Alfa Group Looks for Oil, Partner in Sakhalin-6

An Alfa Group subsidiary announced Friday that it has begun looking for oil off the coast of Sakhalin -- as well as a strategic partner to help finance the venture.

"We have begun negotiations with both foreign and Russian companies to form a consortium for the project," said Yury Shirmankin, first vice president at Alfa Eko, a trading arm for the Alfa Group conglomerate.

Alfa Eko manages 95 percent of Petrosakh, which holds a license to explore part of the still-undefined Sakhalin-6 block off the oil-rich Far East island.

Talks with state-owned Rosneft are at an advanced stage, Shirmankin said. Rosneft, which already has an interest in three other Sakhalin projects, could not be reached for comment Friday.

Alfa Eko plans on spending $400 million to develop its plot, and preliminary development of all of Sakhalin-6 is expected to cost $1.3 billion.

"We don't have access to those kinds of funds, and so we are prepared to part with our controlling stake to bring in other partners," Shirmankin said.

Foreign energy majors have expressed interest in developing Sakhalin's hydrocarbons since discovering substantial reserves in the 1970s.

Domestic companies at first were kept away by the high costs of drilling offshore and creating an infrastructure from scratch. But companies such as Tyumen Oil Co. -- which announced its plans for Sakhalin in July -- have realized that much of western Siberia's potential has already been sapped.

Alfa Group owns half of TNK.

When foreign oil companies come to Sakhalin, they come in a big way. Led by Shell/Royal Dutch, the Sakhalin-2 consortium alone will need to spend $11 billion to develop its reserves.

Analysts say Sakhalin-2 and Sakhalin-1, led by ExxonMobil, are going forward because both operate under a production-sharing agreement, or PSA. Used mostly in extraction sectors, these agreements mitigate risks investors face while financing long-term projects.

Few PSAs have been realized due to holes in Russia's legislation. But Russia's nascent energy partnership has spurred the State Duma to plug those holes. Alfa Eko says it is confident Sakhalin-6 will be included in the Duma's list of PSA contenders.

"We are optimistic and consider our chances to be very good," Shirmankin said. "Sakhalin-6 will be the last. All the most promising parts around the island have been divided up. In the future we will probably see a redistribution of what has already been claimed."