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Forbes: Gazprom Takes On Exxon

Vidya Ram, 12.27.07, 7:45 AM ET

LONDON – If the foreign operators of Russia’s Sakhalin-1 natural gas field weren’t concerned enough after BP was ousted from a major venture over the summer, then Thursday’s comments by a senior Gazprom executive should certainly have them reaching for the vodka.

Gazprom Deputy Chairman Alexander Ananenkov lambasted the operators of Sakhalin-1, arguing that a handover of control to them had led to an “infringement of Russia’s national interests,” and had turned Russian consumers into “poor relations who see their gas siphoned off.”

“We have received an extremely negative experience of foreign participation in exploration projects in Russia’s East,” he told a news conference.

Exxon Mobil operates the vast natural gas field along with the Russian state-controlled oil company Rosneft, India’s Oil and Natural Gas Company, and Sodeco, a Japanese consortium. The field is producing approximately 134 million cubic feet of natural gas per day and 250,000 barrels of crude oil.

The comments, which follow several months of rumblings from Gazprom about the project, will increase pressure on the operators, led by Exxon, to sell their gas to the Russian giant itself.

Gazprom currently has a legal monopoly over all gas exports, but Sakhalin-1 has been exempt under a production-sharing agreement, allowing its operators to market the field’s natural gas in the lucrative Asia-Pacific markets. In 2004, the Exxon-led consortium signed a preliminary agreement to supply 280 billion cubic feet of gas to China’s National Petroluem Corporation and has held talks with Japan and India on supplying liquified natural gas.

These moves have been seen as a direct threat to Gazprom, which has grand plans of its own to supply the Far East, particularly as relations with the European Union get more prickly. The European Commission is currently drafting so-called “unbundling” regulations which could force Gazprom to sell some its distribution assets in Europe.

“There is no way that Gazprom is going to sit idly by and watch Exxon export Russian gas to China and compete with Gazprom’s own plans to export its gas to China,” said Andrew Neff, senior energy analyst at Global Insight. “Gazprom will do whatever it takes to ensure it retains its gas export monopoly on Russian gas to Asia the same as it has an export monopoly on Russian gas exports to Europe.”

Gazprom is also hoping to use the gas from Sakhalin-1 to supply the domestic market, where gas prices are set to soar and reach parity with export gas prices by 2011. The price of domestic gas will rise by 25.0% in early 2008, giving a massive boost to Gazprom’s revenues.

The fact that Exxon is the world’s largest energy company will be of little concern to Gazprom, which is used to taking on the sector’s heavyweights. In June, BP (nyse: BP – news – people ) ceded control of the Kovykta gas fields in eastern Siberia to Gazprom, while the operators of Sakhalin-2–Royal Dutch Shell, Mitsui and Mitsubishi –were forced to drastically reduce their stakes. (See below: ” Russia Shows Sakhalin Partners Who The Boss Is”)

Reuters contributed to this report.

http://www.forbes.com/markets/emergingmarkets/2007/12/27/exxon-sakhalin-gazprom-markets-equity-cx_vr_1227markets02.html

Forbes: Russia Shows Sakhalin Partners Who The Boss Is

Chris Noon, 12.28.06, 3:58 PM ET

It sounds as though Royal Dutch/Shell, Mitsui and Mitsubishi the three companies developing the Sakhalin-2 energy site in the eastern part of Russia, have been thoroughly humiliated by the Kremlin.

The companies will have to shoulder $3.6 billion in new costs to develop the Sakhalin-2 oil and gas project, the world’s largest energy development, thereby lowering the amount state-run Gazprom (other-otc: OGZPY – news – people ) will have to spend to join the project and speeding royalty payments to Russia. That’s $3.6 billion that the oil companies will never see again.

Sakhalin-2’s stage two budget may be approved at $19.4 billion, less than Royal Dutch/Shell (nyse: RDSA – news – people ) had originally sought, Deputy Energy Minister Andrei Dementiev told the Moscow-based Vedomosti newspaper Thursday. The amount includes the $3.6 billion the foreign shareholders will have to spend. Thus Gazprom will reap the rewards from the additional investment without participating in it. A bit like hosting a party and asking everybody to bring a bottle, but not providing any liquor yourself.

The companies have already completed the first stage of the project at a cost of about $2 billion and invested $12 billion in the second stage, scheduled for completion in 2014.

Last week, Gazprom wrested a majority stake from Shell and its partners for $7.45 billion in a deal that consolidates the Kremlin’s command of Russia’s energy resources. Shell saw its 55% stake trimmed to 27.5%, while Mitsui (other-otc: MITSF – news – people ) and Mitsubishi (other-otc: MSBHY – news – people ), had their interests halved, to 12.5% and 10%, respectively.

Sakhalin-2 was, once upon a time, typical of other massive energy projects being developed by foreign oil companies under production-sharing agreements signed during the 1990s, a time when oil prices were low and Russia was thirsty for foreign investment to develop its energy reserves. The idea was the oil companies would invest in the project but get their money back from the initial production; profits thereafter would be shared with the government.

The stakeholders in Sakhalin-2 announced last year the doubling of the cost of the project, which was initially set at $10 billion. This angered the Russian government, as it would delay the payment of its share of the profits. Moscow then threw all manner of roadblocks in the way of the foreign companies trying to develop Sakhalin. In September, it accused Shell of violating worker safety rules a week after pulling environmental authorization for the project.

AFX News contributed to this article.

http://www.forbes.com/markets/2006/12/28/sakhalin-shell-gazprom-markets-emerge-cx_cn_1228markets06.html

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1 Comment on “Forbes: Gazprom Takes On Exxon”

  1. #1 JAMES L IRWIN
    on Apr 2nd, 2008 at 20:24

    VIDYA RAM, FORBES,RETUERS:

    EXXONMOBIL IS NOT THE WORLDS LARGEST ENERGY COMPANY… SAUDI ARABIA IS.

    RESEARCH” FINANCIAL TIMES” AND THEY WILL LIST THE OTHER LARGER ENERGY COMPANIES WHO JUST HAPPEN TO BE COUNTRIES USING NATURAL RESOURCES TO ADMINISTER ALL OR A PART OF THEIR ECONOMIES.

    SOME OF THESE NATIONS REBATE MONIES TO THEIR CITIZENS AND PROVIDE SERVICES.

    JAMES IRWIN
    AMARTEMPLAR INVESTMENTS

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