In the early-1990s Exxon entered into a deal with the Russian government to develop the Sakhalin I project. As part of the deal, Exxon received an exemption from Gazprom’s legal monopoly on exports of gas from Russia. Now, in a shocking development (irony alert), it seems that the exemption is under threat:
The government will step up pressure on U.S. major Exxon Mobil to sell cheap gas from Sakhalin, analysts said Thursday, a day before construction begins on a new gas link to the Pacific.Prime Minister Vladimir Putin will travel to the far eastern city of Khabarovsk on Friday to inaugurate the start of the pipeline to the Pacific port of Vladivostok, which will ultimately liquefy gas from Sakhalin Island for export to Asia.
“I think Exxon Mobil knows that they will twist their arm. It is pure pressure,” said Mikhail Krutikhin, an analyst with RusEnergy.
. . . .
Valery Nesterov, analyst at Troika Dialog, said that despite a growing belief among investors that the government’s grip over resources is easing after deals with Total and Shell in recent months, foreign firms will often remain under pressure.
“Exxon does not have a free choice. Past experience shows that if [Moscow] has a strong desire, the foreign partner has to agree,” he said.
The Khabarovsk-Vladivostok pipeline will run 1,460 kilometers, and Nesterov estimates its cost at $2.9 billion to $4.4 billion.
Sakhalin is already connected to Khabarovsk with a gas link, which is supplying local consumers.
Krutikhin said that even if Exxon is forced to sell all its gas from Sakhalin-1 to Gazprom, volumes will not exceed 7 billion to 8 billion cubic meters per year, while Gazprom is eyeing a peak capacity of up to 47 bcm a year.
“So to fill the pipeline, you need to discover new fields or build a pipeline from Yakutia,” he said.
Workers welded the first joint on the initial 1,350 kilometers (840 miles) of the pipeline at a ceremony attended by Prime Minister Vladimir Putin and Gazprom Deputy Chief Executive Officer Alexander Ananenkov. The pipeline will link Sakhalin Island with the mainland city of Vladivostok.
“The development of gas transportation infrastructure in the east will let us diversify our exports,” Putin said today at the event in Khabarovsk, which is on the pipeline’s route. “But I would like to stress that the domestic market will be a priority for the Far East and eastern Siberia.”
I repeat: “The domestic market will be a priority for the Far East and eastern Siberia.” To translate: If XOM has a deal that allows them to export the gas, well, that’s just its tough luck.
So how will Putin bludgeon ExxonMobil into moving the gas to the domestic market–and likely at controlled domestic prices–rather than to a more lucrative export market?
With apologies to Elizabeth Barrett Browning: “How can I screw thee? Let me count the ways.”
There’s environmental laws (Sakhalin II); licensing (BP, various mining firms, and perhaps now MOL); taxes (Yukos, and myriad others); blowing stuff up (Turkmenistan); legal harassment of employees, including accusations of espionage (TNK-BP); legal fraud and theft (Heritage Capital); abusive lawsuits in pocket courts (Telenor). I could go on, but you get the picture. If they want it, they will take it. The only question is what they’ll pull out their bag of tricks.
So why does anyone invest there, let alone go back after getting bashed around before (Shell, most notably). When I gave a talk to some Foreign Service and Civil Service officers with energy-related responsibilities who visited Houston earlier this week, the analogy that came to mind was battered spouse syndrome. Hopefully Exxon will fight this hard, and won’t succumb to the same syndrome.
As I said in an earlier post, I expect that this will all be a prelim to big confrontations between China and Russia on energy. Note that the China angle plays into the Sakhalin I issue. Moreover, China is becoming increasingly aggressive, and successful, in areas that Russia considers its fiefdoms, notably Central Asia (especially Turkmenistan) and now Moldova, of all places. And finally, the big one: the Rosneft/Tatneft-China oil pipeline/loan deal. That one will turn very interesting once the pipeline is done, especially if oil prices are well above those at the time of the signing of the deal. And absent another world economic catastrophe, that’s almost a given.