Get the latest updates as we post them — right on your browser

. Last Updated: 07/27/2016

Exxon Complains of State Delays

ExxonMobil complained Friday that the government was preventing its subsidiary from continuing to develop a multibillion-dollar project in the Pacific Ocean, just days before the ceremonial opening of production facilities at a Gazprom-led neighbor.

The operator of the Sakhalin-1 project has clashed with the government over the terms of its production-sharing agreement, which exempts the venture from restrictions on gas exports. Exxon Neftegas Limited has faced pressure from Gazprom to scrap plans to export the prospective gas to China in favor of selling it to the state-controlled company.

The Energy Ministry said late Friday that Sakhalin-1 must cut its budget by 15 percent to 20 percent, in line with reductions at other projects, including Sakhalin-2. The cuts must focus on optimizing costs -- including for materials and services -- rather than halting work, which would delay the project's launch, the ministry statement said.

The conflict comes days after an Energy Ministry-led body approved the budget for Sakhalin-2, a rival multinational offshore project. The Gazprom-led Sakhalin-2, which operates under a PSA with Royal Dutch Shell, is preparing to launch Russia's first liquefied natural gas plant on Wednesday.

After sustained pressure over purported environmental violations, Shell handed over control of the project to Gazprom in 2006.

Exxon Neftegas has "no choice but to implement a controlled and orderly suspension of work" on two fields off Sakhalin because the government has not approved its investment plan for this year or supplements to last year's budget, ExxonMobil spokeswoman Dilyara Sydykova said Friday, before the ministry's statement.

Sydykova could not be reached for comment Sunday.

The ExxonMobil subsidiary operates the Sakhalin-1 oil and gas project for an international consortium, which also includes a group of Japanese companies such as Itochu and Marubeni, a subsidiary of Indian state energy firm ONGC and two Rosneft units.

ExxonMobil says the delay is because of bureaucracy at the Authorized State Body, which approves budgets for projects operating under PSAs.

The body includes officials from the energy, finance and natural resources ministries as well as local officials from Sakhalin.

Exxon Neftegas was planning to start drilling production wells on its Odoptu field and continue building a gas pipeline from the field to the shore, the Sakhalin government's industrial safety watchdog reported recently, Interfax said. The company was also preparing to halt unspecified work at another field, Arkutun-Dagi.

Chayvo, the third field, began producing oil in late 2005. Gas production followed, but the company needs to invest more to produce enough gas for exports.

Exxon Neftegas has "fully responded to all" information requests that is within the requirements of the project's PSA, Sydykova said. The Sakhalin-1 development has provided the region with resources, jobs and revenue, she said.

"The Sakhalin-1 future phases will significantly expand these benefits to the state and local communities, but we are concerned that the Authorized State Body's failure to approve budgets may defer or limit these positive results," she said.

Operators of PSAs have traditionally inflated costs to claim a greater share of the output, said Konstantin Simonov, director of the Fund for National Energy Security, a think tank. Exxon Neftegas may be trying to coerce the authorities into accepting its investment plan by threatening a scandal before the grand opening of the LNG plant, he said.

President Dmitry Medvedev is expected to attend the opening, and Japanese Prime Minister Taro Aso has been invited.

The Industry and Trade Ministry, which used to oversee the project, approved last year's budget for Sakhalin-1 in December 2007, striking down a proposal to start designing a pipeline to China.

Gazprom deputy chief Alexander Ananenkov said at a government meeting earlier that year that the company wanted all Sakhalin-1 gas for domestic supplies.

ExxonMobil has a tentative agreement with China's CNPC to sell the country 8 billion cubic meters of gas annually by pipeline. It is also supplying gas to the local market from its only operating field, Chayvo.

A Gazprom spokesman declined comment Friday. Simonov and Alexei Kokin, an oil and gas analyst at Metropol investment company, said they doubted Exxon's problems were linked to the talks with Gazprom.