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Financial Times: Exxon faces tricky talks over Sakhalin gas

By Isabel Gorst in Moscow and Ed Crooks in London
Published: June 27 2007 21:16 | Last updated: June 27 2007 21:16

The next delicate negotiation looming for ExxonMobil is over the gas from its Sakhalin 1 project off the eastern coast of Russia.

Gazprom this week urged Exxon to abandon plans to export the gas to China and instead commit supplies to gas markets in the Russian far east, or to the liquefied natural gas plant at the Gazprom-controlled Sakhalin 2 project.

Russia’s state-controlled gas company took a stake of 50 per cent plus one share at the end of last year, wresting control of Sakhalin 2 from Royal Dutch Shell with the help of pressure from the Russian government.

Alexander Medvedev, the general director of Gazprom’s international marketing division, said Exxon’s plans for exports from Sakhalin 1 could upset Gazprom’s sales negotiations with China. “Even a small volume could muddle importers’ heads,” he said.

Mr Medvedev denied reports that Gazprom had run into difficulties in negotiating an acceptable price with China. “Negotiations are continuing under a normal regime”, he said. Gazprom was interested in reaching a value-adding deal with China rather than just gas supply, he added.

Amy Myers Jaffe, a senior fellow at the Houston-based Baker Institute, said China had “lots of gas supply options” and was prepared to hang out for a good price in negotiations.

Analysts said Gazprom’s stance fitted with its purchase last week – again with the help of government pressure – of a majority stake in the Kovykta gas field in eastern Siberia from BP’s Russian joint venture, TNK-BP. The gas from Kovykta could eventually be sold in China.

Erik Mielke of Merrill Lynch said: “Gazprom didn’t want TNK-BP competing with it in selling gas in Asia, and I would be very surprised if Exxon were allowed to export gas from Sakhalin 1 to China.”

Mr Medvedev said Gazprom was negotiating to buy all Sakhalin 1’s gas production and that it was in the economic interests of all partners in the project to find a compromise. Exxon’s partners in Sakhalin 1 include Rosneft, the Russian state oil company, ONGC of India, and Sodeco, a group of Japanese companies.

Mr Medvedev said Sakhalin 1 could sell gas direct to Gazprom or to Sakhalin Energy, the consortium running Sakhalin 2. “They have a choice”, he said.

Mr Medvedev said Russia would respect the terms of Exxon’s production-sharing agreement at Sakhalin 1. But he added that “some questions were not addressed carefully enough in the [agreements] in the 1990s”.

Speaking to the Financial Times at the end of last week, Rex Tillerson, Exxon’s chairman, said the company had studied a range of gas export options.

He said discussions with China were the “most advanced” but talks were continuing with potential Japanese customers and with India, which is interested in importing Sakhalin gas as LNG.

Any deal with Gazprom, Mr Tillerson said, would have to deliver the highest value for the Russian government in royalties and taxes. He added that Russia would need to stick to the agreement or it would jeopardise investment by Exxon.

Copyright The Financial Times Limited 2007 and its sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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