’t have a spider web of gas lines like the North American system to take gas to residential consumers.
And the electric utilities are choosing LNG.
On Nov. 5, Tokyo Electric Power Co., the country’s largest utility, announced it would buy more LNG from the Shell-led Sakhalin 2 project.
The utility signed a final agreement with Sakhalin Energy Investment Co. for 1.5 million tonnes of LNG annually for 22 years, up from an earlier commitment to purchase 1.2 million tonnes a year. Shell is building a huge LNG production facility on Sakhalin, with an annual capacity of 9.6 million tonnes.
Other Japanese utilities have signed similar long-term LNG deals, with the total contracted supply in excess of 3.4 million tonnes a year. That puts ExxonMobil in a tough position, with its biggest potential Japanese customers already heavily committed to LNG for an extended period.
Chinese pipeline option
A pipeline could be built to take the Sakhalin gas to China. In early November, ExxonMobil confirmed there had been talks with China National Petroleum Corp. on selling Sakhalin gas to China through such a line.
But China has begun developing its own LNG terminals at a rapid pace, perhaps partly to diversify its source of supply away from Russia. The Chinese side is still lobbying hard for its preferred route for a big new Russian pipeline to carry Siberian oil to market. Japan has been seeking another route, and that one looks more likely.
While that jockeying has been going on, Chinese oil importers have seen what can happen when the Russian political winds blow the wrong way: Rail shipments of Yukos oil have been suspended due to the turmoil enveloping that company.
With much of China’s development along the eastern coast, it makes some sense to bring energy in by ship to the big population centers. And there are plenty of LNG producers looking for customers.
That option would give China some assurance that it can get the energy to run its factories without facing crippling shutoffs or unexpected price increases.
Deal with Shell?
That could leave ExxonMobil in a position where its best option is to negotiate with Shell on putting its gas into the Shell LNG system.
So far, a Shell official at the Sakhalin project told the Financial Times, there haven’t been any talks that he was aware of on the possibility. But Julian Barnes said the Sakhalin 2 consortium would be open to the idea.
Whether that would require adding capacity at the Sakhalin 2 LNG plant isn’t clear. But it’s unlikely the Sakhalin government would want the duplication of two separate production facilities there.
Oil pipeline in construction
Meanwhile, construction began Nov. 9 on the 140-mile oil pipeline that will run from the east side of Sakhalin Island to the west and then cross the Tatar Strait. The line will end at De-Kastri on the mainland in the Khabarovsk region, where a port is being built to handle tankers.
The line will have a capacity of 250,000 barrels daily, the expected output from the Sakhalin 1 Chaivo field. Production is expected to start there sometime next year.
Oil and gas lines are also being built for the Sakhalin 2 project, which needs to move its products about 500 miles from the northern end of the island to the south. About a fifth of that project has been completed.
The Sakhalin 1 project has three fields altogether, with reserves estimated at 2.3 billion barrels of oil and 17 trillion cubic feet of gas. It is expected to cost $12 billion. Besides ExxonMobil and the Japanese group, India’s ONGC Videsh Ltd, has a 20 percent interest, and two Russian companies share another 20 percent.
