Randy Kirk

Can Gazprom Realistically Meet Its Natural Gas Projections?

Thanks Adamnb. My understanding of Sakhalin, is that Rosneft holds a larger position in the overall development although Gazprom wants to overturn this (and has the political will to do so). Gazprom is relatively new in the project having acquired a 50% plus 1 stake last year at Sakhalin 2. Sakhalin is being developed in 4 phases, with Rosneft and Exxon controling Sakhalin 1, which is up and running currently with an estimated 250,000 barrels per day of oil production and also 140 M mcfe a day of natural gas (reference: www.eia.doe.gov/emeu/c...) Gazprom is not currently participating in Sakhalin 1 although wants to buy out Exxon's stake (Exxon at 30%, Rosneft at 20% ownership, of Sakhalin 1).

Gazprom is planning to start shipping LNG from Sakhalin 2 in 2009, at an estimated 9.6M tonnes annual rate, which is approximately equal to 84,000 barrels per day of oil equivalent -- Gazprom will get 50% of the revenues from this so this means it will likely not be a major percentage of overall production (as Gazprom's natural gas production is equivalent to approx. 9.5 M barrels per day oil equivalent). I am not sure if the production levels are expected to increase going forward.

Gazprom is also positioning itself to control all delivery of natural gas from Sakhalin -- whether produced by a Rosneft led consortium or not -- and so, if successful, this would be a boost to Gazprom's downstream segment.

Overall, Sakhalin is a potentially large oil and gas production region as the EIA estimates that there are approximately 12 bn barrels of oil and 90 tcf of natural gas (approximately 15 bn barrels of oil equiv) of reserves -- it is not clear if this is recoverable oil or oil in place, however. What is potentially interesting from an investor's standpoint (in my opinion) is if Gazprom Neft participates in Sakhalin 2 -- currently Gazprom Neft is participating in exploratory work in Sakhalin 4, which is not expected to come online for several years. Gazprom Neft generally produces the majority of Gazprom's oil production, and there should be significant oil production at Sakhalin 2 with an estimated 1 billion barrels of liquids reserves estimated (in addition to the 3 bn barrels of oil equivalent in natural gas reserves (see: www.eia.doe.gov/emeu/c...) - -however the liquids may be "natural gas liquids" in which case Gazprom would likely not bring in Gazprom Neft. Note that Gazprom Neft trades as a separate company -- 75% owned by Gazprom, ticker: GZPFY.

Overall Sakhalin should be placed in perspective to the Yamal Peninsula, as shown in Figure 4 in the article above, Yamal is a much larger reserve area, -- although Sakhalin in that figure only includes Gazprom's 50% ownership of Sakhalin 2, if Gazprom moves into Sakhalin 1 then Figure 4's estimated reserves would increase.