Russia tightens grip over energy sector, targets Exxon now

MOSCOW: Russia’s government switched the focus of its attack on huge foreign-led energy projects to Exxon Mobil’s Sakhalin-1 oil scheme on Thursday, saying it would forbid a $4.2bn overspend that cut Moscow’s profits.

Moscow has already taken aim at Royal Dutch Shell’s massively over-budget Sakhalin-2, which it has ordered to be partly for environmental infringements, prompting tough criticism of its actions from Japan and the
European Union.

The moves against on Shell and Exxon are widely seen as part of a broader Kremlin move to tighten its grip on the energy sector, a drive which is expected to speed up before Vladimir Putin’s presidency is due to end in March ‘08.
Analysts have said Russia is trying to force foreign oil majors to give up part or all of their advantageous production sharing agreements (PSAs), which were negotiated at a time of much lower global oil prices.

“If costs continue to rise without control, Russia will be left with only 6% of royalties, while all profit oil will go to repaying costs,” Sergei Fyodorov, head of geological and subsoil use policies at the Ministry of Natural Resources, said of Exxon’s project on Sakhalin island in the Pacific.

Meanwhile another Russian official said that Exxon would not be allowed to start regular shipments of oil to Asian refiners before November 15, as the company wanted, because its terminal needed more checks. Fyodorov said that his ministry had been informed on a preliminary basis that Exxon’s costs could rise to $17bn from an initial $12.8bn, but it had seen no final documents. This follows a doubling of costs to $20bn at Shell’s Sakhalin-2 project, which Russia has severely opposed.

He said costs as well as slow drilling operations and underperformance on other aspects of the project, may serve as a basis for the withdrawal of operating licences. “Our lawyers believe it is possible and does not contradict the agreements,” he said. The production sharing agreement signed in 1993 does not allow Russia to unilaterally terminate the project. But record oil prices mean Russia is losing out on potential revenue.

Shell is already producing oil and plans to build the world’s largest plant to liquefy natural gas by ‘08 to supply customers in Japan and the United States. Exxon plans to produce 250,000 barrels per day by the end of this year from Sakhalin-1, with exports scheduled to begin at the end of September.

It will be the biggest addition of crude in the region for years and is eagerly awaited by refiners as an alternative to supplies from the Middle East. But Russia’s technical standards watchdog in the Far East, Alexander Poleshchyuk, told Reuters he believed Exxon’s De Kastri terminal would be allowed to export the Sokol crude only in two trial cargoes of 100,000 tonne each before November 15.

He said Exxon wanted to export five cargoes. “We have a lot of remarks concerning completion and launch of the terminal. But these are working issues, which always arise when an object is being readied for launch,” he said.

“For us to issue a permission to launch the terminal, they (Exxon) have to submit it for launch permission. The plan today is for November 15,” he added.

“Before that trial tanker loadings are possible. They want to lift five trial tankers. We believe they cannot load more than two 100,000 tonne cargoes,” he said.