Streetwise Professor

January 24, 2010

I Hate Reruns

Filed under: Economics,Energy,Politics,Russia — The Professor @ 8:31 pm

ExxonMobil is at loggerheads with the Russian government over the Sakhalin I project.  The issue is the one that eventually spelled Shell’s doom in Sakhalin II: development costs under the production sharing agreement (PSA):

The government rejected a proposal by ExxonMobil, the world’s largest company by market value, to invest $3.5 billion this year in the Sakhalin offshore fields, putting the oil producer’s plans at risk again, Sakhalin Governor Alexander Khoroshavin said Thursday.

Higher expenses in production sharing agreements — such as Sakhalin-1, which is operated by an Exxon-led consortium — would delay the government in receiving its share of revenues until the companies that develop fields recoup their investment.

“We believe it is an inflated amount,” Khoroshavin told reporters after a Cabinet session Thursday that discussed unrelated issues. “The consortium can’t substantiate it for us, this $3.5 billion.”

Exxon said it had to suspend work on a Sakhalin field for several weeks at the start of last year as it argued with the government about the 2009 investment budget for the project that it co-owns with Rosneft, Japan’s Sodeco and India’s ONGK Videsh. The consortium has been producing oil at a field off Sakhalin for a few years and is investing in another field.

An ExxonMobil spokesman said the company was working to respond to the government’s concerns and hoped to return to discussions on the matter in the spring.

Khoroshavin said Exxon would submit a revised spending plan to the government in March.

This negotiation takes place, of course, in the shadow of Gazprom, which needs the Sakhalin gas to meet its own commitments, and to achieve its ambitions to control the supply of gas to China:

The spending dispute has been recurring as Gazprom seeks to buy all future gas from Sakhalin-1 to prevent it from flowing to China, which would create competition for Gazprom’s own plans to sell gas on that market. Exxon has said the project would sell gas to the highest bidder.

Gazprom also needs the Sakhalin-1 gas to fill a pipeline that it is constructing from the island to Vladivostok to supply clean fuel in time for the Asia-Pacific Economic Cooperation forum in the port city in 2012.

“Much will depend on Sakhalin-1, that is, whether Gazprom can buy their gas for the pipeline,” Khoroshavin said, referring to the prospect of fully loading the pipeline by 2012.

ExxonMobil currently has the right to market the gas itself, an exception from Gazprom’s gas export monopoly that grates on the Russian behemoth.  Given these circumstances, there is good reason to be suspicious of these standoffs.  They are quite likely pretexts to holdup XOM, and wrest control of Sakhalin I gas.  Given the experience of Shell, it is hard to imagine that a canny company like XOM would inflate costs, knowing that this would give Putin the perfect excuse to crank up the “these unfair PSAs were negotiated when Russia was on its knees and now we’re standing tall and will take back what’s ours” rhetoric.  That may be coming regardless, but Exxon has every incentive not to provide Putin any ammunition.

This isn’t over.  It’s almost certain that the pressure will intensify, especially as the 2012 APEC date approaches, and Gazprom becomes more desperate for gas to cover its own falling production.

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  1. Russia never met a cash cow they didn’t want to milk dry. The nerve of Exxon-Mobil wanting to invest in the future. And another abomination, they want to sell the gas to the highest bidder. My god! Note that pretty much every motive in each situation mentioned above by Gazprom is political, not economic. Also, the other typical fixture in Russia comes shining through: “When we fail (again), we have to steal from the other guy who has the goodies.” Tread carefully Exxon.

    SWP, question for you. It is, of course, a standard business practice to want to keep your prices as high as you can get away with, but doesn’t Russia/Gazprom seem over-obsessed with this strategy? It seems that more than enough business success is had by energy companies in Norway, Canada, etc. through volume rather than constantly gaming their customers and creating political leverage over their buyers. I’m trying not to make this a rhetorical question, but it would be interesting to know if you see what I see.

    Comment by Howard Roark — January 25, 2010 @ 1:34 am

  2. “Given the experience of Shell, it is hard to imagine that a canny company like XOM would inflate costs, knowing that this would give Putin the perfect excuse to crank up the “these unfair PSAs were negotiated when Russia was on its knees and now we’re standing tall and will take back what’s ours” rhetoric. That may be coming regardless, but Exxon has every incentive not to provide Putin any ammunition.”

    And there once was a really smart guy who believed that the incentives for bankers would ensure that they would protect shareholder equity. Incentives are sometimes a really fuzzy thing, and can be difficult for other people to calculate in advance.

    “Gazprom becomes more desperate for gas to cover its own falling production”

    Um, why is falling production a problem when demand has declined?

    Comment by rkka — January 25, 2010 @ 7:55 pm

  3. “Um, why is falling production a problem when demand has declined?”

    Um, because when production and prices plummet REVENUE plummets, you braying jackass. Russia DEPENDS on revenue from natural gas and oil for its survival. When they fell during the global crisis, the Russian economy went into the toilet (while non-gas dependent stands like Vietnam held firm).

    That’s why it’s a problem. Well, it’s a problem if you care whether Russia lives or doesn’t, like most of us. You apparently couldn’t care less if Russia turns into Rwanda or Sudan, so you may want to pop a champagne cork and toast that prospect.

    Sheesh. What a maniac. With “friends” like these, Russia needs no enemies.

    Comment by La Russophobe — January 26, 2010 @ 8:08 am

  4. Phoby, Phoby, Phoby…

    When demand declines, there is no point at all in investing to maintain production.

    Russia still has a big current account surplus, and the budget deficit is smaller than was estimated in the Spring.

    The $18 billion the Russian government planned to borrow in 2010 is now $9 billion, due to the government’s improving finances.

    Financial reserves are accumulating again, and the Central Bank is having to intervene to control Ruble appretiation.

    In short, you once again reveal your gibbering cluelessness.

    Comment by rkka — January 26, 2010 @ 5:03 pm

  5. The very fact of comparing Russia and Vietnam – two utterly different countries with different situations and challenges – to flog the old horse of how “Russia is doomed”, should be enough by itself to discredit LR on this matter.

    Comment by Sublime Oblivion — January 26, 2010 @ 11:15 pm

  6. On the matter of comparing economies:

    Regarding the above linked piece is this edited note from someone:

    “Anders Aslund provides a healthy analysis of the differences between Russia and the other BRIC countries (among them being he highest GDP per capita) . This contrasts from some of his previous comments. Upon the global recession, I recall him saying that Russia would be worst hit, with Ukraine and the Baltic republics recovering sooner. Now that Russia is recovering relatively well, he’s suggesting that it could nevertheless be better.”


    Fitch ups Russian credit outlook as PwC looks to bigger long term


    “A sharp rebound in commodity prices has seen Fitch Ratings move Russia’s credit rating from negative to stable, as PwC says Russia could become the largest European economy in two decades.”


    Some related pieces:

    Comment by Knockout Puncher — January 27, 2010 @ 6:37 am

  7. Jim O’Neill – i.e., the guy who invented the BRIC’s concept – says that removing it from the group is a “rubbish” idea.

    Comment by Sublime Oblivion — January 27, 2010 @ 2:37 pm

  8. Perhaps Aslund’s recent piece is motivated in part by an imperial agenda to not see the possibility of BRIC becoming a powerful economic bloc.

    He does bring up some compelling points about Russia’s economy in relation to Brazil’s, Indias’s and China’s.

    Comment by Knockout Puncher — January 28, 2010 @ 5:03 am

  9. So Aslund thought that Russia would get hit harder by the global financial collapse than the Baltics or Ukrainians.

    Typical that he insists on seeing the worst in Russia’s situation, very much like SWP, not to mention clueless Phoby. Analysis so clearly based on politicized considerations should be deeply discounted.

    Comment by rkka — January 28, 2010 @ 6:05 am

  10. Like I said, he did note Russia’s higher per capita GDP to Brazil, China and India.

    This contrasts from the comparison that someone else made with Vietnam.

    Comment by Knockout Puncher — January 28, 2010 @ 6:57 am

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