Sakhalin I

The Sakhalin-1 Project is an oil and gas development on the northeast shelf of Sakhalin island. It was declared commercial in October, 2001. The project area is comprised of the Chayvo, Odoptu and Arkutun-Dagi fields. Total recoverable reserves are estimated to be 2.3 billion barrels of oil (307 million tons) and 17.1 trillion cubic feet of natural gas (485 billion cubic meters).

Exxon Neftegas Limited, an affiliate of ExxonMobil, is the operator of the Sakhalin-1 Project. Other participants in the Sakhalin-1 Consortium are two Russian companies, Sakhalinmorneftegas-Shelf and RN-Astra, the Japanese company Sakhalin Oil and Gas Development Co., Ltd., and India’s ONGC Videsh Ltd.

Sakhalin-1 will be one of the largest single foreign direct investments in Russia. To date, the Consortium has spent over $US 4.5 billion on various exploration activities, environmental studies, engineering design studies, infrastructure improvements, taxes and other expenditures.

The Project will be executed in phases. The initial phase encompasses development of the Chayvo field. Production of oil and gas from Chayvo started on Oct. 1, 2005.

Chayvo will be followed by the development of the Odoptu and Arkutun Dagi fields to maintain the production plateau.

Overview

General

The Sakhalin-1 project includes three offshore fields: Chayvo, Odoptu, and Arkutun Dagi. Exxon Neftegas Limited is the operator for the multinational Sakhalin-1 Consortium (ExxonMobil interest 30 percent). Co-venturers include the Japanese consortium SODECO (30 percent); affiliates of Rosneft, the Russian state-owned oil company, RN-Astra (8.5 percent) and Sakhalinmorneftegas-Shelf (11.5 percent); and the Indian state-owned oil company ONGC Videsh Ltd. (20 percent).

Sakhalin-1 potential recoverable resources are 2.3 billion barrels oil and 17.1 trillion cubic feet of gas (or 307 million tons of oil and 485 billion cubic meters of gas).

Sakhalin-1 is one of the largest single foreign direct investments in Russia. To date, the Consortium has spent over US$ 6 billion on various exploration activities, environmental studies, engineering design studies, infrastructure improvements, taxes and other expenditures.

Project benefits to Russia include direct revenues, estimated at over US$ 40 billion, improvement of infrastructure, technology transfer and the use of Russian suppliers for contracts and procurement. Commercial development brings with it a contribution of US$ 100 million to the Sakhalin development fund over a five-year period. The project will also bring production bonuses of US$ 45 million. According to an independent socio-economic assessment of initial phase of the Sakhalin-1 project, over 13,000 direct and indirect jobs will be created for Russian nationals. The Russian content of contracts awarded to date for the Sakhalin-1 project exceeds US$ 3.5 billion.

Another important project benefit to Russia is supply of Sakhalin-1 natural gas to the Khabarovsk Krai in the Russian Far East. Gas sales agreements with two Khabarovsk Krai buyers, OAO Khabarovskenergo and OAO Khabarovskkraigas, were signed on September 26, 2005. The sales agreements are the first ever concluded between investment project participants under a Production Sharing Agreement (PSA) and domestic Russian gas buyers for long-term gas sales based on international market pricing and commercial terms. Deliveries of gas to Khabarovsk Krai started on October 1, 2005 with the production start-up at Chayvo. The first-year anniversary of ENL’s stable supplies of natural gas to the Khabarovsk Krai will be achieved in October 2006. These supplies significantly contribute to the Russian Far East gasification program.

The Sakhalin-1 project will be executed in phases. The initial phase develops the Chayvo field. Production from Chayvo started on October 1, 2005. The project has been producing up to 50,000 barrels (6,300 metric tons) of oil per day, which were sold to Russian Far East domestic customers before commissioning of the project export system. Natural gas production averaging 60 million cubic feet (1.7 million cubic meters) per day is being marketed to two domestic customers (OAO Khabarovskenergo and OAO Khabarovskkraigas) in the Khabarovsk Krai.

The project crude oil export system was commissioned in late August 2006. Construction was completed on a 24-inch, 140 mile (225 kilometer) pipeline to transport crude across Sakhalin Island and the Tatar Strait to the newly-constructed DeKastri terminal in the Khabarovsk Krai. First oil entered the line on August 29, 2006 and the initial tanker will begin loading at DeKastri in September 2006. With the commissioning of the export system the crude produced by the project will be supplied to international markets, to the greater benefit of the Sakhalin-1 Consortium members and the Russian state.

Project oil production is forecast to ramp-up to 250,000 barrels (30,000 metric tons) of oil per day with the start-up of the Onshore Processing Facility (OPF) in late 2006. The initial domestic gas sales are expected to plateau at annual average rates of 270 million cubic feet (7.65 million cubic meters) per day.

Future phases involve development of Chayvo gas reserves for exports, as well as development of Odoptu and Arkutun-Dagi fields, which will be timed to maintain facility/export system capacity. Learning from initial phase will be incorporated to improve development economics of future phases (lower costs, enhanced recovery, reduced risks, etc). These later project developments are expected to sustain export gas production from all three fields to 2050.

The project has demonstrated word-class safety performance with the Lost Time Injury Rate, (or LTIR) to date being nine times better (0.02/200,000 work-hours) than the oil and gas construction industry average (0.18).

Chayvo Development

The Chayvo field will be developed from both offshore and onshore facilities. The Chayvo Yastreb land rig construction was completed in June 2002. The rig was engineered exclusively for Sakhalin-1 and is the most powerful land rig in the industry. It is designed to drill extended reach wells to offshore targets from land based locations.

The state-of-the-art Extended Reach Drilling (ERD) technology will reduce the high capital and operating costs of large offshore structures and at the same time minimize the environmental impact in this sensitive near-shore area. In June 2003, ENL initiated the shore-based ERD program to install wells under the seabed at distances exceeding 11 kilometers to tap the northwestern flank of the main Chayvo oil zone. 11 ERD wells have been drilled to-date from Yastreb, setting records by depth, horizontal reach and drilling speed.

Oil and gas will also be produced from an offshore platform, called the Orlan. The 20-well concrete structure serves as the offshore drilling and living quarters and will be used to develop the southwestern flank of the main Chayvo zone. Installation of Orlan at Chayvo was completed in July 2005 and the drilling operations commenced in December 2005. The Orlan drilling rig is operated on the platform year-round. Offshore processing facilities are minimal, with a full well stream sent to shore for further processing at the Chayvo OPF. Four ERD wells and one disposal well have been drilled to date from Orlan using the advanced batch drilling process. Work is now underway to commission the remaining production systems and complete the flowlines to the OPF, with the final tie-in scheduled for the third quarter of 2006.

The Chayvo Onshore Processing Facility is designed to produce at the rate of approximately 250,000 barrels of oil per day (12 million metric tons per year) and 800 million cubic feet per day (8 billion cubic meters per year of gas). It will produce oil and gas to supply the Russia Far East and international markets. The Chayvo OPF construction is expected to be completed in October 2006.

Construction was completed on a 24-inch, 140 mile (225 kilometer) pipeline from the Chayvo OPF to the DeKastri export terminal on the Russian mainland in late August 2006.

The DeKastri terminal provides storage and a single point mooring tanker loading facility that will accommodate year-round crude oil export to world markets. The terminal includes two 650,000 barrel (100,000 cubic meters) capacity storage tanks to hold the Sakhalin-1 crude oil prior to tanker transfer and shipment. The terminal is supplied by the oil pipeline from Chayvo OPF. Because of its remote location, the terminal is essentially self-sufficient. It has its own electrical power generation, water supply, waste management system and living quarters for the operating staff.

Sakhalin-1 crude will be stored in the terminal tanks and exported via a subsea loading line to a Single Point Mooring (SPM), located 5.7 kilometers east of the Klykov Peninsula in the Chikhacheva Bay. The dry run testing of SPM and tanker hook up was successfully completed in June 2006.

A dedicated fleet of double-hulled Aframax class tankers carrying up to 720,000 barrels (100,000 tonnes) of crude will be used for exporting crude oil from the DeKastri terminal for year-round export to world markets. The initial tanker will begin loading at DeKastri in September 2006.

Up to 250,000 barrels of the Sakhalin-1 crude named Sokol is expected to be exported daily. This means tankers will depart every three-four days on average. The co-venturers will market the crude individually; the crude will be sold on a delivered basis.

Major Approvals

• Project Commerciality announced at the end of 2001 enabled the project to transition from exploration to development stage.
• The project received the positive conclusion of the State Ecological Expert Review (SEER) in July 2002 for both the Extended Reach Drilling (ERD) project and the Phase 1 Development Justification of Investment.
• On October 2, 2002, Glavgosexpertiza of Russia approved the Justification of Investment (JoI) for Sakhalin-1 project. Favorable conclusions had previously been received from the Ministry of Natural Resources on July 24 and from the Ministry of Economic Development and Trade on August 16, 2002. Approval of the JOI was a key milestone for the Sakhalin-1 project. It allowed the project to proceed to the next TEOC stage based on the preferred oil export pipeline route across Sakhalin Island to an export terminal at DeKastri on the Russian mainland.
• On April 2, 2003 the Authorized State Body approved the Development Program and Budget (DP&B;) for the Sakhalin-1 project. The DP&B; is a strategic plan and cost estimate of the activities required for oil and gas production from Sakhalin-1, including the environmental protection measures and abandonment requirements, as well as the benefits that the project brings to Russia.
• On February 9, 2004 the Ministry of Natural Resources of the Russian Federation approved the positive conclusion of the State Environmental Expert Review (SEER) Panel of the Technical and Economic Substantiation of Construction (TEOC) for Phase 1 of the Sakhalin-1 project. The Review Panel, comprising 49 leading Russian experts from the Russian academia, technical and environmental organizations of the Russian Federation, assessed project key design solutions, the waste management and water protection measures, the emergency response preparedness, the economic and social impact of the project, as well as the various measures that will be undertaken to protect marine and land biological resources during project Phase 1 construction and production operations.
• On April 9, 2004 the Russian Federation approved the Technical and Economic Substantiation of Construction (TEOC) for Phase 1 of the Sakhalin-1 project. Approval of the TEOC is a key project milestone that allows the Sakhalin-1 Consortium to commence construction of the Sakhalin-1 Phase-1 facilities, enabling ENL to maintain the schedule leading to first oil production from Chayvo in 2005.
• During construction stage, ENL and its contractors received over one thousand additional approvals, licenses and permits from federal, regional and local district authorities. These approvals include over ten additional SEER positive conclusions. Since 2005, over one hundred agency inspections and audits have been conducted to verify compliance with Russian regulatory and project documentation.

Local Content

The Sakhalin-1 Consortium continues work on implementing a comprehensive Russian content strategy to identify and contract qualified Russian companies and organizations with the skills and experience required to conduct the work in a safe and environmentally responsible manner. Key features the Sakhalin-1 Consortium strategy have included the launch of the Sakhalin-1 website to communicate project information to Russian contractors and suppliers; holding project seminars in Moscow, Khabarovsk and Yuzhno-Sakhalinsk; encouraging active involvement of Russian design institutes in the project design; developing a comprehensive Russian contractors database; and tailoring major contract packages to encourage Russian participation. The Russian content of contracts awarded to date for the Sakhalin-1 project exceeds US$ 3.5 billion, or about two-thirds of the total. The total value of contracts awarded to date exceeds US$ 5.4 billion.

ENL and its contractors currently employ hundreds of Russian nationals for field development. 350 Russian citizens currently work in the Yuzhno-Sakhalinsk operations office to support the Consortium’s efforts; many of them have received and will continue to receive professional training. During the peak of the project construction activities at Chayvo in summer 2005 the project employed approximately 8,000 people, including direct employees and contractors. By 2010 Russian nationals are projected to increase to 80% of the Sakhalin-1 workforce.

Among the many contributions that Sakhalin-1 project made to the local community are Sakhalin regional small business development program with the total budget of over US$ 1 million and multiple infrastructure upgrades and community support programs in Sakhalin Oblast and Khabarovsk Krai. Some of the most recent initiatives include financial contributions to Sakhalin and Ul’chi District communities to support education, cultural, social and welfare programs. In April 2006 ENL invested in the upgrade of the roads and bridges in the Ul’chi Municipal District of the Khabarovsk Krai. In August 2006 the project donated US$ 300,000 for the purchase of new surgical and diagnostic equipment to modernize a local Central District Hospital Nikolayevsk-on-Amur in Khabarovsk Krai. In April 2005 ENL invested significant funds for needed improvements at the local hospital in DeKastri, including medical treatment and diagnostic equipment, staff training and augmentation, and an ambulance.

Consortium Members

The Sakhalin-1 Project is an international consortium comprised of Russian, Indian, Japanese and U.S. participants. Those participants are listed below in alphabetical order.

• ExxonMobil Exxon Neftegas Limited, a subsidiary of U.S.-based Exxon Mobil Corporation, is the operator of the Sakhalin-1 Project and holds a 30% interest.
• ONGC Videsh Ltd. ONGC Videsh Limited, a subsidiary of Indian National Oil Company ONGC, is based in India and holds a 20% interest.
• RN-Astra RN-Astra, a subsidiary of Russian national oil company Rosneft, is a Russian company and holds a 8.5% interest.
• SMNG - Shelf Sakhalinmorneftegas-Shelf, a subsidiary of Rosneft-Sakhalinmorneftegas, is a Russian Company and holds an 11.5% interest.
• SODECO Sakhalin Oil and Gas Development Co., Ltd., is a Japanese investment company (whose principal shareholders are JNOC, JAPEX, Itochu and Marubeni) and holds a 30% interest.

Gas Marketing

Gas market development and sales remain a high priority for the project. With natural gas resources estimated at 17 trillion cubic feet (485 billion cubic meters), the three fields in the Sakhalin-1 production area can provide a large, long-term commercial supply of gas for export and also supplement regional domestic supplies in Russia. Additional discoveries in other Sakhalin blocks could increase the available supply even more. The Chayvo field alone has enough gas to produce 1 billion cubic feet per day (10 billion cubic meters per year) for more than 25 years. With the Odoptu and Arkutun-Dagi resources, a production rate of 1 billion cubic feet per day (10 billion cubic meters per year) can be achieved for more than 40 years.

2005 has been a year of substantial progress for Sakhalin-1 gas marketing activities. Gas sales agreements with two Khabarovsk Krai buyers, OAO Khabarovskenergo and OAO Khabarovskkraigas, were signed on Sept.26, 2005. The sales agreements are the first ever concluded between investment project participants under a Production Sharing Agreement (PSA) and domestic Russian gas buyers for long-term gas sales based on international market pricing and commercial terms. Deliveries of gas to Khabarovsk Krai started on Oct.1, 2005 with the production start-up at Chayvo.

The natural gas for the domestic sale is produced from the Chayvo Field and sold at a delivery point near the field facilities. The gas is transported by the Rosneft-SMNG and Daltrangas pipeline systems.

Natural gas sales and deliveries from the Sakhalin-1 Project to customers in the Khabarovsk Krai are a significant step in the Russian Far East Gasification Program.

Sakhalin’s geographical location and proximity to gas markets in Northeast Asia present a unique opportunity to access markets with pipeline gas. The Sakhalin-1 Consortium members view that pipelines are the most economic method to deliver gas to Northeast Asian markets. Pipelines will enable Sakhalin gas to be delivered to a broader mix of markets and customers thus providing additional diversity. Also, pipelines will enable natural gas to create additional gas penetration by reaching markets that are not easily served by LNG. Lastly, established markets in Northeast Asia have the opportunity to diversify their gas transportation options which will help creates additional supply security.

Pipeline transportation offers the most economic method to bring natural gas to Northeast Asia markets. Pipelines can access markets not easily reached by other transportation options. In doing so, pipelines enable greater gas penetration by opening new markets. By providing cost-effective transportation, pipelines enable gas to effectively compete with the alternative fuels and bring environmental benefits to markets where energy options were previously limited.

Pipelines create long term strategic links providing a catalyst for future development. Finally pipelines enhance diversity of supply and energy security that is important to all Northeast Asia markets. For all of these reasons the Sakhalin-1 Consortium continues to pursue all market opportunities for a pipeline gas export sale.

An assessment of gas export markets in Japan and China has been completed and the Consortium has concluded that a pipeline, built to international design standards, would be the most cost-effective method to deliver gas to these export markets. Export pipeline gas marketing discussions continue in several markets in NE Asia as the Sakhalin-1 Project considers all options for pipeline gas export sales.

Location

Sakhalin island is situated along the eastern coastline of the Russian mainland, immediately north of the Japanese island Hokkaido. The island is 948 km (589 miles) long from north to south and 27 to 160 km (17 to 99 miles) wide from east to west.

The Odoptu Oil and Gas Field is located on the northeastern Sakhalin shelf on the Piltun Bay latitude, 6 to 10 kilometers off the Sea of Okhotsk shoreline. The Odoptu onshore facilities will be located on two sites - Northern and Southern. The sites are located on the eastern side of the Piltun Spit on the elevated portion of the coastal benches ending on the east with a fall to the sand beaches of the Sea of Okhotsk. The distance between the sites is approximately 10 kilometers.

The administrative location: Okha District, Sakhalin Oblast. The District center - Okha is located 61.6 kilometers northwest of the northern site. The nearest populated locality is Tungor Settlement located 32.8 kilometers northwest of the northern site.

The Chayvo Oil and Gas Field is located on the northeastern Sakhalin shelf on the Chayvo Bay latitude, 5 to 15 kilometers off the Sea of Okhotsk shoreline. The field development will be conducted both offshore and onshore. The Orlan offshore platform will be positioned at a depth of approximately 15 meters. The onshore drilling site is located on the eastern side of the Chayvo Spit, on the elevated portion of the shoreline.

The administrative location: Nogliki District, Sakhalin Oblast. The District center - Nogliki is located 77.4 kilometers south. The nearest populated locality is Val Settlement located 21 kilometers southwest site.

The Onshore Processing Facility (OPF) is planned to be located on the northwestern shore of the Chayvo Bay, near the Ngayan Cape.

The administrative location: Nogliki District, Sakhalin Oblast. The District Center - Nogliki is located 79.2 kilometers south. The nearest populated locality - Val is located 20 kilometers southwest. The Yuzhno-Sakhalinsk - Nogliki - Okha road and Nogliki - Okha narrow-gauge railway is located 7 kilometers west of the site.

The De-Kastri Oil Export Terminal is planned to be located on the northern shore of the Chikhacheva Bay at the site between the Alekseev Cape and the Neprimetny Cape.

The administrative location: Ulch District, Khabarovsk Region. The nearest populated locality - De-Kastri Settlement is located 6.5 kilometers from the terminal site. The existing access road runs from De-Kastri to the oil export terminal of Rosneft-SMNG open joint stock company.

Project History

The Production Sharing Agreement (PSA) for the Sakhalin-1 Project became effective in June 1996.

In September, 2000, the Sakhalin-1 Project completed drilling and testing of the Chayvo 6 well. This was the last well of a 5-year exploration period. , The Exploration Period included drilling of 7 appraisal wells and acquisition of more than 1,200 square kilometers of three-dimensional seismic data. The appraisal work under the PSA along with prior exploration work conducted during the 1970s and 80s delineated Sakhalin-1 hydrocarbon resources totaling 2.3 billion barrels of oil (307 million tons) and 17.1 trillion cubic feet of gas (485 billion cubic meters).

Prior to the effective date of the PSA, the Odoptu field had been identified in 1977 as holding potential oil and/or gas reserves; the Chayvo field in 1979; and the Arkutun-Dagi field in 1989.

The Sakhalin-1 Consortium declared the project commercial on October 29, 2001 and the Russian Federation approved the declaration on December 3, 2001 which formally ended the Exploration Period and commenced the 20 year Development Period under the PSA.

In 2004, the Russian Government approved the Technical and Economic Substantiation for Construction, which allowed Sakhalin-1 to start full-scale construction of the project facilities. The initial phase is the development of Chayvo, which is well under way, followed by Odoptu and Arkutun Dagi. Production from Chayvo started on October 1, 2005. Full production is targeted for the end of 2006. Initial sales of oil and gas to Russian Far East customers started in October 2005. Subsequent development is tied to long-term gas sales contracts. Later project developments are expected to sustain export gas production from all three fields to 2050.