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Alaska Journal of Commerce: Exxon Mobil wrangles with Russian government over permits, acreage

By Tim Bradner
For Web posting Sunday, October 15, 2006

YUZHNO, Russia – Shell’s big Sakhalin 2 project isn’t alone in having political problems with the Russian government. The Exxon Mobil-led Sakhalin 1 group now has its own set of challenges.

The consortium is loading the first export tanker at the new De Kastri oil terminal, but government environmental agencies have been raising issues over whether the final permits will be issued to allow the tanker to sail. It is now scheduled to depart Oct. 15.

De Kastri, on the Russian mainland, is connected via a new 140-mile, 24-inch crude oil pipeline that crosses the Tartar Strain and Sakhalin Island to the Chayvo oil field in the consortium’s license area off the Sakhalin’s northeast coast. Veco Corp., an Alaska oil field services company, helped build the pipeline.

Assuming the terminal’s permitting issues are worked out, plans are to increase oil production to 250,000 barrels per day by the end of 2006.

Another problem has developed with Exxon Mobil’s application to expand its license area north from the Chayvo field to include areas that are part of the same geologic structure as Chayvo. The government, however, disputes the assertion that the area is within the license area and says that it will put the acreage up for auction.

Estimates are that the area involved in the extension contains 75 million to 85 million barrels of crude oil.

The Sakhalin 1 consortium includes Exxon Mobil with a 30 percent interest, Rosneft, a major Russian company, with 20 percent of the project, SODECO, a Japanese consortium, with 30 percent, and ONGC Videsh Ltd., of India, with 20 percent.

Another major uncertainty the project faces is what to do with gas production. A small gas pipeline now delivers gas to customers on the Russian mainland, but the consortium is still considering several options for what to do with large volumes of gas that have been discovered in the license area.

“We’re open to any option that makes sense,” said Steve Terni, president of Exxon Neftgas Ltd., Exxon Mobil’s subsidiary for the Sakhalin project.

An earlier plan to build a long-distance gas pipeline to northern Japan has been dropped, and the latest thinking has focused on deliveries of gas to China through a long-distance onshore pipeline.

That plan, however, is opposed by Gazprom, Russia’s state-owned gas company. Gazprom wants Exxon Mobil and its partners to sell gas into the Gazprom system and let it handle exports to China.

The Sakhalin 1 group believes its license exempts it from Gazprom’s monopoly on exports. Meetings with Gazprom are planned soon, and it is hoped the issue will be resolved by the end of the year, Lev Brodsky, who heads Rosneft’s Sakhalin projects unit, said in an interview with reporters.

There is also pressure from some of the Sakhalin 1 partners to commit some of the project’s gas to the liquefied natural gas project being developed by the Shell-led Sakhalin 2 group. ONGC Videsh, the Indian company, has been pressing this option, as well as major Japanese utilities, such as Tokyo Electric Power Co., which want to buy more LNG from Sakhalin.

There are an estimated 2.3 billion barrels of proven oil reserves and 17.1 trillion cubic feet of proven gas reserves in the Sakhalin 1 license area.

Tim Bradner can be reached at [email protected].

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