#13 - JRL 7228
gazeta.ru
June 18, 2003
US company to pay in full for Sakhalin oil
By Yevgeny Kalyukov, Ivan Petrov

Exxon Mobil has, with some pomp, drawn up the results of the tender for oil transportation deals within the Sakhalin-I project. $400-$600 million contracts will be awarded to two Russian transportation companies. By doing so, the US oil firm hopes to soften the stance of Vladimir Putin and his prime minister, Mikhail Kasyanov, regarding tax privileges for foreign companies.

Exxon Mobil executives and Prime Minister Kasyanov met on the sidelines of the St. Petersburg economic forum in Strelna on Tuesday when the Russian premier received senior vice-president of the corporation Rex Tillerson and the chairman of the Exxon Neftegaz Company (operator of the Sakhalin-I project) Neil Duffin, who assured the premier of Exxon Mobil’s commitment to continue investing in Sakhalin.

On Tuesday afternoon Exxon Mobil held a major news conference, at which the results of the tender for oil transportation deals within the Sakhalin-I project were announced. The contracts will be awarded to Russian firms Sovcomflot and PMP (Primorye Steamship Line), which will transport Sakhalin oil, in particular, to Japan and Korea. The total value of contracts, depending on the world oil price, will amount to $400-600 million.

According to Neil Duffin, when the new contracts come into effect, the share of Russian firms in the Sakhalin-I project will increase to $2 billion. And this is not the limit. Earlier, Tillerson said that at the first implementation stage of the project the volume of investment would amount to $5 billion, and in the future would increase to $12 billion. The Russian share in the Sakhalin-I project fell from 63 per cent in 2000 to 44 per cent in 2001.

The Sakhalin-1 Project is an international consortium comprised of Russian, Indian, Japanese and U.S. participants. Exxon Neftegas Limited, a subsidiary of the U.S.-based Exxon Mobil Corporation, is the operator of the Sakhalin-1 Project and holds a 30% interest. Other participants are ONGC (20%); RN-Astra, a subsidiary of Russian national oil company Rosneft, (8.5%); Sakhalinmorneftegas-Shelf (11.5%); Sakhalin Oil and Gas Development Co. Ltd., a Japanese investment company (whose principal shareholders are JNOC, JAPEX, Itochu and Marubeni) (30%). The first phase of development (2005-2007) will focus on the Chayvo and Odoptu fields, with the first oil shipments expected from Chayvo at the end of 2005 and from Odoptu in early 2007. The oil will be exported via pipelines to a marine tanker terminal at DeKastri. Future phases of development include the construction of a natural gas pipeline to Japan and development of the Arkutun-Dagi field. Gas sales to Japan are expected to begin in 2008. Up to $12 billion is expected to be invested by the Sakhalin I Consortium throughout the project.

It is no coincidence that Exxon Mobil has started trumpeting their prospective large-scale investment and its readiness to enlist the services of Russian companies. It is common knowledge that the Russian authorities have taken a rather harsh stance lately regarding foreign companies working in Russia under the so-called production sharing agreements like Exxon Mobil.

However, ''harsh position'' means only that the Russian government insists that since the national economic situation is relatively stable and the country’s oil and gas sector is faced with far fewer risks for investors than in recent years, foreign investors should work in Russia under the national tax regime, on a par with Russian investors.

Yet, this was enough for the world’s oil majors to take fright and appeal to top government officials – as Russia is viewed as a non-market economy with a bureaucratic style of management, no other reaction could be expected.

However, foreign firms failed to win any favours immediately. On the contrary, when in March Mikhail Kasyanov met with Philip Watts, the chairman of Shell, to discuss plans for the implementation of the Sakhalin-II project the premier gave to understand that foreign companies could only count on a friendly attitude from the Russian government if they fulfill such obligations as enlist the services of Russian firms in projects.

And even earlier, in mid-February, Kasyanov spoke quite critically of the production sharing agreements, saying that ''new deposits in Russia must be developed on the basis of the national tax regime''.

Shell was forced to agree with the premier’s request. The Russian authorities may also exert a similar kind of pressure on Exxon Mobil. In fact, the hundreds of millions which the company has pledged to invest additionally to the Sakhalin-I project is seen as a payment for preserving the PSA regime, under which the project is presently being operated.

Last Sunday Exxon Mobil presented its plans to Vladimir Putin at his meeting with top executives of leading Russian and foreign energy companies and laureates of the Global Energy Award in St. Petersburg.

Exxon Mobil’s Rex Tillerson thanked Russia for its successful implementation of the Sakhalin-I project, in which his company has been taking part since 1989, having already invested $5 billion and with plans to spend another $7 billion. He then proceeded to the main point of voicing concern over the latest amendments to PSA legislation pertaining to oil production on the continental shelf. Putin in turn thanked Exxon Mobil for its commitment to the Russian market and then explained that those amendments pursue the goal of creating equal conditions for all market participants, both domestic and foreign.

Exxon Mobil had nothing left to do but to try its luck at a meeting with Mikhail Kasyanov, or to considerably revise its perception of how business is being done in Russia.

At a news conference on Tuesday Mr. Duffin would not elaborate on the details of his talks with Kasyanov, confirming only that the taxation issue with regards to the PSA regime had indeed been discussed, and expressing hope that Exxon Neftegaz would win the government’s permission for a feasibility study of the project between September and the end of the year. Admittedly, the oil executive did not sound so certain on that count.

That is hardly surprising considering that even out of the $400-600 million investments, far from everything will go into the Russian producers’ accounts, though the winners themselves, Sovcomflot and PMP, are eager to support Exxon Mobil in every way possible. They can now easily order the construction of 5 tankers worth $50 million each.

But, as the PMP president, Alexander Kirillichev, said, the tankers will be built in Korea; Russia has no such facilities. And the loans for construction will be received from banks, ''which have the right to tell us which flag to fly''. ---------

The Sakhalin-1 Project is an international consortium comprised of Russian, Indian, Japanese and U.S. participants. Exxon Neftegas Limited, a subsidiary of the U.S.-based Exxon Mobil Corporation, is the operator of the Sakhalin-1 Project and holds a 30% interest. Other participants are ONGC (20%); RN-Astra, a subsidiary of Russian national oil company Rosneft, (8.5%); Sakhalinmorneftegas-Shelf (11.5%); Sakhalin Oil and Gas Development Co. Ltd., a Japanese investment company (whose principal shareholders are JNOC, JAPEX, Itochu and Marubeni) (30%). The first phase of development (2005-2007) will focus on the Chayvo and Odoptu fields, with the first oil shipments expected from Chayvo at the end of 2005 and from Odoptu in early 2007. The oil will be exported via pipelines to a marine tanker terminal at DeKastri. Future phases of development include the construction of a natural gas pipeline to Japan and development of the Arkutun-Dagi field. Gas sales to Japan are expected to begin in 2008. Up to $12 billion is expected to be invested by the Sakhalin I Consortium throughout the project.