Get the latest updates as we post them — right on your browser

. Last Updated: 07/27/2016

Sakhalin 2 Makes 1st Debt Payment

The Sakhalin 2 oil consortium has transferred to the Sakhalin region the first $4 million tranche of a $160 million debt owed for the past exploration of the offshore oil fields, the Sakhalin Energy Investment Co., the consortium's operating company, announced Friday.

The Sakhalin Energy consortium pumped the first crude at its Far East offshore Molikpaq oil platform last month, obligating the company to compensate the region and Russia for the previous exploration costs of other survey companies on the deposits.

The funds will be spent to develop the Kuril Islands infrastructure, with the first tranche going toward the construction of a $5.3 million geothermal power plant on Kunashir island.

The Mendeleyevskaya plant will have 3.6 megawatt nominal capacity and will supply the island's population with electricity and hot water. The station will allow the island to cut annual coal deliveries by 10,000 tons, Sakhalin Governor Igor Farkhutdinov said late last month.

"Coal costs more in Sakhalin than anywhere else in Russia," he said.

The $4 million paid Thursday is the first of multiple tranches that will be handed over to the Sakhalin region every quarter until $80 million of the debt is paid, Deputy Fuel and Energy Minister Valery Garipov said in a recent interview. The remaining half will be paid after the oil consortium reaches a higher level of crude production.

The Sakhalin Energy consortium was set up in 1994 and consists of the United States' Marathon Sakhalin with a 37.5 percent share, Japan's Mitsui Sakhalin Holdings (25 percent), Mitsubishi Corp. subsidiary Diamond Gas Sakhalin (12.5 percent) and Dutch-British Shell Sakhalin Holdings (25 percent).

Under production-sharing agreement terms, the project participants plan to develop one oil field and one gas field with total recoverable reserves of 140 million tons of crude and 408 billion cubic meters of gas.

Russia will receive a 6 percent royalty from the Sakhalin 2 crude sales at the first stage. The Sakhalin administration will receive 60 percent of that share, according to the PSA terms. However, the federal authorities will not collect their 40 percent share because the state has violated the PSA tax regime and was charging the consortium value-added tax on imported equipment, Garipov said. The government owes about $20 million in VAT taxes to the Sakhalin 2 project, a problem that arose because the necessary PSA amendments to relevant federal laws were passed into law only late last year.

The Sakhalin Energy consortium has already paid $65 million to the Sakhalin development fund over the past three years, Farkhutdinov said. Another $20 million is expected to arrive before the year end.

The consortium previously paid a $15 million bonus to the state for rights to the oil fields.

Sakhalin 2 investments are expected to amount to $10 billion, most of which will be reinvested from the consortium's profits.