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. Last Updated: 07/27/2016

Gazprom Makes Exxon Offer on Sakhalin-1 Gas

Gazprom is offering an "acceptable" price to ExxonMobil for its Sakhalin-1 gas, deputy CEO Alexander Medvedev said Tuesday, expressing doubt that the U.S. oil major would make a profit from selling the gas to China instead.

Exxon said it would weigh all its options and not drop out of talks with China's CNPC.

Gazprom wants to buy 8 billion cubic meters of gas annually to supply the Far East and east Siberia or liquefy it at its Sakhalin-2 plant for exports. Under a government plan to free regulated gas prices, local sales would generate profits similar to exports starting in 2011.

"We can offer Exxon terms that could be very, very acceptable from the perspective of sharing the risks they encounter today," Medvedev told reporters. "What does it mean to sell gas to [China] when you don't have a pipeline? How are they going to ship it?" Exxon building a pipeline would not make economic sense, Medvedev said. "I can't imagine how a pipeline for 8 bcm of gas can be economically viable," he said.

Exxon has found through research that sales by pipeline would make money, said spokeswoman Dilyara Sydykova. "That's why we are holding the negotiations," she said.

Sakhalin Energy, the Gazprom-controlled operator of Sakhalin-2, has permission to hold separate talks with Exxon, Medvedev said. Sakhalin Energy would liquefy the gas at its plant, where Gazprom wants to boost production after it begins to operate next year, Medvedev said.

Sakhalin Energy and Exxon did not confirm or deny that they were in talks.

Gazprom deputy CEO Alexander Ananenkov last week called for a state directive that would bar ExxonMobil from selling gas to China. The government, as signatory of the Sakhalin-1 production sharing agreement, should state the priority of local sales, Viktor Timoshilov, who coordinates Gazprom's eastern projects, said Tuesday.

In addition to meeting local needs, Gazprom wants to make sure that gas producers working in Russia don't compete with each other when they want to sell abroad. Medvedev said. Even small sales outside of Gazprom's control could "cause turmoil in the heads of importers," he said.

Gazprom's own talks with China to build an export pipeline are advancing, Medvedev said. Gazprom is offering China cooperation in "creating value," Medvedev said, apparently referring to joint construction and exploration. Such joint work could influence the price for China, he said. Medvedev reiterated that the price should translate into profits similar to exports to Europe. He denied reports that China did not want to pay more than $100 per 1,000 cubic meters.

Medvedev attempted to show that environmental violations at Sakhalin-2 were a reality, rather than just something that the government used to wrestle control of the project from the Shell-led international consortium. Now Gazprom has to tackle the violations, he said. "The best minds of Russia have been involved in order to correct everything that was done wrongly and to prevent any violations in the future," he said.

n Gazprom sees record revenue this year of $38.1 billion, up from $37.2 billion last year, Medvedev said.