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Reuters: UPDATE 1-Russia audit chamber joins attack on Exxon Sakhalin

Fri Oct 6, 2006 9:53am ET

MOSCOW, Oct 6 (Reuters) – Russia’s audit chamber, a state agency which supervises the use of government finances, said on Friday the Exxon Mobil-led (XOM.N: Quote, Profile, Research) Sakhalin-1 energy project has broken many terms of its production sharing deal with Russia.

The agency said in a statement the group had started oil production two years later than expected and still had no clear gas export plans.

The agency has no enforcement powers but can send its conclusions for further investigation by prosecutors. It said it had sent a letter to President Vladimir Putin.

The agency has repeatedly criticised the neighbouring Sakhalin-2 project, led by Royal Dutch Shell (RDSa.L: Quote, Profile, Research), which has run into trouble after telling the Russian government last year it would double costs to $20 billion.

But this is the first time the agency has released a major statement on Exxon’s Sakhalin-1, whose activities have been seen until recently as much safer than those of Shell.

In recent months, Russian officials have told Exxon they would not approve a cost increase to $17 billion from the previous $12.8 billion.

They also said the company had to undergo more checks at its De Kastri terminal on the Pacific before beginning commercial crude exports of up to 250,000 barrels per day from next year — an eagerly awaited addition to Asian Pacific markets.

Exxon has, however, started loading crude at De Kastri and the first tanker is due to sail next week.  

The group has failed to find customers for pipeline gas in Japan, while plans to supply China are also under threat as Russian gas monopoly Gazprom (GAZPq.L: Quote, Profile, Research) opposes the project because it has a bigger rival plan.

The attacks on Shell and Exxon are largely perceived as a broader Kremlin move to tighten its grip on the oil industry, boost state control and reduce foreign influence in the sector.

The agency said it disliked the fact that, under production sharing deals, Russia will get only 15 percent of hydrocarbons over the life of Sakhalin-1 and 10 percent from Sakhalin-2.

The deals were signed in the early 1990s when oil prices were low and Russia was desperate to attract foreign investments.

© Reuters 2006. All Rights Reserved.

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