Exxon/Russia: Approving Sakhalin Budget (XOM)

Exxon Mobil Corporation (NYSE:XOM) has reportedly received approval from the Russian government for its proposed budget for the Sakhalin-I project. Exxon owns 30% of the joint venture that is developing the oil and gas project, and is the project’s operator.

No figures were released, nor is there any information on the single largest dispute between the Russian government and Exxon. It looks like the Russian government wants Exxon to sell the project’s natural gas to Gazprom, the state-owned gas monopoly, at lower than market prices. Gazprom would then resell some of the gas domestically.

Exxon has been arguing for a new natural gas pipeline to China. The company reached a tentative agreement to ship 8 billion cubic meters of gas annually to China in late 2006. The government and Gazprom have refused approval for the pipeline to transport the gas because Gazprom wants to build the pipeline and export the gas itself — after buying it from the Exxon-led venture at lower than market price.

At this point, it looks like Russia blinked today. The country’s economy is in the doldrums and it cannot afford to leave any money on the table. But Gazprom’s leverage (as well as that of the Russian government’s) is enormous.

We would be very surprised if the dispute is anywhere close to being over.  After all, what is a signed iron-clad contract in most emerging economies?  A new starting point for the next dispute.

Paul Ausick
April 8, 2009