IHS Global Insight Perspective | |
Significance | Russian business daily Vedomosti reported yesterday that the Sakhalin-1 consortium had asked for an increase in the project's total budget to just over US$100 billion, making it easily the most expensive hydrocarbon development project in the country. |
Implications | The reported request by the ExxonMobil-led consortium would effectively double the project's current costs, and since Sakhalin-1 is being developed under a production-sharing agreement (PSA), this would mean a further delay in revenues flowing to the Russian government since the project partners are allowed to recover their costs first under the PSA terms. |
Outlook | Like the Sakhalin-2 consortium earlier, the Sakhalin-1 consortium may now face a push by the government for a change in the project's structure, either in the form of an increased state stake or—perhaps more likely—a concession by the consortium to allow Gazprom to market the project's gas output. |
Déjà Vu All Over Again?
Russian business daily Vedomosti reported yesterday that the Sakhalin-1 consortium has requested approval from the government to double the budget for the project. The report said that the ExxonMobil-led consortium, which also includes Japan's SODECO consortium, India's ONGC, and two Rosneft affiliates, has asked the government's Authorised State Body to allow capital expenditures to increase to US$47.9 billion and for operating costs to rise to US$52.2 billion over the life of the project. Thus, if approved, Sakhalin-1 would become Russia's first US$100-billion hydrocarbon development project, easily the most expensive in the country.
What is more, the paper reported that the consortium, which is operating the Sakhalin-1 project under a production-sharing agreement (PSA), has requested approval from the government to push back the timetable for the development of the Odoptu and Arkutun-Dagi fields by two years and delay the phase-two development of the Chayvo field by four years. The consortium only launched first commercial oil production from the Odoptu field last month, bringing new output onstream to replace declining volumes from the first phase of development of the Chayvo field (see Russia: 30 September 2010: Sakhalin-1 Project Moves to Next Phase with Launch of Odoptu Oil Production). The Odoptu field is expected to add around 35,000 b/d of oil to the project's output in 2011, bringing total production to approximately 156,000 b/d.
ExxonMobil said last month at the launch of the Odoptu field that the Arkutun-Dagi field was expected to come onstream in 2014, and thus far at least, the U.S. supermajor—the operator of Sakhalin-1 with a 30% stake—has not confirmed the Vedomosti report. Nevertheless, if the report is accurate, the request could put ExxonMobil and its partners on a collision course with the Russian government. Under the terms of the PSA covering the project, the consortium has the right to recover its costs before profits from the project accrue to the government, meaning any additional increases to the budget necessarily postpone the government receiving its take from Sakhalin-1. The consortium and the Authorised State Body, which supervises the project on behalf of the Energy Ministry, have bickered over annual project budgets before, so it stands to reason that a request to double the project's lifetime costs, together with a call for delaying the previously agreed field development timetable, is going to raise the ire of Russian authorities (see Russia: 25 January 2010: Sakhalin-1 Consortium in New Budget Fight with Russian Government).
Outlook and Implications
If this plot development seems familiar, it is because we have been down this road before in Russia. In July 2005, the Sakhalin-2 consortium, then led by Shell, announced its own cost overruns and delays that increased the budget for that project—also operating under a PSA—from US$12 billion to US$20 billion. Russian authorities reacted angrily to the news that the government would have to wait for its fair share of the project's profits, and it was not long before Shell and its Japanese partners found themselves under heavy pressure, ostensibly for violating Russian environmental regulations. The end-result was that Shell, Mitsui, and Mitsubishi agreed to what amounted to a forced sale of a 50%-plus-one stake in the consortium to state-run gas giant Gazprom.
Whether history will repeat itself remains to be seen, but ExxonMobil and its partners are no doubt keenly aware of the fate that befell Shell (although it is worth noting that the Dutch/U.K. supermajor retains a 27.5% stake in Sakhalin-2, and the project achieved success as it launched Russia's first LNG exports in early 2009). There is speculation that Russian policymakers may look to use the Sakhalin-1 budget request to try to secure a larger stake in the project, perhaps seeking an increased stake for Rosneft (whose two affiliates hold a combined 20% already) or a role and equity stake for Gazprom.
Another possibility, perhaps even more likely than the first scenario, is that Russian authorities use the request for the increased Sakhalin-1 budget to cajole the consortium to make a concession in the stalemate with Gazprom over marketing of the gas output from the project. The consortium technically has the legal right to export gas under the terms of its PSA, but in practical terms, this amounts to throwing down the gauntlet to Gazprom, since it would break the state gas firm's monopoly on exports. Gazprom has made it clear that it has no plans to compete with Sakhalin-1 in supplying Russian gas to the Chinese market (or any other Asian market, for that matter), so the consortium's request for approval of its budget could give Gazprom the leverage it needs to break the impasse over Sakhalin-1's gas production. A concession by the consortium to allow Gazprom to market its gas could help ease the road towards securing government acceptance of the substantial project cost increase for Sakhalin-1.