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The Wall Street Journal: Exxon Agrees to Sell Gas From Sakhalin-1 to China

October 23, 2006 1:29 p.m.

MOSCOW — Exxon Mobil Corp. said it has reached a preliminary agreement to sell natural gas from a project on Russia’s Sakhalin Island to China. But the U.S. energy giant still needs to make a deal with OAO Gazprom, the Russia’s state-controlled gas monopoly, to get the fuel to market.

The $12.8 billion Sakhalin-1 project is starting to ship crude oil to Asian markets, but has held back large-scale gas development pending a deal on exports, which initially had been slated to start next year. At present, the project sells relatively small amounts of gas inside Russia at prices substantially below world-market levels.

Exxon said it is in discussions with Gazprom to deliver the planned shipments to northeast China. Gazprom jealously guards its monopoly over Russian gas exports. Sakhalin-1 is one of only two projects in Russia legally allowed to export on its own. A Gazprom spokesman said the company believes that any exports from Sakhalin also should go through Gazprom. Kremlin officials also have said the domestic market should get priority over exports in the Far East.

Exxon declined to comment on the details of the agreement announced Monday, saying only that the company hopes a final deal will be reached soon. The company has said it expects to export about eight billion cubic meters a year of gas from Sakhalin-1 at full production. China National Petroleum Corp., the buyer, couldn’t be reached for comment.

Despite its surging economy, China has lagged behind Western economies in shifting to gas as a major fuel, relying instead on oil and low-cost coal. But this spring, China reached a broad agreement to import Russian gas with Gazprom. The first shipments are slated to begin in 2011, with volumes reaching as much as 80 billion cubic meters a year late in the decade. China also is building pipelines to bring gas from central Asian producers such as Kazakhstan.

The Exxon deal appears to be a setback for Japan, which has competed with China for access to Russia’s rich energy resources. Exxon had initially considered a plan to export Sakhalin gas to Japan, but wasn’t able to make that option work. With a 30% stake, Exxon is the operator of the Sakhalin-1 project. Another 30% is held by Japan’s Sakhalin Oil and Gas Development Co. and the remainder is split evenly between India’s ONGC Videsh Ltd. and Russian state-controlled oil company OAO Rosneft.

Russian officials have been increasingly critical of the special 1990s deals that govern Sakhalin-1 and a Royal Dutch Shell PLC-led project known as Sakhalin-2. Russian regulators are due to decide this week on whether to pull a key permit for the Shell project, which they accuse of violating environmental standards. Shell also has faced criticism for a nearly $10 billion cost overrun at the project.

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