The Sakhalin venture

Published : Nov 04, 2005 00:00 IST

The Molikpaq offshore oil platform at Sakhalin Island. - AFP

The Molikpaq offshore oil platform at Sakhalin Island. - AFP

Production starts at the Shakalin-1 oilfield in far-eastern Russia, where India has made its single largest investment abroad.

OCTOBER 1 was an important day for ONGC Videsh Limited (OVL) in its quest to achieve energy security for India. It was on that day that its managing director R.S. Butola and Exxon Neftegas president Steve Terni, turned on a valve on an oil platform at Chayvo Bay, signalling the start of the production of crude oil from the Sakhalin-1 field in far-eastern Russia. India has invested $2.77 billion in the hydrocarbon project, its single largest investment abroad. Of the 23,000 barrels of oil and 58 million cubic feet of gas produced a day in Sakhalin, India will get 20 per cent, a quantity in proportion to its equity.

The total recoverable reserves from the Sakhalin-1 field alone are estimated at 2.3 billion barrels of oil (307 million tonnes) and 17.1 trillion cubic feet of gas (485 billion cubic metres). Subir Raha, Chairman and Managing Director, Oil and Natural Gas Corporation (ONGC), said: "At full capacity, we should be getting about 2.5 million tonnes of oil every year."

Petroleum and Natural Gas Minister Mani Shankar Aiyar, who was present at Chayvo Bay on October 1, said: "It is not usual for a company from a developing nation to be associated with such a project." He described Sakhalin-I as "the beginning of a much longer and deeper association with the island on the east coast of Russia." Viktor Borisovich Khristenko, Russian Minister for Industry and Energy, who had pushed for India's participation in the project, said it marked a new beginning in the relationship between India and Russia. He said, "We have an excellent relationship [with India]. We have cooperation not only in the oil and gas sector but also in other spheres like defence... We are natural allies."

The product from Sakhalin-1 project is sweet crude, similar to the Nigerian crude. It is bonny light and lends itself easily to being refined into petrol, diesel and kerosene. The ONGC has not yet firmed up its plans on how to use its share of crude oil from Sakhalin-1 - whether to sell it abroad, swap it with another country's crude or transport it to India. Indications are that the ONGC would bring the oil to its subsidiary, Mangalore Refinery and Petrochemicals Limited (MRPL), Karnataka, for refining. "This will maximise our profit," an ONGC official said. OVL's share of production from the Greater Nile Oil Project in Sudan is being refined at the MRPL from 2003. The participants in the Sakhalin-1 consortium have signed agreements to sell natural gas from its offshore field to two buyers in Khabarovsk Krai, Russia.

In the early part of the 20th century, geologists and geophysicists exiled from the Union of Soviet Socialist Republics discovered several oilfields, including Somotlor, the biggest hydrocarbon-bearing field in Siberia. Sakhalin Island, situated in the Sea of Okhotsk, was "the zone of penal servitude and exile" in the 19th century. It had been a bone of contention among the Russians, the Japanese and the Chinese since the 15th century. The trouble started when the Japanese settlers on Hokkaido, headed by the Matsumae clan, grabbed the region. There were several expeditions from China, Holland and Portugal to Sakhalin, which was thought to be a land of gold and silver. The battles and expeditions came to an end when Russia "completed the annexation of the region on January 2, 1947".

The island, with its inhospitable weather (snow-bound during winter), is today the largest oil hub in the Pacific Ocean. According to Pallab Bhattacharya, deputy general manager, corporate communications, ONGC, it is also "the most vibrant place with unending flow of capital". The importance of Sakhalin can be understood from the fact that there are weekly flights from Anchorage, Houston and Tokyo from mid-August.

"A dedicated oil pipeline and terminal facility at DeKastri on the Russian mainland will export crude oil to world markets beginning early 2006. Full production is targeted for the end of 2006. The initial gas production will be sold in the Russian Far East domestic market of Khabarovsk Krai... The Odoptu and Arkutun-Dagi fields will be developed in subsequent phases," the web site adds.

When Union Finance Minister Yashwant Sinha visited Moscow on January 15, 2001, it was clear that India and Russia were on the verge of concluding the Sakhalin agreement. On February 10, 2001, the representatives of OVL and the Russian-owned Rosneft company signed an agreement in the presence of Ram Naik, who was Minister for Petroleum and Natural Gas at the time, and Khristenko, who was Russian Deputy Prime Minister. OVL was to invest $1.7 billion in the project. Ram Naik described the agreement as "a quantum jump in Indo-Russian economic relations... In the context of Indo-Russian relations, the Sakhalin-1 project will be remembered years from now same way as we remember the Bhilai Steel Plant."

Oil industry sources said the Sakhalin-1 contract was signed only after the direct intervention of Russian President Vladimir Putin, who spoke to Prime Minister Atal Bihari Vajpayee. Putin reportedly insisted that India should buy 20 per cent equity from Rosneft, which originally held a 40 per cent equity. The sources said that Russia had suggested that OVL hold 20 per cent equity, extract oil until it recovered its entire cost of production and then turn over the 20 per cent to Rosneft. The Russian government was not keen on concluding the agreement until India agreed to this. India, however, did not want to return OVL's share to Rosneft. The contract was signed only after Putin directly took up the matter with Vajpayee, the sources said.

The Union government approved OVL's additional investment of $1.07 billion in the Sakhalin-1 project on November 24, 2004, only after Russia agreed to India's condition that OVL should be allowed to retain its equity. An official press release on that day said, "The additional investment in the project will help in acquiring equity oil abroad and help in increasing oil security for the country."

SAKHALIN-1 is OVL's second overseas project to begin hydrocarbon production. Its first project to go on stream was in Vietnam. On December 18, 2002, OVL started delivering gas from the Lay Tay gas field, off the coast of Vietnam, to utilities inland for electricity generation. The Lan Do field also started producing gas a month later. When OVL acquired 25 per cent equity in the Greater Nile Oil Project in Sudan, it was already an oil producing property. OVL literature says that the Greater Nile Oil Project is an onshore crude oil production area, covering 50,000 sq km, in southern Sudan in the Muglad Basin, about 700 km southwest of Khartoum. For the financial year ending March 31, 2005, OVL's share of production from this project was about 26.82 million barrels of crude oil. This oil is brought to MRPL for refining. When the production from the Greater Nile Oil Project peaks, OVL's share could reach 25 million to 27 million barrels a year.

OVL was set up to provide energy security for the country by sourcing equity and gas from abroad. For while the ONGC's indigenous production of crude oil stands at 26.48 million tonnes, the country's demand is 120 million tonnes of crude a year. OVL is trying to bridge this massive gap.

According to ONGC Reports of August, its official publication, OVL has shown "spectacular performance" in recent years. It has established a strong foothold in hydrocarbon-potential areas spread over 15 properties in 13 countries, including the Ivory Coast and Australia. Its investment commitment overseas stands at $4.3 billion, of which about 64 per cent has been invested up to March 31. This makes OVL the biggest Indian multinational corporation.

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