Flush with Kovykta Victory, Gazprom Eyes Sakhalin-1

MOSCOW Jun 26, 2007 (Dow Jones Newswires)

Russian gas giant OAO Gazprom (GSPBEX.RS) took aim at Exxon Mobil Corp.'s (XOM) Sakhalin-1 project Tuesday, only days after wresting control of a huge Siberian gas field from BP PLC (BP).

Deputy Chief Executive Alexander Medvedev, the man responsible for Gazprom's export policy, said the Exxon-led consortium's plans to export gas to China were unrealistic and should be coordinated with its own ambitious plans for the region, instead of disrupting its own negotiations with prospective Asian buyers.

"Even small volumes (of competing gas) can sow confusion in the minds of importers," Medvedev told a press conference, stressing that the scale of Gazprom's plans - which includes 60 billion to 80 billion cubic meters a year of exports to China, requires intense coordination.

A move against the Sakhalin-1 project, which currently produces 250,000 barrels of oil a day, would inevitably be seen as a continuation of an unspoken government campaign against a raft of deals done in the 1990s, when western oil companies took advantage of low global oil prices, and near-anarchy in Russia, to secure a number of extremely lucrative projects.

Gazprom has already taken control of two of the largest energy projects in Russia's eastern regions against a background of intense regulatory pressure on their former owners, albeit with deals that were still acceptable to the western companies involved.

Last week it agreed to buy a 63% stake in the east Siberian gas field Kovykta from BP Russian arm, and in December it bought a controlling stake in Sakhalin Energy, operator of the world's largest liquefied natural gas project, Sakhalin-2.

"We can offer Exxon conditions which could be highly acceptable for it, as regards sharing such risks as the project currently faces," Medvedev told a press conference.

In contrast to Royal Dutch Shell Group and BP, who lost control of Sakhalin-2 and Kovykta, respectively, ExxonMobil has so far fulfilled its agreed output targets on time, without serious environmental issues and without asking the government to forego tax revenue due to higher-than-expected costs. As a result, analysts say, it is less likely to risk an aggressive official backlash.

However, its negotiations to export gas from the project to China fly in the face of contemporary Russian policy, which turned Gazprom from a "coordinator" of gas issues into a formal export monopolist last year.

Sakhalin-1 agreed heads of agreement with China National Petroleum Corp. in 2006 for the export of gas to northeast China. Vladimir Timoshilov, head of Gazprom's eastern projects division, told the briefing that it would ask OAO Rosneft (ROSN.RS), a 20% minority partner in the project, to vote against any such project.

Medvedev, meanwhile, said Exxon's plans with China are fanciful.

"I struggle to believe that a pipeline with eight billion cubic meters a year (throughput) can be economic," he said.

A spokeswoman for Exxon said that it is in any case in talks with Gazprom on alternative plans, and is keeping its options open.

"The purpose of the discussions is to find a mutually acceptable option for the parties involved," she said.

Medvedev said Gazprom's aim is two-fold: to satisfy the domestic market's demand for gas, and to expand the scale of its liquefied natural gas exports, which are currently focused on Sakhalin-2.

Sakhalin-1 is already supplying gas by pipeline to the Khabarovsk region of the far east, and reckons it can satisfy the region's demand through 2025. That would still leave the bulk of Sakhalin-1's gas output - conservatively estimated at 10 billion cubic meters a year - free for export.

Chris Weafer, chief strategist at Alfa Bank in Russia, noted that "Gazprom doesn't want to give up its export monopoly at any price," and said Exxon would be best advised to abandon its gas export plans, in order to protect its broader business interests in Russia.

"They're going to lose (the export gas) anyway, so it's best to look for the best deal they can and concentrate on building up minority stakes in other projects, where they can book reserves," Weafer said.

Exxon holds 30% of the project through a Russian subsidiary. A Japanese consortium holds another 30%, while India's Oil and Natural Gas Corp. Ltd. (500312.BY) holds the remaining 20%.

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