What is the Fate of ExxonMobil Projects in Russia?

A potential buyer of YukosSibneft accussed of violating Russian law
Immediately after high-ranking officials in Russia praised ExxonMobil for investing the Russian fuel and energy sectors and the company's venture to develop the Sakhalin oil fields, the American company has faced serious problems. This is easy to understand as ExxonMobil is a most prospective buyer of 40-50 percent YukosSibneft, the merged company headed by oligarch in disgrace Mikhail Khodorkovsky.

The RF Natural Resources Ministry discovered that participants of the Sakhalin-1 project incorrectly managed natural resources and violated ecological legislation. A statement issued by the ministry called attention to a meeting held by Alexander Povolotsky, the head of Ministry's State Service for Supervision over Nature Management and Ecological Safety with Exxon Venturs (CIS) Inc. concerning possible violations of the law.

Non-observance of the legislation in Russia is very common, but this time the situation may become problematic. What has the powerful American company done? As it turns out, the US investor acts poorly with respect to Russian natural resources. Deputy Natural Resources Minister Alexander Povolotsky has concerns how the American company has managed natural resources in Russia. The claims first of all concern realization of the Sakhalin-1 project. One of the main errors was the refusal to allow ministry experts to inspect the infrastructure of the Sakhalin-1 project; delaying a geological survey program (the investor was provided developed oil and gas fields approved by the Ministry's State Resources Commission). The second claim is quite understandable: the fate of the project is unclear, thus American company has not started the geological survey. But the first claim sounds rather fantastic. It is hardly likely that the administration could shut the door in the face of a governmental organization inspecting the infrastructures. 

Mass media report that the Natural Resources Ministry is extremely dissatisfied with the fact that "the US company has refused to negotiate the creation of a unified nuclear dump and constantly shifts the responsibility for negative influence upon the environment onto contractors." In particular, Alexander Povolotsky threatened that the future of the Sakhalin-3 project would be decided taking into account the company's activity in other oil ad gas fields. In other words, ExxonMobil was made to understand that it might be in for some problems. 

This is interesting that the current issue of Business Week is devoted to ExxonMobil's activity and plans in Russia.   

On the one hand, Business Weekly says, this is quite understandable that ExxonMobil wants to conclude a deal with Yukos as soon as possible. The merger of Yukos and Sibneft resulted in the creation of the world's fourth largest private oil company with huge resources and production potential. At the same time, the price of Russiancrude still remains the lowest in the world. Production of one barrel of Russian crude costs $1.47 while one barrel costs over $20 on the world markets.

On the contrary, having concluded a deal with Mikhail Khodorkovsky, the US company will win a leading position in the most dynamically developing sector of the world oil industry. What is more, it is poised catch up with British Petroleum, another world leader which obtained control over the rich oil fields of Western Siberia due to the merger with Russia's TNK. 

This depends upon the position and further actions of the Russian authorities if ExxonMobil concludes this deal. Recently, Russian President Vladimir Putin has openly declared that a merger of this scale is not only a private business deal. 

The situation is rather complicated because even though Vladimir Putin says this sale may take place, it seems that the RF Prosecutor's Office ignores his words. Indeed, following the presidential statement, investigators from the Prosecutor's Office organized searches of Yukos offices and said they had more evidence proving that the company evaded tax payment.

On the eve of the presidential elections scheduled for March 2004, the competiting parties within the Kremlin are at odds, with Khodorkovsky been caught with the cross-fire. "Probably, President Putin thinks this way: an anti-Yukos campaign may be enough to satisfy the enemies of Mikhail Khodorkovsky within the Kremlin. But at the same time, as long as the campaign does not cause damage to Yukos' development, as well as not scare off foreign investors," Inopressa.Ru quotes the opinion of the American magazine. "But the president should be more careful as even such reliable investors as ExxonMobil may leave if the game becomes too complicated."

It would appear that the US investor has found itself stuck in Sakhalin. Even though the Sakhalin-1 project faces some problems from time to time, it is still developing successfully. Even before the project started, ExxonMobil had had problems with Russian officials and local authorities. After all, Americans who have worked in Russia for several years already know what they should expect of the Natural Resources Ministry. 

But it is not ruled out that this time the ministry's claims could become a cause for concern. If the Russian authorities are ready to resort to any measures to break the possible alliance between ExxonMobil and YukosSibneft, the US company may be shown the door and deprived of the possibility participation in this country's oil sector. The press has reported that the US company considered probable sale of the share in the Sakhalin project to Japanese partners some time ago when the company received similiar complaints from the Natural Resources Ministry. Nothing of this kind has happened yet. It is highly likely that the company is extremely interested in obtaining Russian oil assets. What will Russian authorities demand from ExxonMobil to have its plans fulfilled?