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Russia: Gazprom needs to work hard on ExxonMobil for Sakhalin gas

31 Jul 2009

Photo - see caption
Sakhalin I fields

The Russian gas giant Gazprom said earlier today it needed to work hard on US energy major ExxonMobil to obtain gas from the Sakhalin-1 project for a new Far Eastern gas pipeline. 

Prime Minister Vladimir Putin inaugurated the pipeline, due to come onstream in the third quarter of 2011, but there is no deal yet between Gazprom and the Exxon-led Sakhalin-1 consortium on gas supplies. "We will need to work hard on Exxon to obtain these 8 to 10 billion cubic meters of gas from Sakhalin-1," Gazprom's Deputy CEO Alexander Ananenkov told Putin after the inauguration ceremony.

The pipeline will link offshore fields around Sakhalin Island with the Pacific port of Vladivostok where Gazprom plans to build an LNG plant, which will ultimately liquefy gas from for export to Asia.

The government also wants to supply Sakhalin-1 gas for domestic consumers in the Far East at regulated prices expected to be 2.5-3 times lower than export prices in 2012 even after annual hikes. Exxon eyes exports to China. "I would like to stress that domestic market will be a priority for the gas from East Siberia and the Far East," Putin said in a speech at the pipeline inauguration ceremony.

Exxon signed its Sakhalin-1 deal with Russia in the early 1990s under a production sharing agreement that guarantees stable returns regardless of changes in legislation and exempts the US firm from Gazprom's export monopoly on gas.

Analysts expect Russia to step up pressure on the consortium, which also includes Russia's Rosneft, Japan's Itochu, Marubeni and India's ONGC, to sell cheap gas. They say the consortium has little choice.

The Sakhalin-1 project has been producing around 200,000 barrels per day of oil after starting a few years ago, but its plans to supply gas to China have been on hold despite earlier contracts with Beijing. Gazprom is holding talks with Exxon about buying all of its gas output from Sakhalin and industry sources say the company offers prices equal to Russia's domestic gas prices. Exxon said it is studying all option to sell gas from Sakhalin-1.

Gazprom, which has faced demand destruction for its pipeline gas in Europe since the start of 2009, says it wants to expand in the gas liquefaction business to tap new markets and gain flexibility in supplies.

On Sakhalin, it already controls Sakhalin-2, an oil and LNG project previously led by Royal Dutch Shell, which ceded control after months of pressure from Russian ecological agencies, which threatened to impose huge fines on it.

The Sakhalin-Khabarovsk-Vladivostok pipeline will run 1,350 kilometres and carry six billion cubic metres of gas per year. Ananenkov said the first phase will cost 210 billion roubles ($6.69 billion).

The pipeline project comes as part of a bigger plan to revive Russia's Far Eastern economy ahead of a summit of Asia-Pacific Economic Cooperation (APEC) leaders in 2012 on Russky Island near Vladivostok.

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