Russia Petroleum Technology Forum Moscow, March 9-11, 2005

Experience of Providing a Healthcare Contract for Gas Turbines on Sakhalin Energys Molipak Platform by Graham McKirdy Siemens Industrial Turbomachinery Ltd PO Box 1, Waterside South, Lincoln LN5 7FD, United Kingdom

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Introduction

When we were invited to present a paper at this years conference, we wanted to illustrate the creation of a Long Term Support Agreement (LTSA) for gas turbines. This particular contract was formulated in partnership with our customer to meet his requirements, namely fixed OPEX over a 10-year period, better than industry availability, low risk, scope covering planned and unplanned events and operation in severe weather conditions. In conjunction with these criteria, we were also very much aware that we would be operating within the Russian Federation on the only offshore oil production platform. Therefore our technical and legal structure would have to comply with the terms of Production Sharing Agreement (PSA) with the Russian Federation on the development of the Sakhalin II project, taxation, local content, environmental standards and GOST. We also must not forget that any contract is essentially a live document and will inevitably through its life be amended to match an ever-changing operational and commercial environment.

We consider that this harmonious approach working with Sakhalin Energy has matched the requirements of our customer.

We therefore would like to attempt to share with you our experiences in the hope that it is clear that to support turbomachinery in this environment more than just manpower and materials are required. Hopefully we may provoke further consideration of our approach and perhaps generate some questions.

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Facts

Location o Sakhalin Island, and in particular the Molikpaq Platform, is one of the most remote offshore oil and gas production locations in the world and reaching the platform takes a 60 hour transit time from either London or Amsterdam. From Western Europe two routes, via Moscow or via Korea /Japan can be taken to Sakhalin Island. Once in Sakhalin a train journey of 17.5 hours takes you to the onshore supply base in Nogliki in the north east of the island. There you will wait for possibly 24 hours for helicopter transport to the platform. Overall, 31 hours travelling and 30 hours waiting. The route via Korea and Japan is of a similar timescale but the flights are less regular. o The same timescales are true for the shipment of materials, with additional time required for customs clearance.

Weather o The prevailing weather around the Molikpaq Platform in the Sea of Othosk is truly arctic. From the middle of December through to the beginning of the following June the seas are frozen over. During the production season production is affected by waves being whipped up by hurricane force winds. This has safety implications and affects the offloading of crude oil from the Floating Storage and Offload Facility (FSO) to visiting tankers. With the wind chill, the temperature may fall down to 70 degrees C.

Operating Window o Currently there are no crude oil or gas pipelines to shore; these are planned to be in operation in 2006, therefore the FSO and offloading buoy for crude tankers can only operate when the seas surrounding the Molikpaq Platform are free from ice. Therefore the encroaching ice between December and June interrupts oil production and shuts down the turbomachinery. The operating window lasts between six and seven

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months. Since 2004, however, a water injection module has been added to the platform allowing water injection into the reservoir throughout the winter shutdown season to pressurise the well in preparation for the beginning of June. This is achieved with two SGT 100 (formerly Typhoon) twin-shaft turbines driving water injection pumps. As there is no gas available, diesel fuel is used.

Known Hydrocarbon Reserves o It is said that Sakhalin Island is mentioned in the prophecies of Nostradamus: he predicted the island shaped like the fish would become the richest place on earth. Currently conservative estimates on known oil and gas reserves are as follows: Gas 2.7 trillion cubic meters (tcm) 91.0 trillion cubic feet 9 (tcf)now currently after mainland Russia, Iran has the largest proven reserves of gas with 24.0 tcm. In comparison the combined current known reserves of Norway and the United Kingdom stand at 2.4 tcm. Oil - at the moment this is less plentiful in the seas off Sakhalin Island. Current known reserves are estimated at 13.9 billio n barrels oil (bbl): in comparison, Qatars known reserves are 14.5 bbl and United Kingdom and Norway stand at 14.5 bbl. Sakhalin II project combined reserves are about 1 billion bbl of oil and 0.5 tcm (18 trillion tcf) of gas.

I trust this short introduc tory summary of the prevailing conditions and potential hydrocarbon reserves provide accurate and graphic picture to you of Sakhalin Island.

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Project History

Milestones o Oil was discovered in the Piltun Ashtokeskoye (PA) field in 1984. After winning a tender for development of PA and Lunskoye field in the early 1990s a consortium of companies formed Sakhalin Energy Investment Company Ltd to operate the project. Sakhalin Energy developed the field utilising a converted Arctic Class drilling rig, the Molikpaq, as the production platform. First oil was delivered in 1999. Two years later Marathon sold its share in the project to Shell. Today Sakhalin Energy Shareholders are Shell (55%), Mitsui (25%) and Mitsubishi (20%). o For Siemens, the equipment supplied initially comprised of one SGT-100 and two SGT-200 (formerly Tornado) industrial gas turbines and two Siemens injection centrifugal compressors which were installed on the platform in 1998. In 2001 discussions commenced with Sakhalin Energy with respect to expanding our product support through the vehicle of an LTSA for the existing equipment and future additions to the platform. In the middle of the following year we reached agreement. o In 2003 additional Siemens turbomachinery was installed on the Molikpaq Platform within the water injection module comprising three SGT-100 industrial gas turbines. o This year we are in the process of 'novating' the LTSA to OOO Siemens SP in Moscow.

Production Volumes o 2000 o 2001 o 2002 o 2003 o 2004 12.4 million bbl 15.1 million bbl 10.8 million bbl 10.3 million bbl 11.7 million bbl

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Customer Requirements

At the commencement of our discussions with this customer, the criteria for moving away from traditional methods of product support in the form of planned or unplanned event, issue of purchase order, completion of task and then issue of invoice were quite clear.

Availability o This was to be equal to, or above industry accepted norms of 97%. o Minimum downtimes the price of oil at $45.00 per barrel at a production rate of 70,000 barrels per day easily equates to a loss of $3,150,000 per day, over $22.0 million per week. Also, the RF have imposed strict limits on SEIC with respect to flaring of gas therefore its essential to avoid any unplanned shutdowns as this results in flaring of gas. o Risk coverage for unplanned shutdowns in the form of turbines and strategic spares held in Sakhalin. o Dedicated Contract Manager due to the time difference between Sakhalin and Lincoln (10 hours), the time required to manage the logistics of supporting such a demanding operation, a full time contract manager was appointed. . o Fulltime technician babysitter on Molikpaq. o Guaranteed response times, contained with the contract. o Emergency call-out service.

Benchmarking in comparison to other Shell OPCOs o SEIC are a part of Shell. It is well known that Shell operate many oil and gas assets throughout the world. These assets also operate turbomachinery - turbines, compressors and pumps. All assets are required to benchmark their annual OPEX. The various OPCOs have differing operating environment and turbo-machinery, however the OPEX of the Molikpaq would be subject to this scrutiny.

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Pricing Structure o The requirement here was simple, single monthly payments for the LTSA to cover the full contract scope. This value would remain unchanged for the contract term. This principle allowed SEIC to accurately plan OPEX with no surprises over an extended period of time.

PSA Requirements o It is widely known within the industry that SEIC have a Production Sharing Agreement (PSA) with the Russian Federation for their Sakhalin assets. Along with ExxonMobil / ExxonNeftGas and Total Kharyaga there are only three in existence within the RF. o The details of the SEIC PSA are confidential but several aspects have an impact on supplier and sub-vendors to SEIC. For example, Russian Content, submission of tax returns for the contract and personnel engaged in maintaining the turbines, registering locally with the Sakhalin Oblast for taxation purposes. After review of several companies who had already established a presence on the island, we engaged the services of Price Waterhouse Coopers Moscow (PWC).

Remote Diagnostic Capability o Again the remote location of the platform and turbomachinery necessitated the inclusion of this facility. Basically this provides the following: Daily download of operating data from all six turbines to a Siemens server. The data is retrieved automatically by a daily phone call from the Siemens server. The format of the data replicates exactly the Control Screens and Tags of each turbine package. In the case of trending and diagnostic activity of particular faults, the historical data in question can be accessed by the customer through their own account. This provides unlimited

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access to the data stored on the Siemens server. Each individual tag can (if required) be analysed over large or miniscule time frame. Another facility required and provided with the Remote Diagnostic Capability is real time analysis. If a fault indicated by a trip or alarm occurs which requires immediate analysis by specialist disciplines located at the Siemens facility in Lincoln, SEIC can authorise (through a telephone line) Siemens to dial into the control panel of the particular turbine package in question. The specialist in Lincoln can then carry out starts and shutdowns, adjust parameters, and observe the turbine in each of the above sequences.

Scope

Contract o The LTSA actually consists of two contracts, Materials and Manpower. The manpower contract values make up 20% of the total value.

Manpower o Permanent presence on Molikpaq babysitter. This was viewed as essential by the customer. The skills required were diagnostic capability, software reprogramming of the controls logic, electrical and mechanical. Two technicians rotate on a backto-back basis. The duration of each stay on the platform is four weeks. o Additional technicians for planned and unplanned inspections. In addition to the permanent presence of the babysitter a pool of technicians was created with skills specific to the SEIC turbine fleet and with Russian visas. o Full time Contract Manager based in Lincoln. This was also viewed as essential by the customer.

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o Provide training on platform for SEIC personnel. o Technical support, 24 hours per day from Siemens in Lincoln. Siemens in Lincoln operates a 24-hour helpdesk for the Siemens turbine fleet. The helpdesk consists of specialists in each discipline who will analyse faults and shutdowns on- line utilising the resources of the Siemens infrastructure and the Remote Electronic Link

Materials o To meet the customers requirements of minimum downtime and minimum risk, we were required to support the existing fleet of six gas turbine packages. Now due to the varying timescales of installation and location of manufacture, each of the packages has differing configurations. o Gas Turbine The gas turbines in operation are two SGT-100 power generation sets; two SGT-100 mechanical drive pump sets which are coupled to two Sulzer high pressure water injection pumps; and two SGT 200 mechanical drive compressor sets coupled to two Siemens STC-SV (formerly MV) gas injection centrifugal compressors. o Power Turbine The mechanical drive units have different power turbines.

o Main Gearbox for Generator Set. o Combustion and Fuel Systems They are of varying configuration. For example three gas turbines incorporate Dry Low Emissions (DLE) combustion systems whilst the remaining three incorporate conventional combustion systems. The SGT-200 units are gas fuel only; the four SGT100s are dual fuel. This allows operating on diesel during the winter production shutdown. o Oil System Conventional.

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o Controls In most turbomachinery installations it is an accepted fact that the majority of alarms and shutdowns are associated with spurious trips and alarms from within the control systems, therefore the provision of replacement, screens, cards and probes became an integral part of the front line stockholding. o Package frame and systems The first three units installed were packaged at Siemens gas turbine packaging facility in Houston, USA, the remaining three were packaged in Lincoln, England. o Spare gas turbines and power turbines located in Sakhalin. o Operational strategic spares held on Molikpaq.

Inspection Schedule o Within Siemens we use the industry nomenclature of describing inspections as A, B and C. o An A inspection represents an annual visual inspection of gas turbine, power turbine and package frame and systems. Generally carried out at 8,000 hours. o A B inspection represents an inspection carried out at 24,000 hours and is generally an overhaul of the turbine hot gas path components. This is in addition to the A class inspection. o A C inspection is carried out at 48,000 hours and is generally an overhaul of the power turbine, turbine hot gas path components. o Therefore the general sequence / overhaul cycle is A, A, B, A, A, C.

Taxation o As stated above, for a company to operate within a PSA they are required to become tax compliant. Prior to the creation of our company OOO Siemens SP, we registered with the Sakahalin Oblast. Then on a yearly basis we must submit tax returns for the company and manpower. This is a key element of the contract and operating in Sakhalin. Otherwise failure

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to do so would result in heavy fines and possible restrictions from working within the Russian Federation.

Logistics o This is a crucial element in the support of the Molikpaq turbines. Within the contract scope Siemens are responsible for shipment of all material and customs clearance. In addition to this all associated paperwork must comply with RF Import/Export regulations. All materials must be supported with proforma invoices, GOST certification and reference numbers. Again failure to do so results in severe delays. Here again we worked closely with SEIC and selected their logistics partner. In addition to a shipping partner we had to select a customs clearance agent. Due to the volume of materials passing through the airport and port of Sakhalin Island there are many agents to choose from. o SAP- Both SEIC and Siemens operate SAP, it is a requirement that all materials shipped to SEIC in support of the contract are immediately entered into the SEIC SAP system with unique location numbers. The Siemens technicians as babysitters on the Molikpaq are fully trained and proficient on the SEIC SAP material control system.

Results

Reduced OPEX o It is accepted by both parties, that in the first three years of the LTSA the cumulative monthly cost of goods and services provided when compared to the cost of ad hoc contracting and traditional methods equate to a genuine reduction in OPEX. Due to the nature of the contract, all unplanned incidents, where the defect is the responsibility of Siemens, the costs are covered at no extra charge to SEIC.

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Support Times o To support the fleet and maintain up time it was decided to retain two core engines on the island, SGT-100 and SGT-200. This has contributed greatly to our response time in the event of unplanned shutdowns.

Availability o In the first two years of the contract, our availability was below expectations; now in 2004 we have achieved 97%.

The Future

Incorporation of Compressors o The two SGT-200-2S mechanical drive packages are coupled to two Siemens STC-SV gas injection compressors. Currently they are supported by the conventional planned or unplanned event, issue of purchase order, completion of task and then issue of invoice contract. Discussions are under way to develop this contract along similar lines to the LTSA. At the Siemens turbocompressor plant in Duisburg, Germany, one LNG Boil Off compressor, STC-SH10-6-A and one LNG Flash Gas compressor STC-SV10-6-A are being assembled. These will be located onshore in the SEIC LNG plant currently under construction in the south of the island. It is also an idea to incorporate these two Siemens units into the scope of the LTSA.

Novation of Contract to Siemens Moscow o On signature of the contract a commitment was made by the senior management o f ALSTOM (the previous owners of the gas turbine business in Lincoln) that the contract would be novated to our Moscow legal entity. This has been re-confirmed by Siemens senior management.

Questions

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