SAKHALIN II (PHASE 1) OIL PROJECT

Location:

Russia

Project number:

3321

Business sector:

Natural resources

Notice type:

Private

Environmental category:

A

Target board date:

16 Dec 1997

Status:

Completed

PSD disclosed:

18 Apr 1997

Project Description

The project is the commercial development of the Astokh feature of the Piltun-Astokhskoye oil and gas field located off Sakhalin Island, using the Molikpaq, an Arctic offshore drilling unit.
The project aims to:
(i) increase Russia's crude oil production and exports;
(ii) promote the economic development of Sakhalin Island;
(iii) introduce modern and environmentally sound offshore oil production techniques in the Russian Federation.

Transition Impact

The project is expected to provide a demonstration effect, which will facilitate the implementation of an effective production-sharing framework in Russia. As a result, it will enhance fiscal stability for companies operating in the Russian natural resources industries and facilitate foreign investment. The company's environmental practices, including its commitment to ongoing public consultation, also have a transition impact.

The Client

Sakhalin Energy Investment Company Ltd. The company's business is the development of the Lunskoye and Piltun-Astokhskoye oil and gas fields located off Sakhalin Island under a Production Sharing Agreement with the Russian Federation entered into in June 1994. The development of these fields is generally referred to as the Sakhalin II project. The development of the Astokh feature, which the Bank is considering financing, constitutes the first phase.

EBRD Finance

A US$ 116 million (ECU 102 million) senior loan. Co-financing will be provided by the Overseas Investment Corporation (OPIC), an agency of the US Government, and the Export-Import Bank of Japan (JEXIM), a Japanese governmental financial institution. OPIC and JEXIM will both provide loans equal to the Bank's loan.

Project Cost

US$ 780 million (ECU 688 million).

Environmental Impact

The project was screened A/0, requiring an Environmental Impact Assessment (EIA) and associated public consultation. Environmental investigations were undertaken by firms of independent consultants and compiled by SEIC ("the Company"). In addition, the Bank required external expert opinions on the project and on specific areas of concern: oil-spill modelling, birds, fish, marine mammals, and public consultation. The Bank's consultants evaluated the adequacy of the EIA and made specific recommendations to the Bank on how it should be improved. The original draft EIA prepared by the company in January 1997 was modified to reflect comments made by the Bank's consultants and by the public. A number of additional studies were undertaken, including detailed oil-spill modelling and coastal sensitivity analysis, prior to the EIA being reissued in September 1997 for public comment.
In addition to the EIA, some eight background reports and 11 detailed procedural manuals were reviewed by the lenders. Additional procedures and plans were developed as part of an Environmental Action Plan agreed between the lenders and the Company. The Company has covenanted to implement the Environmental Action Plan (EAP) under the terms of its loan agreement with the lenders.
Standards
The Production Sharing Agreement commits the Company to the environmental standards generally accepted by the international oil and gas industry. The Environmental Action Plan specifies that the Company will meet or exceed World Bank and Russian environmental standards, and that USA offshore environmental guidelines specific to offshore oil and gas operations in Alaska were originally used to develop commitments for the project. Since 1997, the Russian Federation has developed requirements, and in many cases, these are more stringent than the international standards.
The Company completed its environmental impact assessment according to Russian law and submitted it to the Russian authorities in December 1997, for the environmental expert review (i.e., the "Expertisa" review); approval was received in March 1998.
Another EIA was prepared in 2001 in relation to the drilling for water injection wells, which is known as Phase 1A. The major change in this EIA was the use of oil-based drilling muds on an intermittent basis, where required by geological conditions. All oil-based muds will be recirculated, where possible, and wastes and cuttings cleaned and reinjected into the formation. No oil-based muds or cuttings will be discharged to the sea. Water-based muds will also be reinjected into the formation, where feasible.
Key Environmental/health and safety issues and mitigation
The operation involves the establishment of a significant new oil field using a drilling and production unit in the Sea of Okhotsk, some 18 km off the north-east coast of Sakhalin Island. The following potential environmental impacts could result from the project. Mitigation measures are shown in italics.
a) Location and climate: The Molikpaq was originally operated as a drilling platform in the Beaufort Sea in North America, where ice conditions are more severe than offshore Sakhalin Island. The Bank's independent technical and environmental experts agreed that the design issues associated with the Molikpaq refurbishment were robust for the pack ice, temperatures, and wave strength requirements of the conditions in the Sea of Okhotsk.
b) Adaptation to processing facility: The Molikpaq required substantial modification to convert from a drilling platform to a drilling and processing platform. Refurbishment works were undertaken in a shipyard in South Korea. The addition of processing facilities was reviewed by the lenders for safety considerations due to the proximity to living quarters, and certified by independent certification authorities prior to installation and operation.
c) FSO: The floating, storage, and off-loading facility (FSO) is a leased oil tanker (135,000 ton dwt), which was certified under international standards for its class of vessel, such as those of the International Convention for the Prevention of Pollution from Ships (MARPOL) and the International Maritime Organisation (IMO). The vessel is a newly built, double-hulled ice class oil tanker, and in accordance with international shipping standards. The FSO is disconnected from the pipeline during the ice season and rough weather. Lease agreements with the FSO document environmental and safety obligations. The Company has representatives on board during all mooring and loading procedures.
d) Air emissions: Air emissions can be associated with produced gas. The Company originally planned to separate gas from oil at the platform, and to compress and reinject all produced gas into the formation (whilst retaining a small allowance for operational flaring only). Due to problems with the compressor train, this objective was not met in full until 2005 when the Company adopted a policy to reduce production if it could not reinject all of the gas. The platform also has a flare for emergency and maintenance use.
e) Risks associated with seismic activity: Off-shore Sakhalin Island is in seismic zone 1 to 1.6. In comparison, on-shore Sakhalin is in zone 2 and Japan is in the highly seismic zone 5. Off-shore Sakhalin is more comparable to the North Sea, which is zone 1. Seismicity issues appear to be one of the main public concerns associated with the development of the Sakhalin Shelf. The EBRD's independent engineers are satisfied that, in the event of an earthquake, limited environmental damage would occur because of the automatic shut-off valves, which would stop production at the sea floor, even if the platform was damaged. The Bank's engineers also confirmed that the Molikpaq has been designed in excess of international industry requirements for seismicity risk.
f) Oil-spill modelling: The Far Eastern Regional Hydrometeorological Research Institute (FERHRI) undertook a detailed and extensive oil-spill modelling according to international standards and Russian requirements, which models oil-spill trajectories for four different spill scenarios and takes into account an extensive number of criteria (such as meteorological conditions off Sakhalin Island). Independent oil-spill experts hired by the Bank confirmed that the oil-spill modelling performed by FERHRI had been prepared in accordance with best industry practice.
The modelling shows that, under some conditions, an oil spill could have an impact on the coast of Sakhalin Island. Coastal sensitivity studies were undertaken to determine sensitive environments and habitat to be taken into account in the oil-spill contingency plan.
g) Oil-spill prevention, mitigation, and response: Significant studies were done on the potential for accidental spillage/release of crude oil in water or on ice during the production phase and during trans-shipment of oil between the FSO tanker and transport tankers, and the resulting impact on environment. The production facilities have been constructed with state-of-the-art automatic shut-off valves, which will shut down the oil flow from each well in the event of an emergency or pressure loss. This is aimed at preventing a catastrophic oil spill in the event that the platform is damaged, for example, in a major earthquake. In addition to the shut-off valves, the flow line from the FSO to the tanker contains periodic break-away couplings. In the event that the flow line breaks, these special safety couplings close immediately and flow ceases at once. The amount of oil lost into the environment would be minimal. An Exclusion Zone has been established around the platform, pipeline, and FSO, so that fishing vessels will not be in direct proximity to the facility, particularly during loading times.
The Company has prepared an oil-spill contingency plan, which describes oil-spill response procedures and strategies, taking into account, among other factors, the type of spill, its volume as well as an analysis of sensitive areas along the coastline. The plan also lists Tier I, II and III response equipment and resources available at the Company, on the Island and internationally. The plan was reviewed by the lenders' independent oil-spill experts for adequacy in scope and depth prior to drilling and has been subject to routine monitoring and reporting. 
h) Marine mammals: Disturbance to marine fauna during the construction and operation phases of the project. The EIA states that there are some 32 species of marine mammals that have been observed in the greater Sea of Okhotsk, including several endangered species. A key species of concern in the project area is the Western North Pacific or Okhotsk-Korean population (Korean) gray whale, which is on the 2000 IUCN (International Union for the Conservation of Nature and Natural Resources) list of critically endangered species. The Company is co-sponsoring an extensive research and monitoring programme for gray whales in the Sea of Okhotsk. The programme involves sea surveys, aerial surveys, photographic and acoustic surveys. The Company has developed a gray whale protection plan, which includes prevention and mitigation measures in relation to potential environmental impacts and monitoring and reporting activities.
i) Birds: Disturbance to sea birds during the construction and operation phases of the project. The EIA concludes that impacts to sea birds are not likely to be significant. The Company has supported a field study of bird populations in the Chaivo Bay area and continues to support on-going monitoring.
j) Fish: Although the EIA provides information on catches in the Sea of Okhotsk, there is limited information available on fish stocks and catches in the project area; unofficial data show that while the Sea of Okhotsk is abundant in fish, the Molikpaq area is not significant. The primary species in the area is pollock. No significant environmental impacts were predicted or have been identified from the construction and operation. No fishing will be allowed from the facility. Impacts to the local fishing industry would be due to either the loss of fishing in the exclusion zone, or in the event of an incident, such as an oil spill. The Bank's independent consultants on fisheries concluded that significant impacts on fisheries were not anticipated, but suggested that additional baseline information on fisheries dynamics should be collected. The Company has agreed to use official and non-official sources to establish baseline abundance data for the area, and to monitor trends of fish catches in the area on an annual basis.
The company has negotiated compensation for the establishment of the safety exclusion zone around the Molikpaq and FSO Tanker traffic schedules will be published in the fisheries institutes. The Company maintains contact with representatives of indigenous groups on the island, including indigenous fisheries. Furthering its original commitment in the Environmental Action Plan (EAP) to establish a Fisheries Liaison Officer post, the Company has since 2003 established an island wide network of community liaison officers who are located within key project-affected communities and have responsibility for liaison with local and indigenous fisheries groups.
j) Dredging impacts: Limited dredging of substrate under the Molikpaq was undertaken to provide a more stable sand base. Sand was also dredged to put into the core of the Molikpaq. Due to the type of sand in the vicinity of the site, it is unsuitable for use as core material. A separate sea floor area was dredged and the sand placed in the core of the Molikpaq and condensed. Two seabed surveys were undertaken to assess environmental impacts. Loss of habitat was not significant.
k) On-shore facilities: On-shore facilities include living accommodation for personnel in Yuzhno-Sakhalinsk, a small transit accommodation near the airport in Nogliki, and a warehouse facility at Kholmsk, including fuel storage. The housing development uses local electricity and has a back-up generator and small sewage treatment plant. All have been built in accordance with Russian regulations and in accordance with good practice.
l) Waste disposal: Treatment and disposal of drilling muds, cuttings, produced water, deck runoff and domestic and sanitary wastes from the Molikpaq and FSO tanker are handled in accordance with good industry practice and in line with World Bank and Russian requirements. No oil-based muds or cuttings will be discharged into the sea. Water-based muds will be reinjected into the formation where technically feasible.
m) Noise: Noise was generated by seismic sounding and explosives were used to condense sand in the Molikpaq core during installation; these noises were significant for a limited period of time. The Company developed guidelines to refrain from such activities in the event that whales are in the vicinity, and during limited visibility. Representatives from the gray whale study group were present on the seismic boats to search for whales in the vicinity prior to initiating seismic activities.
n) Decommissioning phase: At the end of the full field development (30+ years), the Molikpaq will have the core sand pumped out and will be floated to a shipyard or mooring point. Options for its disposal/fate include selling for use in another oil field development project, dismantling for scrap, etc. Studies will be conducted well ahead of decommissioning to determine the most appropriate options.
Summary of Environmental Action Plan
The Environmental Action Plan (EAP) details specific standard requirements for waste streams and outlines the various programmes under the environmental, health and safety (EHS) programme. In addition to an EHS programme, detailed operational Environmental Protection Plans have been prepared and reviewed to the lenders' satisfaction for drilling, seismic studies, dredging, production, on-shore construction, FSO deployment (including ice management), tanker procedures, cuttings and mud management, chemical usage, sewage, solid and hazardous waste, produced water, and small spill response. In addition, hazard analyses have been conducted on the process system and the drainage system, and other studies are being conducted on loss prevention and pipeline inspection. The Company has obtained coastal survey data, including sensitive areas of the north-east coast of Sakhalin Island for inclusion in a Geographical Information System.
The EAP provides an audit programme schedule, including an independent environmental audit every two years for the duration of the involvement with the Company. Monitoring programmes have been included into the EAP. The EAP also provides a health and safety programme and a commitment to ongoing public consultation and community programmes.
Public consultation
As an 'A' level project, the operation was subject to the requirements of the Bank's Public Information Disclosure Policy (1996) and Russian Law pertaining to environmental impact assessments.
a) Availability of information: The public was involved in the meetings on the environmental issues associated with the project for the original feasibility study in 1992. A press release announcing the proposed development of the Astokh feature using the Molikpaq, fulfilling the Bank's notification requirement, was made on 26 July 1996. A first draft of the EIA was made available on Sakhalin Island on 18 January 1997 and the Company's offices in Moscow on 24 January 1997 for a 60-day period. The availability of the documents and contact information for comments were published in the press on Sakhalin Island (18 January) and in Moscow (31 January).
A revised EIA was produced in September 1997, which incorporates the results of the work and studies completed since January 1997 as well as comments received from the public during the initial display of the EIA. The revised EIA was made available by the Company in four locations on Sakhalin Island, in Moscow as well as in two locations in the United States on 3 October 1997. The availability of the revised EIA was also announced through the press.
b) EBRD: The first draft EIA document was placed in the EBRD Business Information Centre in London and in the EBRD Resident Office in Moscow on 24 January 1997 and its availability was posted on the Bank's Web site on the Internet. The Executive Summary of the draft EIA was circulated to the EBRD Board of Directors on 24 January 1997. The September 1997 EIA was placed in the EBRD Business Information Centre and in the EBRD Resident Office in Moscow in early October 1997 where it is permanently available for review.
c) Meetings: Since the original feasibility study in 1992, the Company has met with the Congress of Indigenous Peoples on the Island and with different fisheries regarding the Phase I project and the larger Sakhalin II development. They have also discussed the project with representatives of international non-governmental organisations on numerous occasions. Public meetings were held in six cities on the Island in October 1997: Yuzhno-Sakhalinsk, Okha, Nogliki, Korsakov, Kholmsk, and Poronaysk. In addition to the EIA being available for public review prior to the meetings, over 20 handouts were prepared on key issues, which contained contact information for the company for public comments or questions.
d) Public consultation programme: The Company developed a public information programme, which is monitored by the Bank. A significant amount of information on the project, including environmental, safety, and social issues, is found on the SEIC website.
 

Technical Cooperation

None

Company Contact

 

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