4. About the Company

4.1 Sakhalin Energy

Mitigation of all potential risks to health and life is one of the crucial conditions for the company's successful operation and implementation of fundamental human rights: right to life, right to favourable working conditions and others.

Sakhalin Energy Investment Company Ltd. (Sakhalin Energy or the company) was founded in 1994 to develop the Piltun-Astokhskoye and Lunskoye oil and gas fields in the Sea of Okhotsk offshore Sakhalin Island.

Sakhalin Energy operates under the Sakhalin-2 Production Sharing Agreement (PSA) that was signed by the company and the Russian Federation represented by the Government of the Russian Federation and the Sakhalin Oblast Administration (currently, the Sakhalin Oblast Government).

The following companies hold shares in Sakhalin Energy through their subsidiaries: Gazprom (50% plus one share), Shell (27.5% minus one share), Mitsui (12.5%), and Mitsubishi (10%).

To develop these two fields, the company constructed a large-scale infrastructure for extracting, transporting, processing, and then markeing of hydrocarbons. The infrastructure includes three fixed offshore platforms, offshore and onshore pipeline systems, an onshore processing facility, two booster stations, an oil export terminal with a tanker loading unit, a liquefied natural gas (LNG) plant with LNG export terminal, and gas transfer terminals. This has been one of the most technically complex projects carried out over the last few decades in the global oil and gas industry.

Production facilities of «Sakhalin Energy»

4.2 Main Production Results in 2017

In 2017, the сompany won the first place in the All-Russian competition “Labour productivity: Leaders of Russian Industry” with labour productivity rate of 132.63 mln roubles per person per annum. As the result of the competition, Sakhalin Energy is the leader in labour productivity in Sakhalin Region, leader of Russian oil and gas industry and ranks among the top three winners of the competition for the third consecutive year.

In 2017, the company delivered crude oil/LNG production targets ahead of schedule. This was achieved due to elimination and optimisation of limitations in operation of onshore equipment, improvement of well operation modes and reliability of all process equipment of the company. The above targets have been achieved in compliance with all safety requirements.

4.2.1. Assets

February 2017 marked eight years since the first LNG plant in Russia was officially launched. Russia has become one of the key players in the promising Asia Pacific market through the efforts of Sakhalin Energy. About 4% of global supply of LNG comes from the Prigorodnoye production complex.

PA-B won the overall Drilling Rig of the year award with Molikpaq in the runner’s up and LUN-A in the 5th place in the Shell Rig League table in 2017, which ranks on the performance, HSE and People scores. Molikpaq (PA-A) Platform

In July 2017, it was 18 years since the Molikpaq platform first started producing oil. Over the first nine years, starting from 1999, Molikpaq operated only during the ice-free season. In 2008, year-round production of hydrocarbons commenced.

As of the end of 2017, the operating well stock of the Molikpaq platform included 16 production wells, six water injection wells, and one well for re-injecting drill cuttings back into the reservoir. The average daily production rate in 2017 was 6.91 thousand t (50.87 thousand bbl) of oil and 0.82 mln m3 of associated gas.

Since the commencement of oil field development at PA-A platform, more than 35 mln t (over 260 mln bbl) of oil have been produced.

In 2017, the company continued development drilling to maintain production plateau.

In February 2017 oil well targeted the central part of the area with open hole gravel pack completion.

In May 2017 side track was drilled in the oil well and completed using Frac & Pack technology to prevent sand production. The well was shut in due to low reservoir pressure and casing integrity issue.

Alongside with that the company drilled water injection well in June 2017 with the purpose to maintain pressure in the central part of the reservoir.

Apart from drilling activities, the company continued to monitor reservoir and well performance, injected water quality and cutting re-injection {CRI) well performance. Continuous sand, water and well integrity monitoring is performed on all wells.

In Q3 and Q4 essential rig refurbishment projects (BOP control panel, cement unit and air compressor replacement) were successfully completed.

In November 2017 seven conductors were installed.

In 2017, Addendum to CRI Technical Project for Astokh area, Piltun-Astokhskoye oil, gas and condensate field was developed.

In 2017, Addendum to Reservoir Management Plan and Operational Reserves Update for Astokh area, Piltin-Astokhskoye field were developed. At the end of 2017, these materials were submitted for approval to SRC Rosnedra. Piltun-Astokhskoye-B (PA-B) Platform

PA-B celebrated the 10-year anniversary in 2017 – the upper platform structures were erected in 2007. In June 2017, the company completed a one-of-a-kind crane boom replacement operation at PA-B platform. A 48-metre-long, 18-tonne boom was installed at an operating platform in challenging weather conditions for the first time in the history of oil and gas industry.

As of the end of 2017, PA-B platform had 15 production wells, seven water injection wells, and two cutting re-injection wells.

The platform’s average daily production rate in 2017 was 4.52 thousand t (33.26 thousand bbl) of oil and 1.28 mln m3 of gas. Since the commencement of oil field development at PA-B platform, about 15 mln t (almost 110 mln bbl) of oil have been produced.

In May, PA-B platform achieved a very significant milestone: seven years without lost time injury (LTI).

In 2017, two oil producers were drilled at Piltun area.

Pilot and main horizontal holes were drilled in the well completed in May 2017. The pilot hole was drilled to revise layer stratigraphy in the northern part of the field, optimize the horizontal part of the well trajectory and to revise geological structure of other layers.

The data obtained from the pilot hole will be used to optimise location of another oil well and to revise the whole field development strategy. After the survey, the lower part of the pilot hole was abandoned. The well was completed with sand screen installation.

In July 2017, the second oil well was drilled, it was completed using Cased Hole Frac and Pack technology.

In August 2017, an appraisal pilot hole was drilled to realise a planned geological survey of layer properties and identification of saturation type to make a decision on further area development and wells sequence. All surveys were conducted, the pilot hole was abandoned, the development strategy was revised.

In May 2017 the following well stimulation activities were performed in one of the oil-producers: tubing acidising and salting inhibitor injection. As a result, the well was successfully put back into operation after being idle.

In Q4 2017, 11 conductors were hammered at the Piltun platform. Lunskoye-A (LUN-A) Platform

In 2017, the LUN-A platform continued to operate in a stable manner, producing an uninterrupted flow of gas from the existing wells. The platform’s average daily gas production rate was 47.93 mln m3. Since the commencement of this field development gas production achieved 136 bln m3.

In 2017 two gas wells were drilled from the LUN-A platform.

A pilot hole was drilled during construction of the first gas well with the purpose of further appraisal of a Lunskoye block.

The purpose of the appraisal was to confirm oil rim and revise the geological structure.

In 2017, the upper master gate valves, production wing valves and swab valves were replaced on three gas wells to restore their integrity.

Alongside with drilling and repair works, open hole logging was executed, continuous monitoring of reservoir pressure, cutting re-injection and produced water re-injection monitoring were performed as well as core studies and downhole water samples analysis.

In 2017, Addendum to CRI Technical Project for the Lunskoye field was developed.

In 2017, in accordance with appraisal results, Addendum to Reservoir Management Plan and Operational Reserves Update for Lunskoye Oil, Gas and Condensate Field were developed. At the end of 2017, these materials were submitted for approval to SRC Rosnedra. Onshore Processing Facility (OPF)

The onshore processing facility (OPF) handles the initial processing of gas and condensate from the Lunskoye field before they are pumped into the pipelines for transportation to the oil export terminal and LNG plant. The oil and associated gas from the Piltun-Astokhskoye field are also processed at the OPF. In 2017, OPF daily average capacity was 50 mln m3 of gas and 15,9 thousand t (123 thousand bbl) of oil and condensate. Trans-Sakhalin Pipeline System, Booster Stations, and Gas Transfer Terminals

The trans-Sakhalin pipeline system comprises about 280 km of offshore pipelines and onshore multiphase pipelines, over 1,600 km of oil and gas pipelines, as well as 104 block valve stations, five Pipeline Maintenance Depots, two Booster Stations (BS), and two Gas Transfer Terminals (North and South).

Sakhalin Energy and Gazprom transgaz Tomsk (contracted by Sakhalin Energy to maintain the transSakhalin Pipeline System) are tasked with providing uninterrupted and safe hydrocarbons transportation to the Prigorodnoye production complex. An HSE case is implemented in Sakhalin Energy for its pipeline systems that identifies all potential hazards to the integrity of the assets. These hazards include internal and external surface corrosion, excessive pipe pressure, earthquakes, landslides, soil erosion, seabed gouging, shore scouring, ship traffic, illegal hot taps, and inadvertent or willful damage. The following measures have been taken to prevent or eliminate these potential hazards:

  • to deal with external surface corrosion, the pipeline has a cathodic protection system;
  • to monitor internal surface corrosion, Sakhalin Energy internally pigs the pipelines using Intelligent Pigs that can detect internal corrosion;
  • the offshore and onshore oil pipelines are pigged on a regular basis to remove water and sediments;
  • to ensure a timely response in case of an earthquake, Sakhalin Energy uses its own seismic monitoring system with detectors located along the entire pipeline and the USGS (United States Geological Services) system;
  • seismic faults are monitored every year to assess movements and displacements;
  • prior to seasonal drops in ambient air temperature, the pipeline is checked for water in the pipeline fault crossing trenches so as to avoid freezing and limited pipe movement;
  • the pipeline RoW is monitored regularly with helicopter overflights and physical checks of all pipeline features including rivers, fault crossings, swamps, liquefaction areas, road crossings, rail crossings, etc. Also, the entire pipeline RoW is walked every twelve months;
  • space technologies are also used to monitor the vegetation growing on the RoW.

According to statistics, more than 70% of pipeline incidents in the world are caused by unintentional damage from human activity. Sakhalin Energy has been proactively educating the community about how to identify the pipeline system and its importance. Local authorities, contractors, and land users are regularly informed about land use limitations within the RoW and are provided with the contact information and telephone numbers of the company. Additionally, special notice boards are located along the RoW with free telephone numbers in case of questions or concerns.

Sakhalin Energy continues to route gas condensate from the Sakhalin-3 project gas treatment plant (Kirinskoye field) into the Sakhalin Energy oil pipeline system as per the agreement between Gazprom Export and Sakhalin Energy. This gas condensate is transported to the Oil Export Terminal (OET) along with Sakhalin Energy’s oil. The Prigorodnoye Production Complex

The Prigorodnoye production complex is situated in the south of Sakhalin on the shore of Aniva Bay, which stays ice-free nearly year-round. It incorporates the LNG plant with the LNG jetty and the oil export terminal (OET) with the tanker loading unit (TLU) installed 5 km away from the shore. The plant covers about 420 ha and has two trains, each with a design capacity of 4.8 mln t of LNG per year. Over the years, efficiency and reliability enhancement programmes have significantly increased the plant's capacity.

Since the start of operation in 2009, LNG plant produced over 200 mln m3 (90 mln t) of liquefied natural gas.

In 2017, the Prigorodnoye production complex operated safely throughout the year with zero recordable injury (TRC) and no significant process safety incidents. HSE Goal Zero programme was formally rolled out in the asset and provided strong foundation in creating a Culture of Care towards staff and contractor partners. The Prigorodnoye production complex also successfully maintains ISO 9001 for its overall Quality Management System (QMS).

The reliability performance has been outstanding where the overall time based reliability performance for the LNG asset stands at more than 99% for both LNG trains.

The asset successfully carried out a major Maintenance Turnaround event in June in conjunction with the planned shutdown of the Sakhalin-2 integrated gas chain system. The major shutdown event was completed safely with zero injury and no significant incidents. The event was executed within the allocated budget and was completed ahead of the business plan.

In 2017, a set of initiatives were implemented targeting increase in LNG production by improving liquefaction efficiency without any impact on greenhouse gas (GHG) emissions. Prominent initiatives to name are precool mixed refrigerant (PMR) advanced process control (APC) system, light/ heavy mixed refrigerant (LMR/HMR) ratio control, HMR Expander Optimization and installation of windscreens.

The performance achieved in 2017 is by far the best performance of the Prigorodnoye production complex since its inception. Safety will continue to be the asset of utmost priority for our staff and contractor partners.

In 2017, the company was listed among finalists of international Platts Global Energy Awards in the nomination “Liquefied Natural Gas. Industry Leaders”.

4.2.2 Development Projects OPF Compression Project

OPF compression site preparation activities were continued in 2017 by ZapolyarPromGrazhdanStroy. The work is expected to be completed in 2018.

Manufacturing of equipment, including three gas compressor units and vessels was continued in 2017 by Russian and foreign companies. Equipment delivery to construction site is planned for 2019.

In September 2017, a contract signed with Petrofac Facilities Management Limited for detail design, procurement and construction of the OPF compression. The construction to be completed at the end of 2021. South Piltun Area Development Project

Sakhalin Energy is updating information on the geological structure and geological and recoverable reserves at Piltun-Astokhskoye field, including South Piltun area, and is planning to submit an integrated reservoir management plan to the State Reserves Committee of Rosnedra. LNG Train 3 Construction Project

In 2017, Sakhalin Energy developed the development the design documentation for the Sakhalin-2 LNG train 3 project.

Shell Global Solutions International and Giprogaztsentr, a Russian design institute, supported Sakhalin Energy in development of the design, in which a number of other companies, including local, are involved. In addition, few Sakhalin companies performed engineering and environmental baseline surveys.

A State Environmental Expertisa review was successfully completed for the offshore part of the project (LNG jetty). The project was submitted to State Expert review by Glavgosexpertisa.

The Sakhalin-2 LNG expansion project is the optimum and economically sound way to strengthen Russia’s presence on the world LNG market.

4.2.3 Hydrocarbon Production and Export LNG

Liquefied natural gas (LNG) is a colourless and odourless liquid with a density half that of water. It consists mainly (up to 90%) of methane (СН4), the simplest natural gas in the group of gaseous hydrocarbons. When cooled to approximately -160°C (-250°F) at standard atmospheric pressure, natural gas liquefies and contracts to 1/600th of its initial volume, becoming suitable for collection, storage, and sea shipment.

Due to regular debottlenecking and equipment adjustment, the LNG plant exceeds its design output of 9.6 mln t per year. In 2017, Sakhalin Energy produced 11.49 mln t of liquefied natural gas.

Sakhalin LNG is transported in spherical-hold customer vessels and in Grand series LNG tankers (Grand Elena, Grand Aniva, and Grand Mereya) that were constructed especially for this project and provided to the company under long-term charters by two Russian-Japanese consortiums. LNG is also transported by the Amur River and Ob River vessels chartered on a short-term basis. Thus, the company's fleet consisted of five LNG tankers at the end of 2017.

In 2017, Sakhalin Energy shipped LNG to Japan, South Korea, China, and Taiwan. CPC Corporation (Taiwan) has maintained its share in the consumption of LNG produced under the Sakhalin-2 project due to the increased domestic demand and the shutdown of the nuclear power plants that had been used to produce electricity. LNG buyers also include gas distributing, power generating, and trading affiliates with various volumes of demand.

In 2017, Sakhalin’s share in the Asia-Pacific LNG market was over 9%, and in the global LNG market — about 4%.

LNG Sales Market Structure in 2017, % Oil

Sakhalin Blend is an oil grade introduced by Sakhalin Energy to the Asia-Pacific region. It is a light, low-sulphur oil blend.

The company has extracted and shipped a mixture of oil and condensate from the oil export terminal in the Prigorodnoye production complex since 2009. In 2014, the company began to use condensate produced in the Kirinskoye field as part of the Sakhalin-3 project (a project of Gazprom). The condensate produced by the company and the condensate produced under the Sakhalin-3 project are mixed with oil to produce a unique grade of light low-sulphur oil with a density of about 44–45.5° and a sulphur content of about 0.14%. Sakhalin Blend is well known in the Asia-Pacific region. It competes successfully with similar light low-sulphur grades of oil produced in the Middle East, condensates, and heavier Far Eastern blends such as Sokol and ESPO.

In 2017, Sakhalin Energy produced 4.17 mln t (30.71 mln bbl) of oil and 1.64 mln t (14.46 mln bbl) of condensate, and received 0.1 mln t (0.83 mln bbl) of condensate produced under the Sakhalin-3 project.

The convenient geographical location of Prigorodnoye port and the availability of the company’s own oil tank fleet (three specialised ice-class tankers) allow deliveries to the Asia-Pacific region in winter or vessel-to-vessel transshipment in the ports of South Korea and/or Japan for further transportation to other buyers.

In total, 11 companies from five countries purchased Sakhalin Blend in 2017. The blend was delivered through 22 transit and destination ports in Japan, China, South Korea, India, and the USA.

Historically, the main markets for Sakhalin Blend are Japan, South Korea, and China. These are strategically important markets because of their geographical proximity and stable demand for light low-sulphur crude oil. In 2017, the shares of these three countries remained high and accounted for approximately 91% of the total supply for the year. Several cargoes were delivered to India and the USA by means of vessel-to-vessel transshipment.

The share of oil blend exported by Sakhalin Energy to the Asia-Pacific region was 0.35%.

Structure of the Oil Blend Sales Market in 2017, % Natural Gas

Since 2011, Sakhalin Energy has been supplying natural gas to the gas main line system of Gazprom to pay royalties payable in kind to the Russian party. The gas is transferred via two terminals in the northern and southern parts of Sakhalin Island. Since the commencement of natural gas delivery, more than 7.56 bln m3 of natural gas has been delivered to the Russian party, including more than 3.45 bln m3 of natural gas transported via the Southern Gas Transfer Terminal to Yuzhno-Sakhalinsk Heat and Power Plant-1 and other Sakhalin infrastructure facilities (the figure includes 683 mln m3 delivered in 2017). In 2017, over 436 mln m3 of natural gas was delivered via the Northern Gas Transfer Terminal to the Sakhalin—Khabarovsk—Vladivostok gas pipeline for further use under the Far East and Primorye fuel and energy sector development programmes. In total, about 1.12 bln m3 of gas was supplied to the Russian party in 2017.

4.3 Continuous Improvement Programme

The objective which Sakhalin Energy is pursuing by Continuous Improvement and Value is to be the premier energy source for Asia-Pacific and to secure long-term future. To meet this objective, the company continuously identifies ways to run business more efficiently every day without compromising safety and reliability.

The company continued implementing improvements of all processes using key success factors:

  • leaders and managers are personally committed, involved and engaged with staff;
  • improvement activity is linked to strategic imperatives and performance targets, decisions are made on risk based analysis;
  • leadership creates an environment where continuous improvement is part of the corporate culture;
  • improvements are recognized and rewarded.

In 2017, Sakhalin Energy achieved significant progress in terms of identification and implementation of continuous improvement initiatives in different areas of activity, which resulted in a considerable cost reduction, improved profitability and efficiency and enhanced production.

Sakhalin Energy demonstrated significant progress with continuous improvements identification and execution across the company and in its different areas which lead to substantial cost savings; value, efficiency and production improvements in 2017.

In 2017, the concept of Sakhalin Industrial Park (SIP) was developed and approved. SIP will allow to enhance the quality of work performed, shorten the supply chain for maintenance operations and improve cost control. Anchor residents, main activities and services to be provided by SIP have been defined.

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