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Reuters: Gazprom, eyeing Asia, calls for block on Exxon

POSTED: 1:26 a.m. EDT, June 20, 2007

MOSCOW, Russia (Reuters) — Russia’s Gazprom asked the government on Tuesday to block an Exxon-led project from selling gas to China, which would remove a challenge to its Asia strategy and seal its absolute control of gas exports.

Gazprom Deputy Chief Executive Alexander Ananenkov said the gas from Sakhalin-1 on the Pacific coast was needed to supply Russia’s Far East and plans to export 8 billion cubic meters (bcm) a year to China would leave the domestic market short.

“We consider it necessary for a directive to be issued and Sakhalin-1 gas to be sold to Gazprom, so we could supply gas to Russia’s regions, and for the gas not to be exported as proposed by Exxon Mobil,” Russian news agencies quoted Ananenkov as saying.

“Demand in the four Far Eastern regions alone is more than 15 bcm,” he told a meeting of Russia’s Far East socioeconomic development council, chaired by Prime Minister Mikhail Fradkov.

Stopping Exxon’s Chinese plan would keep all Russian gas out of China, despite its thirst for energy supplies. An agreement on Russian gas pipelines has stalled because China is unwilling to pay as much for its gas as Gazprom wants.

Gazprom is building an Asian export strategy on the basis of the huge Sakhalin-2 project, next to Sakhalin-1, and is trying to shore up domestic supplies to give it free rein in exports, a strategy it has already employed in Europe.

Gazprom bought control of Sakhalin-2 at a knock-down price from Royal Dutch Shell and its Japanese partners, who were obliged to sell up after a campaign of criticism from Russian officials and threats of crippling licence withdrawals.

The deal put Gazprom in charge of a huge liquefied natural gas (LNG) plant due to come on stream next year. It wants to expand the plant to supply Asia’s emerging LNG market, but first it must guarantee the domestic market will be fully supplied.

Gazprom told Reuters earlier this month that it was in talks with Exxon about buying all the gas from Sakhalin-1, whose shareholders also include state-controlled Rosneft, ONGC and a Japanese consortium, Sodeco.

Exxon signed a preliminary agreement in 2004 to supply Sakhalin-1 gas to Chinese firm CNPC but it has also held talks with Japan and India, which want to import its gas as LNG.

Exxon spokeswoman Jeanne Miller told Reuters the firm was evaluating potential gas sales to China and was conducting preliminary studies into the feasibility of a pipeline to northeast China, the nearest part of China to Sakhalin.

“We’ve been in discussions with Gazprom about all potential options for delivering the pipeline gas there,” she said.

But Gazprom may also face opposition from Rosneft, the main force on Sakhalin until the Gazprom-Shell deal.

One investment banker said Rosneft, long a rival of Gazprom, would want to keep the right to sell its gas even if it was processed by Gazprom’s LNG plant at Sakhalin-2.

“I don’t think Rosneft want Gazprom to push them around,” he said. “They won’t want to lose the ability to trade the gas.”

There can be only one

Sakhalin-1 and Sakhalin-2 are production sharing agreements, excluding them from Gazprom’s legal monopoly on gas exports. But Deputy Energy Minister Andrei Dementyev said Exxon Mobil still needed government approval if it wanted to export gas to China.

“Without this gas there won’t be any regional balance,” he told the meeting with Fradkov. “[Exxon] may be autonomous in its intentions, but when it comes to putting them into practice, all gas deliveries are linked by the single supply system.”

Another field on Gazprom’s wish list is Sakhalin-3, a licence Russia may award this year or next. Ananenkov said it could be on stream in 2014, until which time Gazprom would need Sakhalin-1’s gas to meet Russian demand.

To further cover domestic supplies in eastern Russia, Gazprom signed a deal this week with Urals Energy and is trying to lock in another deposit, TNK-BP’s huge Kovykta field.

Gazprom is in talks with TNK-BP and its parent, BP, about taking a controlling stake in Kovykta, which cannot supply the Chinese export market without Gazprom’s cooperation.

But Gazprom is in no rush to supply China and says Kovykta will not be required for exports until 2015. The stalemate over China’s pipelines has left it with potentially spare gas at home and made Sakhalin-2 the mainstay of its Asian export strategy.

TNK-BP, which is under threat of losing the licence for Kovykta, has said it would welcome Gazprom as a controlling shareholder in the East Siberian field.

Gazprom has said any agreement on Kovykta is likely to be part of a wider deal and may involve other BP and TNK-BP assets in Russia or abroad. It is also interested in Sakhalin-4 and Sakhalin-5, 49 percent owned by BP and 51 percent by Rosneft.

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