Streetwise Professor

July 31, 2009

Let Me Count the Ways

Filed under: Economics,Energy,Financial crisis,Politics,Russia,Uncategorized — The Professor @ 2:01 pm

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.

Bloomberg adds some details:

OAO Gazprom, Russia’s state-owned natural-gas exporter, started building a pipeline in the Pacific Ocean that may damage  Exxon Mobil Corp.‘s plans to export the fuel to China.

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.

h/t R

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  1. So why does anyone invest there, let alone go back after getting bashed around before (Shell, most notably).

    Because world oil production has peaked and will decline, and the oil majors are willing to be anyone’s bitches to add some fat to their reserves listings.

    Comment by Sublime Oblivion — July 31, 2009 @ 5:08 pm

  2. I’ll ignore the offensive barbaric sexual pig that Mr. SO exposes himself to be.

    I’ll just note that he’s openly acknowledged Russia will not follow the rule of law.

    And I’ll remind him that Russia is running massive budget deficits (Putin just admitted at least 7.5% next year) and must borrow from the West. It can ill afford this kind of high-handed illegality. Two different Western courts have just declared war on Russia as a fundamentally corrupt society, and the ECHR is issuing devastating judgments on a daily basis that Russia may soon run short of cash to pay.

    Sooner rather than later, Russia will go the way of the USSR.

    Comment by La Russophobe — August 1, 2009 @ 4:37 am

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