09MOSCOW1964, SAKHALIN OIL AND GAS — “NOBODY GETS HURT”

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Reference ID Created Released Classification Origin
09MOSCOW1964 2009-07-31 11:08 2011-08-30 01:44 CONFIDENTIAL Embassy Moscow

VZCZCXRO1139
PP RUEHDBU RUEHFL RUEHKW RUEHLA RUEHNP RUEHROV RUEHSL RUEHSR
DE RUEHMO #1964/01 2121108
ZNY CCCCC ZZH
P 311108Z JUL 09
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 4408
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEHXD/MOSCOW POLITICAL COLLECTIVE PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RHMFISS/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

C O N F I D E N T I A L SECTION 01 OF 04 MOSCOW 001964 
 
SIPDIS 
 
DEPT FOR EUR/RUS, EEB/ESC/IEC GALLOGLY AND WRIGHT, S/EEE 
MORNINGSTAR 
DOE FOR HEGBURG, EKIMOFF 
DOC FOR JBROUGHER 
NSC FOR MMCFAUL, JELLISON 
 
E.O. 12958: DECL: 07/29/2019 
TAGS: EPET ENRG ECON PREL RS
SUBJECT: SAKHALIN OIL AND GAS -- "NOBODY GETS HURT" 
 
Classified By: A/Econ MC Lynette Poulton for Reasons 1.4 (b/d) 
 
------- 
Summary 
------- 
 
1. (SBU) Embassy officers traveled to Sakhalin Island July 
21-24 to gain a better understanding of the region's oil and 
gas operations.  The two main hydrocarbon-producing projects 
in the region, Sakhalin 1 and 2, account for only a small 
fraction of Russian oil and gas production but are 
significant as the primary Russian investments of ExxonMobil 
(Sakhalin 1) and Shell (Sakhalin 2).  Furthermore, they are 
the two most prominent of the three remaining projects in 
Russia governed by production sharing agreements (PSAs).  A 
tour of the Sakhalin 1 project was the centerpiece of the 
trip and highlighted both ExxonMobil's technological 
accomplishments as well as its success in infusing an 
impressively pervasive culture of safety among its workers. 
We also toured the perimeter of the Sakhalin 2 LNG facility, 
and met with representatives from El Vary (a BP-Rosneft joint 
venture exploring the region), the Sakhalin Salmon Institute 
(an environmental group), and Ecoshelf (an oil-spill response 
and waste-management company).  One striking feature of 
Yuzhno-Sakhalinsk ("Yuzhno"), the capital city of the oblast, 
was its relatively shabby appearance given the oil wealth of 
the island.  By all accounts, there will be further 
exploration and development of hydrocarbon resources in the 
region, although Sakhalin is still unlikely to raise 
significantly its contribution to overall Russian oil and gas 
production.  End summary. 
 
---------- 
SAKHALIN 1 
---------- 
 
2. (SBU) The highlight of our trip to Sakhalin Island was a 
visit to the Sakhalin 1 on-shore processing facility (OPF) 
and helicopter flyovers of the project's Odoptu field and the 
offshore Orlan platform.  ExxonMobil operates the Sakhalin 1 
project and virtually all workers were employees of 
ExxonMobil.  The logistical difficulties of working in the 
region were exemplified by the simple measure of how long it 
takes to get to the site and to return.  We departed our 
hotel in Yuzhno at 7:30 am and returned after 9:00 pm for 
substantive meetings and demonstrations that lasted 
approximately 3 hours total.  The only means of reaching the 
north of the island are a train that requires some 10-12 
hours each way, or by a charter air service jointly sponsored 
by the Sakhalin 1 and 2 consortia.  The air service is 
strictly for the use of the project teams, a restriction 
explained to us as necessary to comply with the tax and 
accounting rules of the PSAs.  The 1 1/2 hour flight is 
followed by a 1 1/2 hour drive (if, as happens often we were 
told, weather does not permit helicopter flights) to the OPF. 
 Helicopter service shuttles workers to and from the offshore 
oil platforms and the Odoptu field to the north. 
 
3. (SBU) The OPF is a technologically impressive facility 
that can handle a peak of 250,000 barrels per day of crude 
and 800 million cubic feet per day of gas.  It currently 
processes about 160,000 barrels and 100-250 mcf per day.  The 
site is managed and operated by teams of Russian and expat 
ExxonMobil employees, many of whom work in 28-day shifts, 
followed by 28 days off.  The project's engineering successes 
(the project boasts a host of oil-field "firsts" and records) 
are made more remarkable by the remoteness of the location in 
which such facilities have been built and run. 
 
------------------ 
"NOBODY GETS HURT" 
------------------ 
 
4. (SBU) Aside from the project's technological and 
management feats, what really stands out for the layman 
visitor is an extraordinary emphasis on worker safety.  The 
focus on safety is evident from the first interaction with 
ExxonMobil staff.  We were picked up in a left-hand drive car 
because ExxonMobil has determined that right-hand drive 
vehicles (virtually every other car on Sakhalin Island) are 
not as safe given that driving in Russia is in the right 
 
MOSCOW 00001964  002 OF 004 
 
 
lane.  Seatbelts, of course, are mandatory -- the driver does 
not drive until all seatbelts are buckled.  Upon entering the 
facility, cards with employee names pre-printed on them on a 
big board are turned around to show a clear color-code noting 
that a given employee is on-site in case an emergency 
requires an evacuation (cards were made for us as well). 
The logo embroidered on the standard polo short worn by staff 
says "Sakhalin 1 Project -- Nobody Gets Hurt".  Everywhere on 
the walls signs are posted alerting passersby to some safety 
requirement, reminding them of some safety policy, or simply 
letting them know that "Nobody Gets Hurt.  Not today.  Not 
tomorrow.  Not ever."  These reminders are
literally 
everywhere, including three separate ones by the coffee pot 
in the cafeteria, one of which points out the safe way to 
pull the coffee maker plug.  Before beginning to walk around 
even the offices of the facility, all visitors are given a 
safety presentation. 
 
5. (SBU) After our tour of the OPF, we were given a 
helicopter overflight of the Orlan offshore production 
platform and the production facilities being built to support 
production at the Odoptu field to the north.  However, before 
flying on a helicopter, all riders must watch two separate 
safety videos of about 10 minutes each.  Even the on-site 
workers who use the helicopters very routinely to go back and 
forth to the airport or to the platform must watch the videos 
every time, we were told.  Because the offshore facility is 
(barely) over a short limit for flying over water, all riders 
must also wear (rather uncomfortable) cold-water survival 
gear that resembles a space suit. 
 
6. (SBU) Notably, everyone we came across took all the safety 
precautions seriously.  Our main guide even told us he has 
adopted in his personal life many of the safety practices he 
has learned from ExxonMobil. 
 
---------- 
SAKHALIN 2 
---------- 
 
7. (SBU) We also toured the perimeter (due to maintenance we 
could not enter the installation) of the Sakhalin 2 (known as 
"Sakhalin Energy") LNG plant and terminal.  The large complex 
is the first LNG facility in Russia, and began shipping LNG 
in March.  According to Sakhalin Energy representatives, the 
LNG terminal will reach its full capacity of 9.6 million tons 
per year (approx. 13 bcm) by the end of 2009.  The 
representatives told us that total expenditures over the life 
of the Sakhalin 2 project (which includes both oil and gas 
production, processing, and transportation facilities) had 
thus far reached 22 billion dollars, and that about 10,000 
people representing 40 nationalities worked on the project 
during the construction phase.  The facility is currently run 
by only 300 people.  Seemingly appreciating the high costs of 
the project, a Sakhalin Energy engineer told us he was 
confident that lessons learned during the development of 
Sakhalin 2 would result in much lower costs for future LNG 
terminals. 
 
------- 
EL VARY 
------- 
 
8. (SBU) While the Sakhalin 1 and 2 projects are already 
producing sizeable quantities of oil and gas, other projects 
are still in the exploration phase.  One such project is El 
Vary, a Rosneft (51%) - BP (49%) joint venture with three 
licenses in offshore areas (Sakhalin 4 and 5) in the northern 
regions of Sakhalin.  We met with three El Vary 
representatives -- the General Manager (from Rosneft), the 
Finance VP (from BP), and the operations VP (from BP) in 
their offices in Yuzhno.  They told us the JV had already 
spent "hundreds of millions" of dollars, but had yet to 
discover enough resources to declare a field commercially 
exploitable under the current regulatory and fiscal system. 
They said that BP is "carrying" Rosneft (paying for 
everything until the venture pays off).  They noted that the 
lack of a PSA raised the commercial threshold for El Vary. 
However, all three representatives said they believed 
"significant" finds are still possible and that the region is 
"very, very interesting" from the perspective of oil and gas 
 
MOSCOW 00001964  003 OF 004 
 
 
companies. 
 
9. (SBU) El Vary representatives stressed the "very 
challenging" conditions in the remote region, which is only 
ice free from July to October, and the consequent added 
expenses required to explore the area.  They said new tax 
breaks offered by the government specifically for the region 
might help make deposits there more commercially attractive, 
but suggested a more fundamental reform to a profit tax (from 
the current revenue-based tax) would likely be needed. 
Further complicating the exploration process are 
uncertainties regarding international offshore boundaries as 
well as uncertainties with regard to the new law on 
restrictions on foreign investors in "strategic sectors". 
This law includes restrictions on foreign ownership of 
hydrocarbon "fields of strategic significance." 
 
--------------- 
THE ENVIRONMENT 
--------------- 
 
10. (SBU) Representatives from both Sakhalin 1 and 2 projects 
also highlighted for us their efforts at environmental 
preservation.  Stepped up efforts on this front are 
especially important given that Shell lost its majority stake 
in Sakhalin Energy to Gazprom following alleged violations of 
environmental regulations.  Sakhalin Energy representatives 
explained to us that the entire area around their LNG 
terminal is under constant environmental monitoring for 
indications of pollution or wildlife disturbance. 
Furthermore, Sakhalin Energy sponsors the Sakhalin Salmon 
Initiative (a local environmental group), among other social 
and environmental organizations.  Representatives from the 
Salmon Initiative, accompanied by Sakhalin Energy's corporate 
social responsibility manager, told us the group is involved 
in a variety of environmental monitoring, education, and 
awareness activities that have made Sakhalin citizens more 
conscious and appreciative of their environment.  The 
Sakhalin 1 project also touts its environmental record 
extensively.  Representatives showed us their 24-hour eagle 
nest monitoring station, which is one of many such monitoring 
efforts. 
 
11. (C) Bill Stillings (protect), a long-time Sakhalin 
resident and founder of Ecoshelf, an oil-spill clean up and 
waste management company, however, told us that "even the 
Western companies" generally do the minimum needed with 
regard to environmental compliance.  Stillings, however, did 
note that Western companies had at least helped Russian 
counterparts gain some sense of environmental awareness, 
something that had previously been completely lacking. 
According to Stillings, there are no adequate waste 
management facilities in the Russian Far East for much of the 
waste his company handles.  Ecoshelf must send this waste to 
"authorized facilities" elsewhere in Russia.  He added that 
being an authorized facility in Russia doesn't mean much -- 
"I wouldn't want to live close to one."  He said the oil 
companies had at least built some proper landfills adequate 
for some solid waste, but that regular Russian landfills were 
merely "holes in the ground." 
 
12. (C) As far as environmental damage goes, Stillings said 
Sakhalin is "a mess" and that in the north there are "puddles 
of oil everywhere."  That said, he told us he believes things 
have gotten better in recent years.  He added that money for 
environmental protection follows the swings in the economy, 
and that resources for environmental protection had dropped 
with the recession. 
 
13. (C) Stillings s
aid there had generally only been minor 
oil spills in the region, but that there had been a "fairly 
big spill" earlier this year at Rosneft's onshore project. 
He said this spill was "kept quiet" by the authorities, 
despite NGO attempts to publicize it. 
 
------- 
COMMENT 
------- 
 
14. (SBU) We observe from our trip to Sakhalin that 
sustainable economic development of the region is headed in 
 
MOSCOW 00001964  004 OF 004 
 
 
the right direction, but has a long way to go.  For one, 
there is only sporadic physical evidence of the billions of 
dollars spent by international oil companies on developing 
the resources of the region or of the billions of dollars 
earned thus far by the GOR.  This evidence is largely in the 
form of the few plush office buildings specifically built for 
the oil and gas companies on the island, as well as the two 
or three international-standard hotels that cater to those 
companies' employees and visitors.  Outside of these 
structures, the town of Yuzhno is filled with shabby "Soviet" 
buildings.  Streets, sidewalks, and general infrastructure 
are in poor repair.  The town looks poor, not rich.  That 
said, by all accounts things are much better in Yuzhno and on 
the island in general than they were just a few years ago. 
Local employees of ExxonMobil also expressed to us their 
appreciation for the way the company treats them -- as equals 
and professionals.  They were proud of their accomplishments 
and of the development of the island.  With those seeds 
planted, Sakhalin may well develop into a more modern and 
prosperous oblast.  However, from our short observation, that 
process will likely take decades, not years.  End comment. 
RUBIN

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