4. About the Company

4.1. Sakhalin Energy

In 2018, for the second time the company won the first place in the All-Russian Labour Productivity: Leaders of Russian Industry competition with labour productivity rate of 139.44 mln roubles per person per annum. Based on the result of the competition, Sakhalin Energy is the leader in labour productivity in the Sakhalin Oblast, leader of Russian oil and gas industry, and ranks among the top three winners of the competition for the fourth consecutive year.

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), a British-Dutch company; Mitsui (12.5%) and Mitsubishi (10%), Japanese corporate groups.

To develop these two fields, the company constructed a large-scale infrastructure for extracting, transporting, processing, and then marketing 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 an LNG jetty, and gas transfer terminals. This has been one of the most technically complex projects carried out in the global oil and gas industry over the last few decades.

4.2. Main Production Results in 2018

In July 2018, Sakhalin Energy shipped the 600th standard oil cargo since the beginning of year-round deliveries.

In August 2018, Sakhalin Energy produced and shipped the 1,500th standard LNG cargo since the start-up of the first Russian LNG plant.

Every year, Shell selects the best of the best in the Group’s drilling rigs league. In 2018, three Sakhalin Energy`s rigs competed for this award among 84 Shell rigs from around the world. The rating is based on the HSE performance, operational delivery against plan, and people performance. All three company’s rigs have landed in the top 5 among participants of the rating.

The Piltun-Astokhskoye-B (PA-B) platform and its team won the Drilling Rig of the Year for the second year in a row.

Based on HSE performance, three Sakhalin Energy`s rigs swept the podium among Shell offshore drilling rigs, with the Molikpaq (PA-A) platform earning the top spot, followed by the Lunskoye-A (LUN-A) and Piltun-Astokhskoye-B (PA-B) platforms.

4.2.1. Assets

February 2018 marked nine 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 the global supply of liquid natural gas comes from the company`s LNG plant.

On 17 October 2018, all offshore platforms celebrated an important milestone: two years without recordable injuries (This includes lost workday cases, restricted work cases and medical treatment cases). This is a remarkable achievement, especially considering high complexity and hazardous nature of operations.

The Role of Digitalisation in the Acquisition of Real-Time Production Data

In 2018, the company performed a large-scale upgrade of the MobilePi system initially introduced in the Sakhalin-2 project in 2016. This system provides real-time access to production parameters of each asset, as well as up-to-date information on production in general. The comprehensive data on wells condition and process flow elements prevents the distortion of information and enables specialists to take prompt and well-informed decisions in case of failures.

4.2.1.1. Molikpaq (PA-A) Platform

In July 2018, it was 19 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 2018, the operating well stock of the Molikpaq platform included 16 production wells, seven water injection wells, and one cutting re-injection well. The average daily production rate in 2018 was 6.50 thousand t (47.88 thousand bbl) of oil and 0.78 mln m3 of associated gas.

Since the commencement of field development at PA-A platform, more than 38 mln t (over 281 mln bbl) of oil have been produced.

Sakhalin Energy successfully completed a unique operation at the Molikpaq oil and gas platform. For the first time ever in the Russian oil and gas industry, a stationary crane replacement was carried out on an operating offshore platform with the help of a temporary construction crane.

In 2018, in the Astokh area of the Piltun-Astokhskoye field, a side track in the water injection well and an additional water injection well were drilled to enhance the efficiency of the reservoir pressure maintenance system.

In 2018, the company continued to convert wells to gas lift operation* to increase oil recovery. Also the company delivered new wells, controlled field development and wells operation, quality of injected fluid for pressure maintenance and cuttings re-injection system performance (* When a well stops flowing due to low formation pressure, production switches to artificial lift operation, associated with the introduction of additional pressure from outside (surface). One of such techniques, whereby the pressure is injected in the form of the compressed gas, is gas lift. Gas lift is a system consisting of a production casing and an inside tubing, where the fluid is forced up by the compressed gas (air). This well operation technique is called gas lift).

The company performs continuous monitoring of the composition and water cutting of well production, carrying out of solids/mechanical impurities, and wells integrity at the asset.

The company is committed to introducing continuous improvement initiatives to all production processes. Being guided by the principles of sustainable use and management of the subsurface, Sakhalin Energy develops the Piltun-Astokhskoye field using enhanced oil recovery techniques. Relevant enhanced oil recovery programmes are introduced as part of the field development design documentation updates, taking into consideration the learned lessons and best international practices. The main enhanced oil recovery techniques applied at the Piltun-Astokhskoye field are in-fill drilling by means of side tracking (ST) and the use of physical and chemical methods of bottom-hole treatment (BHT) with salt inhibitors to remove scaling.

The qualitative programme performance indicators by year are presented in the 2015–2018 Enhanced Oil Recovery Programme Results table.

2015–2018 Enhanced Oil Recovery Programme Results

Indicators

Years

2015

2016

2017

2018

Total ST since the start of development, ea.

6

7

8

8

Cumulative oil production from ST, thousand t

1053

2136

3211

4374

Total BHT since the start of development, ea.

0

2

4

9

Cumulative oil production from BHT, thousand t.

0

50

91

162

In 2018, re-estimation of hydrocarbons reserves in the Astokh area of the Piltun-Astokhskoye oil and gas condensate field was performed, and Addendum to Reservoir Management Plan for the Astokh Area of the Piltun-Astokhskoye Oil and Gas Condensate Field was developed and duly approved (Protocol of CDC Rosnedra No. 7231 dated 13 July 2018).

4.2.1.2. Piltun-Astokhskoye-B (PA-B) Platform

As of the end of 2018, PA-B platform had 16 production wells, eight water injection wells, and two cutting re-injection wells.

The platform’s average daily production rate in 2018 was 4.39 thousand t (32.37 thousand bbl) of oil and 1.33 mln m3 of gas. Since the commencement of oil field development at PA-B platform, more than 16 mln t (over 121 mln bbl) of oil have been produced.

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

In 2018, one water injection well and one production well were drilled in the Piltun area.

The water injection well in the west flank of the Piltun area was completed as a “smart” well (dual completion/injection with selective control of water injection, taking into consideration the variable formation properties to enhance injectivity).

The production well was completed using state-of-the art Frac and Pack technology to achieve the maximum production rate, ensure safe and long-term well operation.

In addition to new wells delivery, the company controlled field development and wells operation, quality of injected fluid for pressure maintenance and cuttings re-injection system performance. The company performs continuous monitoring of the composition and water cutting of well production, carrying out of solids/mechanical impurities, and wells integrity at the asset.

In summer 2018, 4D seismic monitoring was performed in the Piltun-Astokhskoye field. Specific features of the 2018 scope of work included the use of seabed receiving stations that enabled the coverage of areas directly adjacent to the production platforms. The acquisition of data from these areas through a seismic survey with the use of floating receiving stations (streamers) is technically infeasible. Therefore, the company will obtain additional data for the analysis of reservoir development. The company achieved another important milestone: for the first time in the history of the Russian oil and gas industry, a Russian company (Sovcomflot) conducted a 4D seismic survey, using towed streamers from a Russian research vessel "Vyacheslav Tikhonov". The acquired data was also processed by a Russian company (PetroTrace Services).

The outcomes of the 4D seismic monitoring will be used to develop recommendations for further optimisation of all fields development, in particular new drilling targets may be revised. Finally, based on the analysis of the acquired data the company will decide on the practicality of similar works in future.

4.2.1.3. Lunskoye-A (LUN-A) Platform

In 2018, 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 47.68 mln m3. Since the commencement of this field development gas production achieved 153 bln m3.

Pursuant to the strategy to maintain hydrocarbons production and to expand the scope of reservoir development, the company is increasing its capabilities of ultra-extended reach drilling (ERD).

As part of this strategy, in 2018 the longest gas producing well in the company’s history with the length of 8.4 km was drilled at the Lunskoye field.

In 2018, in the course of the drilling, a number of records — not only for the company but among all Shell Group ventures — were set:

  • the measured depth (MD) of the well is 4 times longer than the true vertical depth (TVD);
  • the world longest wireline tractor logging path during Cement Boundary Logging (CBL) of 13 3/8’’ casing, as well as the longest total wireline tractor logging path in Shell;
  • the longest section of floating liner.

The well was completed with gravel pack technology. The gravel pack operation was performed from a designated Frac and Pack vessel.

In addition to drilling and workover operations the company performed logging operations in the open hole, continuous reservoir pressure monitoring, drilling waste and formation water re-injection, core examination and formation water sampling.

In summer 2018 additional 4D seismic monitoring was performed at the Lunskoye field. Specific features of the 2018 scope of work included the use of seabed receiving stations that enabled the coverage of areas directly adjacent to the production platforms. The company will obtain additional information to study both the efficiency of reserves recoverability and the geological structure of the central part of the field.

The outcomes of the 4D seismic monitoring will be used to develop recommendations for further optimisation of the Lunskoye field development, as well as to decide on the practicability of seismic acquisition works in the following years.

Based on the additional exploration of the VI fault block, re-estimation of hydrocarbons reserves and Addendum to Reservoir Management Plan for the Lunskoye Oil and Gas Condensate Field were duly developed and duly approved (by Protocol of CDC Rosnedra on HCS No. 7230 dated 13 July 2018).

4.2.1.4. 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 2018, OPF daily average capacity was 48 mln m3 of gas and 15 thousand t (114 thousand bbl) of oil and condensate.

In November 2018, the Sakhalin Energy`s onshore processing facility (OPF) achieved MIE “Proactive” status in Operational Excellence Blade 10 — Work Preparation, Scheduling, and Execution (WPSE), with an assessment score of 86%. At the same time, it was assessed “Calculative” in Operational Excellence Blade 12 — SCEs and Performance Standards (IA), with an assessment score of 73%. Thus, OPF has sustained and improved its MIE performance since September 2014 (“Proactive” status in Operational Excellence Blade 10 with an assessment score of 80% and “Calculative” in Operational Excellence Blade 12 with an assessment score of 65%), continuing to be “Proactive” and “Calculative”, respectively.

4.2.1.5. TransSakhalin Pipeline, Booster Stations, and Gas Transfer Terminals

The TransSakhalin pipeline comprises about 280 km of offshore pipelines, around 1,600 km of onshore multiphase pipelines and oil and gas pipelines, as well as 104 block valve stations, five pipeline maintenance depots, booster station (BS-2), and two gas transfer terminals (northern and southern).

Sakhalin Energy and Gazprom transgaz Tomsk (contracted by Sakhalin Energy to maintain the TransSakhalin pipeline) 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 system 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 right-of-way 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 right-of-way is walked every twelve months;
  • space technologies are also used to monitor the vegetation growing on the right-of-way.

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 the appropriate actions in the pipeline areas. Local authorities, contractors, and land users are regularly informed about land use limitations within the right-of-way and are provided with the contact information and telephone numbers of the company. Additionally, special notice boards are located along the right-of-way 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`s 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.

Digital Technologies Introduced By the Company Help to Mitigate Negative Impact on the Environment and Improve Production Safety

In 2018, the company actively used unmanned aerial vehicles to monitor its pipelines and assets. High resolution cameras enable operation in remote hard-to-reach areas and allow the company to identify landslides or unauthorised intrusions within the pipeline right-of-way, determine the condition of buildings and structures. All this helps to minimise general production impact on the environment. The use of unmanned aerial vehicles results not only in time and cost savings, but also helps workers avoid risks associated with working at height or in remote areas. In 2020, the company plans to test LIDARs (data processing technology using active optical systems) that may detect hydrocarbons spills.

As part of the Sakhalin-2 project, 100% of pipelines operate less than 11 years (as of the end of 2018) and do not exceed the design standard operation life. To verify pipeline system standard operation life the company carries out regular pigging with a subsequent analysis of results and develops preventive maintenance plans. In addition, the entire length of the onshore pipelines is equipped with cathodic protection (CP) system to deal with external corrosion. The company performs regular maintenance and monitors the CP system performance.

4.2.1.6. 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 236 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.

In 2018, the Prigorodnoye production complex operated safely throughout the year with zero recordable injury (TRC) and zero API Tier 1 and 2 process safety incidents. The Goal Zero programme, which was formally introduced in 2017, kicked off a culture and behaviour change, and received positive traction from staff and contractors. The LNG plant subsequently elevated the Goal Zero programme to the next level in 2018 by introducing a Culture of Care (CoC) programme to further embed the much-needed changes in safe working behaviour and culture which delivered a strong personal safety performance.

With respect to process safety, the LNG plant embarked on a Loss of Primary Containment (LOPC) improvement programme that utilises data from near miss and potential incidents, to identify bad actors and apply causal learning methodology to reduce leak incidents. The Prigorodnoye production complex also successfully maintains ISO 9001, 14001 and OHSAS 18001 for its overall Quality, Environmental and Occupational Safety Management Systems.

In addition to high safety performance, the overall performance of the LNG plant was outstanding in 2018. The results of recent external benchmarking annual exercise by PTAI (Phillip Townsend Associates) showed that the asset continued to operate in top quartile performance areas that include environmental, reliability and overall unit operating costs.

The reliability performance of the LNG plant is maintained at the highest level. In 2018, Train 2 achieved the outstanding value of 99.1%, while LNG Train 1 reliability performance was at 93.7% impacted by the unplanned corrective shutdown of K-1420 axial compressor in August 2018. Though the outage had an impact on the overall reliability performance of the LNG train 1, on the other hand it displayed the excellent preparedness of the asset to handle unplanned events. The 21 days of safe implementation of the recovery work for the compressor, and a flawless and leak-free start-up, currently stands as one of the best recovery efforts in the LNG industry.

A planned Maintenance Turnaround (TA) shutdown event was successfully carried out at the LNG plant in June 2018, in conjunction with the planned shutdown activities of the Sakhalin-2 integrated gas chain system. The major TA event was completed safely with zero injury and no significant incidents. The event was implemented within the allocated budget and as per the schedule. One of the key scopes delivered during this major event was the upgrading of the Instruments Protective System (ProSafe) as part of the asset obsolescence programme.

As part of the Continuous Improvement Programme, the actions were implemented in 2018 to achieve incremental capacity increase in LNG production. In consequence of these low capital and high investment returns actions an estimated increase of 0.6 cargoes for the operating year was achieved.

For performance improvements and sustainability, the asset embarked on various improvement initiatives. The Continuous Improvement (CI) Programme launched in 2017 is seeing good traction, and in 2018, the asset delivered more than 5% of value improvements against the annual OPEX budget, via CI tools and tactics from various departments. The key driving factor of the CI programme in the asset is the engagement of the entire staff — anyone can come up with a potential solution, and the leadership will undoubtedly consider it.

To reach the next level in CI programme implementation, the company has determined critically important tasks for the asset, key measures and priorities in business targets and indicators. The critically important tasks were carried out through various processes such as external benchmarking and assurance exercises (e.g. audit, economic and technical project feasibility analysis) and enabled to identify gaps and opportunities for improvements. The critically important tasks are part of the asset’s overall annual business improvement process, designed to sustain top-quartile performance.

In recognition for the outstanding performance in 2018, the LNG asset received an award from Shell as the Best Integrated Asset of the Year.

Since the start of operation in 2009, LNG plant produced over 229 mln m 3 (103 mln t) of liquefied natural gas.

4.2.2. Development Projects

4.2.2.1. OPF Compression Project

The OPF compression facility is designated to support the planned production levels in case of the wellhead pressure drop in the Lunskoye wells.

Petrofac Facilities Management Limited is the EPC Contractor for the OPFC project.

In 2018, ZapolyarPromGrazhdanStroy completed activities for preparation of OPF compression site.

Manufacturing of equipment, including three gas compressor units and vessels was completed in 2018 by Russian and foreign companies. Equipment delivery to construction site is planned for 2019 via a temporary loading facility.

In 2018, main construction works were started on the site by StroyGasConsulting. Construction works are scheduled to be completed by the end of 2021.

4.2.2.2. South Piltun Area Development Project

Taking into consideration the recent data on geological structure and reservoir parameters of the Piltun-Astokhskoye field, acquired as a result of additional exploration and reservoir development, in 2018 Sakhalin Energy developed the Piltun-Astokhskoye Field Reservoir Update and Integrated Reservoir Management Plan, incorporating design solutions to put into operation currently undeveloped formations, including the reserves of the South-Piltun area. The results of these works will be submitted to the CDC Rosnedra for review at the end of 2018. The expert review and the defence of the documents are scheduled for Q3 2019.

4.2.2.3. LNG Train 3 Project

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

Shell Global Solutions International and Giprogaztsentr, a Russian design institute, carried out the development of the design documentation, in cooperation with other companies, including local Sakhalin ones. In addition, several Sakhalin companies performed engineering and environmental baseline surveys.

The design documentation was submitted to state expert review by Glavgosexpertisa and received positive conclusion in 2018. 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

4.2.3.1. 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 shipment by special-purpose transport.

Due to regular debottlenecking and equipment adjustment, the LNG plant exceeds its design output of 9.6 mln t per year. In 2018, Sakhalin Energy produced 11.41 mln t of liquefied natural gas.

In 2018, Sakhalin LNG was transported in spherical-hold customer vessels and in Grand series LNG tankers (Grand Elena, Grand Aniva, and Grand Mereya) that were constructed specifically 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 2018. In addition, the infrastructure of Prigorodnoye port makes it possible to serve customers’ LNG tankers and to ship LNG on “free on board” (FOB) terms.

The implementation of the project to increase the maximum allowable fill level of cargo tanks of the Grand Series LNG Tankers in 2018 brought excellent results: an increase of company revenue from each LNG cargo sold, reduction in transportation costs per unit of production, and additional flexibility in the LNG supply schedule. The increase from 98.5% to 99% was possible due to the technical and managerial solutions. As a result, the maximum loading capacity of each tanker per voyage increased, on average, by 740 m3 of LNG.

Year-round LNG shipments to customers began in March 2009. The company has a solid reputation due to the stability of deliveries, product quality, high safety standards, and highly qualified staff. In addition, Sakhalin Energy has a number of competitive advantages in the LNG markets in Asia (Japan, South Korea, Taiwan), in particular:

  • well-established relationships with potential customers in these countries;
  • long-term sales and purchase contracts with all major LNG customers in Japan and South Korea, as well as a framework sales agreement and a medium-term contract with CPC Corporation (Taiwan);
  • geographical proximity to the sales markets. The company is the closest source of LNG (the duration of an LNG tanker voyage to Japan is 3–6 days, to South Korea —4 days, to Taiwan — 5 days).

In 2018, Sakhalin Energy continued to ship LNG cargoes to Japan, South Korea, Taiwan, and China. The list of LNG buyers also includes gas distributing, power generating, and trading affiliates with various volumes of demand. The company worked towards an increas of the number of potential customers in the Asia-Pacific region. In particular, negotiations were first initiated on the conclusion of direct framework agreements for the sale of LNG with Chinese companies. Thus, a direct framework agreement with PetroChina — one of the largest LNG customers in China — was concluded in 2018.

Sakhalin LNG accounted for 4.8% of total LNG demand in the Asia Pacific and about 3.6% of global LNG demand.

Sakhalin LNG Sales Market Structure in 2018, %

4.2.3.2. Oil

Sakhalin Blend is a special oil grade introduced by Sakhalin Energy to the Asia-Pacific region. It is a light, low-sulphur oil blend, consisting of three components produced offshore Sakhalin:

  • crude oil from the Piltun-Astokhskoye field;
  • condensate from the Lunskoye field;
  • condensate produced in the Kirinskoye field as part of the Sakhalin-3 project and purchased from Gazprom Export.

The company has been producing and then shipping a mixture of oil and condensate from the tanker loading unit (TLU) of the oil export terminal (OET) at 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 (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 42–45° and a sulphur content of about 0.16%. 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 2018, Sakhalin Energy produced 3.98 mln t (29.29 mln bbl) of oil and 1.58 mln t (13.93 mln bbl) of condensate, and received 0.10 mln t (0.87 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*) enable deliveries to the Asia-Pacific region in winter time or vessel-to-vessel (VTV) transshipment in the ports of South Korea, Japan and China for further transportation to other buyers in the remote markets. (*The company’s export facilities are located in Aniva Bay, the ice conditions of which require vessels to meet certain technical parameters).

Vessel-to-vessel transshipment (to the so-called ‘daughter’ tankers) is widely used in the industry. Sakhalin Energy has arranged for the possibility to apply this method to support production continuity and shipment schedule flexibility.

The company successfully completed a number of VTV operations in the past, and now there are four approved sites where VTV operations are carried out on a regular basis: Yeosu (South Korea), Tsushima and Nagasaki (Japan), Qinzhou (China).

In total, 11 companies from four countries purchased Sakhalin Blend in 2018. The blend was delivered through 21 transit and destination ports in Japan, China, South Korea, and the USA.

Historically, the main markets for Sakhalin Blend are Japan, South Korea, and China. In 2018, the shares of these three countries remained high and accounted for approximately 98.6% of the total supply for the year. Several cargoes were delivered to the USA by means of vessel-to-vessel transshipment.

The proximity to the developed oil refining regions in the Asia-Pacific region, relatively low transportation costs per barrel, the possibility of unloading in several ports, in addition to well-established business relations and experience of cooperation with most major customers in the region contribute to successful sales of Sakhalin Blend oil.

The share of oil blend exported by Sakhalin Energy to the Asia-Pacific region accounted for 0.34% of the total volume of oil consumed in the region.

Structure of the Oil Blend Sales Market in 2018, %

4.2.3.3. 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 8.66 bln m3 of natural gas has been delivered to the Russian party, including more than 4.13 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 653 mln m3 delivered in 2018). In 2018, over 430 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, over 1.12 bln m3 of Sakhalin gas was supplied to the Russian party in 2018.

4.3. Continuous Improvement Programme

The company’s continuous improvement vision and strategy is to embed a continuous improvement mindset and create an environment where leaders and staff are engaged and empowered to continuously look for ways to run our business more effectively with greater value without compromising on safety and reliability.

In 2018, Sakhalin Energy achieved significant progress in terms of identification and implementation of continuous improvement initiatives in different areas of activity (in total about 300 initiatives), which resulted in considerable cost reduction, improved profitability and efficiency and enhanced production.