Russian optimism is growing about a planned restart of production on the Sakhalin 1 oil and gas project in the country’s far east after international sanctions forced Moscow to intervene and put in place a new operator last year.
Sakhalin 1 was producing at a rate of 250,000 barrels per day in 2021 before then-operator Exxon Neftegas — a regional subsidiary of US supermajor ExxonMobil — declared force majeure in May 2022 in response to international sanctions imposed on Russia following its invasion of Ukraine in February.
The sanctions included a ban on Western insurance cover being granted to Russian state shipping company Sovcomflot for its fleet of dedicated ice-class tankers capable of reaching the port of De-Kastri, from where almost all of Sakhalin 1’s oil production is shipped to international markets.
However, Sovcomflot recently carried several Sakhalin 1 oil cargoes to South Korea, according to marine traffic tracking services.
And, according to a New Delhi source familiar with the matter quoted by Reuters, production at Sakhalin 1 has recovered to between 140,000 and 150,00 barrels per day since the appointment last October of the new Russian-owned operator — also named Sakhalin 1.
Caution over the new operator’s ability to restore oil production at the project was highlighted last November by ONGC Videsh, when an executive with the Indian company told investors during a conference call that increasing output at the project may prove to be “an uneasy task”, as the development had depended heavily on services provided by international oilfield service companies such as Schlumberger, Weatherford and Parker Wellbore, which were unable to continue business in Russia because of the sanctions.
At the end of the last year, ONGC Videsh was granted a 20% stake in Sakhalin 1 by the Russian government, replacing the shareholding of the same size that it held under the previous operator before the government confiscated all of the project’s assets.
Exxon Neftegas had held a 30% operating stake in the project since the conclusion of the Sakhalin 1 production sharing agreement in 1996.
Following Russia’s invasion of Ukraine, Exxon Neftegas’ parent company ExxonMobil announced its decision to exit the project.
However, in October, Russian President Vladimir Putin issued a decree instructing authorities to disband operator Exxon Neftegaz and transfer the project and all of its assets and equipment to a new operator.
ExxonMobil has not filed a request to regain its shareholding in Sakhalin 1 and Russian authorities now plan to sell the company’s former equity to a new investor during the first quarter of this year.
However, Russia’s Deputy Prime Minister Alexander Novak said earlier in January that the government has yet to decide on the requirements for a potential buyer, so it remains “premature” to discuss any potential contenders for the 30% stake in the project.
Regional authorities on Sakhalin Island said that the halt in Sakhalin 1’s production led to the total oil output on the island falling by 44% to 181,000 bpd in 2022.
Authorities anticipate oil production in the region to recover to about 277,000 bpd this year, a regional minister said in December.
Since the Russian invasion in Ukraine in February 2022, India has become a major buyer of Russian oil as international sanctions led to the loss of European and other markets for Russia’s oil producers.
ONGC Videsh had not responded to Upstream’s request for comment at the time of publishing.