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Russia's Far Eastern Sakhalin region is expected to raise crude and condensate production by 8% this year, but with growth slowing further in coming years, Vera Shcherbina, chairman of the Sakhalin regional government, said Wednesday.

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The region is expected to produce 18.1 million mt, or 362,500 b/d, this year, according to Scherbina's presentation at the annual Sakhalin Oil and Gas forum in Yuzhno-Sakhalinsk.

"Such situation is the result of the dynamic development of projects on the exploration of offshore fields in the Sea of Okhotsk," Shcherbina said.

The growth rate is a sharp slowdown from the 15% year-on-year rise in 2015, an increase the regional government doesn't believe can be repeated. In fact, the output volumes are seen flattening in the mid-term, Shcherbina said.

Article Continues below...

Sakhalin's governor, Oleg Kozhemyako, last year forecast the region's crude output would grow to 18.85 million mt by 2020, which means a 4% increase in the course of the next three years.

Shcherbina said the volume is achievable, but the region's task is to maintain the output despite the difficult economic situation.

"Our task today is primarily to maintain the current crude and condensate production volumes because we need some stability today. The projects being implemented today will continue developing, they will probably continue to raise [output]. The volume of 18.85 million is possible to achieve," she said.

Gas output at Sakhalin Island is seen growing 1.8% on the year to 28.9 Bcm this year, a steady pace from last year, according to the presentation.

GROWTH DRIVERS

Much of the growth comes from the Sakhalin 1 consortium, led by Exxon Neftegaz, which launched the Arkutun Dagi field last year.

It is also proceeding with the second stage of the Odoptu field development, which is expected to complete in 2017 and double the current production of 55,000 b/d by late-2017-early 2018.

The Odoptu Stage 2 project, once completed, is also expected to add 8 Bcm/year in gas output from the region, Shcherbina said.

Sakhalin 1 boosted its crude output by nearly 9% to 4.6 million mt, or about 138,200 b/d, in the first eight months of this year, according to the Central Dispatching Unit, the statistical arm of the energy ministry.

Exxon Neftegas, a subsidiary of US ExxonMobil, holds a 30% interest in Sakhalin 1, the same stake as Japan's Sodeco, while Russia's top producer Rosneft and India's ONGC Videsh hold 20% each.

Rosneft, which accounts for a fifth of Sakhalin's total output including through its Sakhalin 1 share and the North Chayvo field, expects its production in the region to grow by 20% this year to 13,000 mt/day, or 95,300 b/d, said Alexander Zharov, a department head at Rosneft.

Its Sakhalin 1 share aside, Rosneft expects to produce 2.5 million mt this year, mainly from North Chayvo, which already accounts for two-thirds of Rosneft's Sakhalin crude output, as well as the Lebedinskoye crude and condensate field, where it launched drilling in May, Zharov said.

With its investment in exploration in the Far East hitting record Rb31 billion ($485 million) this year, Rosneft sees the potential to add 1-1.2 million mt/year to Sakhalin's crude production in the 2020s-2030s through the development of shallow-water blocks, including those under exploration and survey currently, where active development can start within 3-4 years, he said.

Further exploration and development offshore northeast Sakhalin and the Tartary Straight, which divides Sakhalin from mainland Asia, could add about 4-4.5 million mt/year to Sakhalin crude output in the future, he said. For that, Rosneft plans to involve foreign partners, as it does in half of its offshore projects.

He noted cooperation with Statoil in shallow-water drilling further north, offshore Magadan, as an example but did not say if the Norwegian company would join its projects in Sakhalin.

Sakhalin Energy, which operates the Gazprom-led Sakhalin 2 offshore fields, Piltun-Astokhskoye and Lunskoye, increased crude output by 1.8% in January-August to 1.77 million mt, or about 53,200 b/d, according to CDU. Gazprom holds 50% plus one share in Sakhalin 2, while Shell holds 27.5% minus one share, Mitsui owns 12.5% and Mitsubishi Corporation 10%.

Gazprom also continues to develop three blocks, Kirinsky, Ayashsky, and Vostochno-Odoptinsky, within the Sakhalin 3 project, and plans to launch the Yuzhno-Kirinskoye field, which contains large crude reserves, in 2021.

The company also announced earlier this month the discovery of a new field within the Yuzhno-Lunskaya structure of Sakhalin 3.

REVENUES DECLINE

Sakhalin, which heavily relies on oil and gas revenues, felt the bite of the downturn in the global oil prices in the past two years, Shcherbina said. The region's revenue from the oil and gas sector is expected to drop by a third on the year to Rb120 billion ($1.88 billion) in 2016, and by another 30% next year to less than Rb85 billion, she said.

The revenues drop is due to lower tax payments from offshore projects. Russia's tax system sees upstream taxes decline along with the oil price, with the state carrying the bulk of the burden from the oil price fall, with only marginal effect on the companies.

The situation has pushed the authorities to seek ways to launch a set of "unprecedented" support measures for new projects within and outside the energy sector as of January 2017, she added.

The measures include tax breaks, including on the income tax and property tax, zero tax for the first five years on the most prospective new projects, technological equipment cost compensation of up to 50%, and interest rates co-financing on the most prospective projects.

"We've discussed these measures for offshore projects. We would like to see small enterprises get involved, and other entities that would provide services for offshore projects. This will give us additional budget revenues, and will create a favorable climate," she said.

Russia adopted a new tax system for offshore projects two years ago offering greater tax breaks then at the existing projects under the production-sharing agreement (PSA), and continues to seek ways to make the work offshore Sakhalin more effective in the future.

--Nastassia Astrasheuskaya, nastia.astrasheuska@spglobal.com --Edited by Jeremy Lovell, jeremy.lovell@spglobal.com