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Bloomberg: Russian Oil Output Is Little Changed on Price Drop, Shell Probe

By Garfield Reynolds

Oct. 2 (Bloomberg) — Russian oil output was little changed in September, as world prices fell and the government threatened to halt work at a Royal Dutch Shell Plc project that’s the nation’s biggest foreign energy investment.

Average daily oil output during the month was at 9.751 million barrels a day, or 39.91 million tons, compared with 9.759 million barrels a day in August, according to the Energy and Industry Ministry’s CDU-TEK unit. Exports rose 50,000 barrels a day to 5.45 million barrels a day, little changed from a year earlier.

Crude oil futures have dropped 18 percent in New York since touching a record $78.40 a barrel on July 14, the highest since the contract began trading in 1983.

Shell’s $22 billion Sakhalin-2 project would have to stop building key pipelines if Russia’s Natural Resources Ministry decides this month to cancel a construction permit. Shell and Japan, developers of the Sakhalin-2 fields in the Sea of Okhotsk, have rebuked Russia for threatening to halt the project, citing “abnormal” and “one-sided” demands. Japan will also be one of the biggest consumers of the project’s fuel.

The pipelines will carry oil and gas to the southern tip of Sakhalin island to ensure year-round export. The Shell-led Sakhalin Energy Investment Co. is building a plant there to cool natural gas to a liquid state for shipment by tankers starting 2008. It has contracts to sell about 98 percent of its liquefied natural gas output, mostly to customers in Japan and Korea.

Exports Rise

Exports to countries outside the Commonwealth of Independent States totaled 4.49 million barrels a day, up 1.1 percent from August.

The CIS comprises the former Soviet states, except for the three Baltic republics.

Shipments to refineries in Belarus, Kazakhstan and Ukraine jumped 17 percent to 820,000 barrels a day from 700,000 barrels a day in August. Exports outside the Transneft system plunged 56 percent in September to 140,000 barrels a day, from 250,000 a day in August.

Production rose 2.3 percent from a year earlier.

OAO Lukoil, Russia’s biggest producer, boosted extraction 5 percent to 1.85 million barrels a day, compared with the year- earlier period.

OAO Rosneft, key to President Vladimir Putin’s plans to increase the government’s role in the energy industry, raised output 16 percent to 1.77 million barrels a day, taking the company past BP Plc’s OAO TNK-BP Holding venture to become Russia’s second-biggest oil producer. Rosneft last month started operating OAO Udmurtneft, acquired this year from TNK-BP.

The BP-led venture’s output dropped 11 percent from September 2005, to 1.61 million barrels a day. That was also a 6.9 percent decline from August 2006.

Sakhalin Venture

Exxon Mobil Corp.’s Sakhalin-1 venture off Russia’s Pacific coast slashed output about 60 percent to 24,200 barrels a day, from 38,500 a day in August, according to CDU-TEK. Output at fields run by so-called production-sharing agreements, such as those covering Exxon Mobil’s Sakhalin-1 and Shell’s Sakhalin-2, fell 12 percent to 128,900 barrels a day.

Shell, BP, Exxon Mobil and Total SA face demands from Russia to cede some control of oil and gas fields to state- aligned companies, including OAO Gazprom and Rosneft. The foreign-led ventures have become anomalies in Russia as President Putin increases state control over the energy industry.

The first phase of the Sakhalin-2 project, which has already been completed, cost $2 billion. Shell announced in July 2005 that the cost of the second phase, involving the construction of the pipelines, new platforms and the LNG export terminal, had doubled to $20 billion.

To contact the reporter on this story: Garfield Reynolds in Moscow at [email protected]

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