Online Extra: Q&A with ExxonMobil's Neil Duffin
Work environments don't get much more inhospitable than the Okhotsk Sea coast of Sakhalin Island in the Russian Far East. First, it's remote -- halfway between Moscow and Seattle and 800 miles north of Tokyo. And it's so cold that work is limited to the 120 days of the year that are ice-free. Plus it's prone to severe storms and earthquakes.
Bleak as it is, Sakhalin Island is also home-away-from-home for Neil Duffin, president of Exxon Neftegas. The Sakhalin-based unit of ExxonMobil (XOM ) is lead partner in a $600 million project developing offshore deposits of oil and natural gas. As part of the Sakhalin I project with Russian and Japanese partners, Exxon Neftegas wants to sell upwards of 8 million tons of gas each year to energy-hungry Japan via pipeline. Problem is, the massive pipeline has yet to be built. Duffin spoke with BusinessWeek Tokyo Correspondent Chester Dawson about why ExxonMobil thinks the controversial project is commercially viable. Here are edited excerpts of their conversation:
Q: The Sakhalin I development project headed by ExxonMobil dates back nearly 30 years. So why has the need for a pipeline to Japan suddenly become an issue?
A: We drove the Chayvo 6 well last year, and that was based on our seismic interpretation of the oil volume in that reservoir. When we drilled...it actually confirmed our prognosis on that well. And so that set the stage for us to progress ahead with the development. So, from an oil-and-gas perspective, we had the resources we thought we needed to start making progress. We're [now] ready to start moving forward.
Q: How soon can you expect to start up operations?
A: We're looking at five years from the trigger point of getting a commercial agreement. So, if it was 2002, then 2007. So I think we'd be in a good position that, if they progressed to market, next year that we could deal with it.
Q: How much will the pipeline cost to build, in ballpark terms?
A: That's not a number that I'm prepared to release at this time. We honestly believe it's competitive. And that's the key issue to this whole business. You will start to see that [figure] coming out as we progress forward and get into contracting terms, etc. We've got to go out at some stage and bid this work, so I'm not going to go out and put a number in the marketplace.
Q: Cost estimates for the pipeline range up to $16 billion. Can it recover that steep investment?
A: We believe this project is commercially viable and will attract the necessary financing out in the marketplace. We don't see that being any different to any other pipeline we would install anywhere else in the world.
As with any project of that size, we need to have some underlying agreements that we could take to the marketplace for financing as an example. So execution of an acceptable letter of intent from a gas purchaser in the export market would provide investors with an appropriate signal that the gas market is ready to be taken seriously.
Q: How will the pipeline be financed?
A: Generally, the way these things work is that a group of banks comes together to bring the funds together, as it does for typically a LNG project where large sums of money are involved. That consortium then pulls the money together from different sources: sublenders, etc. I'm sure the Japanese [banking] system would love to have a piece of that.
Q: How much is ExxonMobil willing to invest in the pipline?
A: Obviously, we look at the project in totality. We believe we have a reasonable estimate as to what the costs are. What the final consortium is [in terms of] percentage equity holders in the pipeline is still an issue for discussion.
Q: Japanese utilities and other potential clients have reservations about its feasibility. Why?
A: It's a new concept for Japan, and I believe there are several factors going on right now that help us. The fact that Japan's government said it wants to increase its volume of gas usage and [diversify] its supply helps us. They've got some [government] committees looking at gas pipelines now. So I believe all these factors coming together is very useful to progress this project.
Q: Will pipeline gas be competitive with liquefied natural gas?
A: One of the advantages of the pipeline is the relatively short distance we're taking about. As you may be aware, there's a distance beyond which pipelines are not effective and LNG is effective. And we're relatively close to Japan, so we believe, on that basis, that we can run a pipeline down. We've surveyed two routes -- one down the Tokyo side [or Pacific coast] and one down the Niigata side [Sea of Japan coast].
So we've done a lot of work that we believe, with the distances involved and with the right project design codes, that we can put a project together that will enable us to supply gas competitively to some new markets [for natural gas in Japan] and some existing markets where we may switch [customers] from other fuels to [natural] gas.
Q: Would you like the Japanese government to play a role in financing the pipeline project?
A:That's for the Japanese government to determine. I think it's economic enough that it's going to be attractive to the banking system, and how the Japanese government wants to interface with that is their business.
Q: What's the capacity of the key natural-gas fields involved -- Chayvo, Odoptu, and Arkutun-Dagi?
A: We've got about 17 trillion cubic feet of gas [in all of the Sakhalin offshore fields, including these three], which is world-class gas-market volume. But we're really talking about the three fields [producing] 1 billion cubic feet a day for up to 40 years. That's about 8 million tons annually, [or] 12 million tons for 25 years. It's very significant. Our intent is to phase these developments. Chayvo primarily and Odoptu for the first phase, and then we expand that and build on the Arkutun-Dagi field as we progress.
Q: How much money has ExxonMobil sunk into developing the project so far?
A: It's not much short of $200 million. The [Sakhalin I development project] consortium has put in just over $600 million, and we've got 30% of that. So, significant sums of money to show our commitment to the project.
Q: Is Japan the only target market?
A: Japan is the primary market we're looking at. We've put a lot of effort in there. But we've also done some assessments on other market places: China, as an example. So options are there. Right now, we view Japan as the lead market opportunity.