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Petroleum News: Exxon raises stakes in Russia standoff

Several projects impacted in battle between Western majors, Russian government, including Sakhalin 1 and 2, Kharyaga and Kovykta

The Associated Press

Exxon Mobil Corp. said Sept. 21 that the cost of Sakhalin-1 oil project it is leading has increased by 30 percent, an announcement that could raise the stakes in a growing industry standoff with the Russian government.

An Exxon spokesman told Dow Jones Newswires that the increase at the Sakhalin-1 project on the Pacific island of Sakhalin was due to inflation and currency, and added that the company had not yet submitted the change to the government for approval.

A spokesman for the Natural Resources Ministry said that the U.S. oil giant had given it preliminary notification of a budget increase, but no official notice. The spokesman indicated the ministry would likely reject any increase.

Previously, Russian officials had warned that the De Kastri oil terminal built by Exxon Sakhalin did not meet environmental requirements.

The terminal was due to have been commissioned Oct. 4 as part of the Sakhalin-1 project production start-up.

Exxon declined to say whether that would put back its launch date, Dow Jones Newswires reported. “We do believe that contract sanctity is important and we hope to resolve these issues amicably,” it quoted Mark Albers, president of Exxon Mobil Development Co., as saying.

Sakhalin-2, Kharyaga under attack

The report comes just days after the resources ministry said it would pull an environmental permit at Royal Dutch Shells’ mammoth Sakhalin-2 liquefied natural gas project and was considering revoking French energy company Total’s field license at its Kharyaga project.

The ministry said it had decided to revoke the Sakhalin-2 permit to “satisfy the arguments of the prosecutor’s office,” which alleged over the weekend that permission to develop the second phase of the project had been granted illegally.

An order to this effect has been prepared, the ministry said, and must be approved by the state technological safety oversight agency watchdog, Rostekhnadzor. It would take legal effect after that.

Ministry spokesman Rinat Gizatulin was later cited by Dow Jones Newswires as saying that the decision may only be temporary and that the license could be reinstated within six months.

The resources ministry had begun a review in the spring of Total’s Kharyaga fields for compliance with the production sharing agreement.

Sergei Fyodorov, head of the ministry’s government policy department, said in a statement Sept. 20 that the ministry review had been turned over to the Agency for Subsoil Use, which would consider whether to pull the license. He did not indicate when a decision might be taken; no one at the agency could be reached for comment.

Fyodorov contended that Total had failed to keep its production promises and Kharyaga’s 22,000 barrels per day of current production was three times lower than stipulated for 2006.

Total spokeswoman Patricia Marie told The Associated Press that the company was working in line with the production sharing agreement, but provided no further comment.

BP project under fire

Russian prosecutors are also pressing for the suspension of an exploration license for TNK-BP, the British-Russian joint venture, to develop Kovykta, a massive natural gas field in Eastern Siberia, the Financial Times reported Sept. 19.

AN AFX news report said prosecutors in the regional capital of Irkutsk were demanding the local resources agency suspend TNK-BPs license on environmental grounds and for failing to fulfill terms of the license.

Discovery put up for sale

Finally, on Sept. 21 Reuters reported that Russia’s resources ministry had put up for auction a small oil deposit despite claims by Exxon that it was part of the Sakhalin-1 project.

According to Reuters, Deputy Minister Alexei Varlamov told reporters the auction to explore the field was called in July. He did not say whether Exxon had bid.

The ministry has already told Exxon it would not automatically expand the area of the Sakhalin-1 license, despite the discovery of new reserves near or within existing deposits.

According to Reuters, Exxon has said the move contradicted the initial PSA and warned Russia it could hurt the country’s investment image.

Boils down to the Russians want more

Analysts have interpreted the steps as a move by the Russian government to secure more money for its coffers and better terms for the Russian firms that are partners in all the projects.

The two Sakhalin projects are being developed by Western oil companies under PSAs (profit sharing agreements) signed in the 1990s. A third PSA was granted to Total to develop the Kharyaga oil field in the Nenets region, north of the Arctic Circle.

Under the deals, Western oil companies win tax breaks, while the government gets a share of the oil and gas once the project’s production costs have been covered.

Strapped for cash in the early 1990s, Russia was quick to sign the deals that put foreign companies in the driver’s seat as it lacked funds to explore its mineral wealth on its own. Now, with windfall oil revenue boosting the economy, Russian companies appear to be pushing for a bigger role.

“I think that the environmental problems are a smoke screen for government policy, which is to get more influence and perhaps even involvement in the projects,” said Stephen O’Sullivan, oil and gas analyst at Deutsche UFG in Moscow.

Shell’s Sakhalin-2 project has been subject to heightened scrutiny by authorities after it announced last year that its costs would double, thus delaying the flow of revenues to state coffers.

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