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THE NEW YORK TIMES: Gazprom Wants All of Exxon's Sakhalin Gas: Report

Gazprom Wants All of Exxon's Sakhalin Gas: Report

Published: April 25, 2006

Filed at 5:50 a.m. ET

MOSCOW (Reuters) – Russia's gas monopoly Gazpromwants to buy all gas from ExxonMobil's (XOM.N) Sakhalin-1 project on the remote eastern island for re-exports to China and Korea, a business daily reported on Tuesday.

Vedomosti said Gazprom had raised the idea in its Sakhalin development strategy, which is due to be reviewed by the firm's state-controlled board on April 27.

Gazprom declined to comment on the report, which said Gazprom wanted to propose that ExxonMobil, the operator of Sakhalin-1, sells all of its gas at the wellhead at prices ensuring “acceptable profitability.''

Gazprom would then re-export the gas to China and Korea to make sure it remains the sole Russian gas exporter.

Exxon was not immediately available to comment on the proposal, which would contradict the initial production sharing agreement on Sakhalin-1, which guarantees stable tax and development regime for the project.

Exxon launched the oil phase of Sakhalin-1 last year and wants to have peak production of 250,000 barrels per day by the end of this year.

But the firm's attempts to pre-sell large reserves of gas to neighbouring Japan by pipeline have so far failed as the country relies more on liquefied natural gas supplies.

Exxon, which also has state oil firm Rosneft, Indian ONGC and Japanese firms as partners in the project, has agreed to sell small volumes of gas on the Russian market.

Gazprom has been stepping up pressure on independent gas projects over the past years as the Kremlin is trying to regain control over the strategic energy resources.

It has already blocked the development of BP's landmark East Siberian Kovykta gas field, which could supply gas to China, and has agreed with Royal Dutch Shell (RDSa.L) to become its partner in Sakhalin-2, the world's largest LNG project.

Rosneft, a top Kremlin oil vehicle, has been also seeking a bigger role in Sakhalin-1 gas exports and may oppose Gazprom's new plan.

Analysts from Aton brokerage said they found it hard to believe that the government would allow Gazprom to buy gas from Exxon at Russian prices, which are at least five times lower than international prices.

“The government will likely try and take account of the interests of all the parties involved. If an off-take agreement is reached, we would expect the pricing terms to probably be linked to prices in international markets,'' Aton said in written research.

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