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Russia won't let Exxon expand Sakhalin oil fields

Russia's government said it won't allow Exxon Mobil Corp. to expand the boundaries of its $12.8 billion offshore oil project near Sakhalin Island in the Pacific Ocean, adding that nearby discoveries should be auctioned off. Russia is opposed to Exxon's proposal to include new prospects adjacent to the Chayvo and Odupto fields in the 1996 contract that governs Exxon's Sakhalin 1 development, the Natural Resources Ministry said today in an e-mailed statement. Instead, the discoveries should be classified as separate fields and sold at auction, the ministry said. Exxon Mobil, the world's biggest oil company, is the latest international energy producer targeted in President Vladimir Putin's campaign to increase government control of the country's petroleum wealth. Yesterday, Russia sued to halt Royal Dutch Shell Plc's $20 billion oil and gas development, also located near Sakhalin Island. “The Putin government is trying to squeeze more concessions out of Exxon just like they are doing with Shell,” Paul Ausick, an analyst at Bandersnatch Research LLC in Bozeman, Montana. “There's no chance these companies are going to be allowed to operate under the rules agreed to when they were set up in the Wild West days in the 1990s.”  

Deputy Natural Resources Minister Alexei Varlamov informed Ben Haynes, president of Exxon Mobil's Russian subsidiary, of the government's decision today during a meeting in Moscow, the statement said. “We are contacting our Moscow personnel for an update,” Robert Davis, a spokesman at Exxon Mobil's corporate headquarters in Irving, Texas, said in an e-mailed statement. He declined to comment until he spoke with Exxon's Russian staff. The ministry's statement didn't address unexplored regions east and north of Sakhalin 1. Exxon won rights to search for oil and gas in the area, known as Sakhalin 3, in the 1990s and has been waiting six years for the Russian government to grant exploration licenses. The shares have increased 20% this year, compared with a 4.2% rise for the Standard & Poor's 500 index. Just two weeks ago, Exxon Mobil CEO Rex Tillerson told reporters at a Norwegian oil conference that he wanted to expand the company's presence in the Russian oil sector. Russian authorities are nearing the end of a “reordering” of its natural-resources laws, after which investment opportunities will open up, Tillerson said in the Aug. 22 press briefing at the oil conference, held in the Norwegian port city of Stavanger.  

Exxon Mobil, which pumps more oil than every member of OPEC except Saudi Arabia and Iran, began producing oil from the Chayvo field, which lies six miles off the coast of Sakhalin Island beneath the Sea of Okhotsk, in October. Two other offshore fields, Oduptu and Arkutun-Dagi, are next in line for development. The three fields, which hold an estimated 2.3 billion barrels of crude oil and 17.1 trillion cubic feet of gas, comprise Exxon's Sakhalin 1 project. The 1996 contract and Russian law “don't provide for the automatic possibility to widen the agreed on area,” the ministry said in its statement. A proposal to expand the boundaries was previously rejected in an August 2005 ruling by a government panel, which also recommended putting new discoveries in the area up for auction, the ministry said.

Tillerson who succeeded Lee Raymond as CEO in January, is counting on Sakhalin 1 and other multibillion-dollar projects in Angola, Nigeria and Qatar to boost production and reserves. Exxon was the only one of the world's three largest oil companies to raise Q2 output. While Exxon increased production by 6.2% to the equivalent of 4.16 million barrels of oil a day, Shell and London-based BP Plc saw Q2 output drop by 2.5% and 7.7%, respectively. Exxon's profit is expected to rise 4.2% this year to $37.6 billion, according to the average estimate from 13 analysts surveyed by Thomson Financial. Such a result would surpass last year's $36.1 billion net income, the biggest in US history. (Bloomberg)