Russian Authorities Struggle with ExxonMobil

Has ExxonMobil been deprived of the licence to develop the Sakhalin-3 project?

Special treatment toward foreign investors has not appeared in Russia during the years of economic reform. They forgot about foreign investors and if they did come they were not really welcomed. The history of unsuccessful investments in Russia could fill a libraby of thick books. However, investors are not rushing to share the stories of their adventures in Russia. Foreign investors still come to Russia because it is profitable for them. This is the country where the law can be observed approximately and people's rights can be openly violated. There are not many places like Russia in the world.

Teton Petroleum Company's CEO Howard Cooper believes oil assets need to be acquired in Russia now. One should assume that he knows what he is talking about. The company founded in 1996 has accessed crude reserves of three deposits in Russia's west Siberia - Yeguryakhsky, South-Yeguryakhsky and Golevoy - at the price of three to five cents per barrel. The proven reserves of the mentioned deposits are 19.8 million barrels and predictable reserves are estimated at 13.2 million barrels.

"The average price of a barrel of reserves in Texas, for instance, is about seven dollars. Furthermore, only one of ten drilled wells produce the kind of crude needed for industrial purposes. In Russia, many deposits were developed during the Soviet period - there is no risk at all," Cooper told RusEnergy news agency. Howard Cooper also said one can find hundreds of small, albeit profitable, crude deposits in Russia which have been developed but not exploited for this of that reason. "Soviet geologists have complete work that will stand for 25 years," said he.

Enumerating the advantages of working in Russia, Cooper said that investors did not have much of a choice: "These are only Venezuela, Columbia, Nigeria, Indonesia and several other states. However, all of them, except for Canada, have extremely unstable political regimes. The situation in Russia is a lot more stable and Russian crude reserves are cheaper than the Canadian reserves."

However, it is more difficult for foreign investors to work in Russia. The Russian Ministry for Natural Resources has been causing trouble both to Russian and foreign large companies for about a year. Furthermore, the ministry is especially interested in the activities of foreign oil giants in Russia. It goes without saying that the ministry finds a number of drawbacks, defects and even crimes, when companies violate the Russian law. Officials of the Ministry for Natural Resources have recently come up against Shell. Now it is ExxonMobil's turn. The recent investigation conducted by the ministry into the activities of ExxonMobil is not complete. The ministry investigation centers on the company's Sakhalin-1 project. However, the worst is still to come.

This is not the first time ExxonMobil faced problems in Russia. State Duma deputies and the now-deceased governor of the Sakhalin region tried to attack the company. There were public conflicts too - it was said that the American company was pulling out from projects selling its share to Japanese partners. However, the conflict was settled: no one has left, the Japanese have received anything, the American company is still working with Sakhalin crude and gas. The scandal started when ExxonMobil became interested in the purchase of 50 percent stake in YukosSibneft.

Deputy Minister for Natural Resources Alexander Polovotsky has recently said in a statement to Exxon that they would not have the licence for the Sakhalin-3 project. The Ministry would never venture to release such a harsh statement to the oil giant. The Vedomosti newspaper wrote negotiations between Mr. Polovotsky and Jeff Woodberry, President of Exxon Ventures in Russia, and Glenn Waller, Vice President for affairs with governmental structures were rather calm: there were no threats and no shouting. In other words, the Russian official simply informed the foreign businessmen of some official concerns and how the company should act in the future. The official said the ministry intended to complete its investigation of the Sakhalin-1 project by the end of the year. 

Let us assume that American companies are not afraid of the investigation – they have experienced many before. The situation with the gas Kirinsky deposit is absolutely different, though: Exxon was intended to develop the deposit within the framework of the Sakhalin-3 project. According to the geological exploration, the potential reserves of the deposit are 730 billion cubic meters of natural gas and up to 70 million tons of gas condensate. KOO Pegastar runs the project and this company belongs to ExxonMobil, ChevronTexaco and the Russian state-owned company Rosneft. However, the Ministry for Natural Resources does not want to issue the licence to the company to develop the deposit.

The ministry explained the refusal as follows. Pegastar won the auction for the development of the Kirinsky deposit based on a 1993 Production Sharing Agreement (PSA). However, instead of submitting auction results to the government, the committee started coordinating the details of the project with investors. As it usually happens, it took them too much time to coordinate all questions - ten years. The legal procedure to conclude PSAs has changed several times during this time. The amendments passed into law concerning PSAs in summer have made it impossible to develop the Sakhalin-3 project. The results of the above-mentioned competition have not been submitted to the government. As a result, all project participants submitted an application to the Ministry for Natural Resources for the licence to work on the project under the Russian fiscal regime.

It seem quite obvious that Rosneft had no problems concerning this issue. ExxonMobil was not that lucky, though. Aleksey Perepelkin licensing department chief of the ministry said the ministry did not see any reasons to issue the licence to Exxon. "The auction that they have won was conducted on the base of PSA terms. Now these conditions are impossible. If we issue them the licence to work on the project under the conventional fiscal regime, it will be discriminating toward other companies that would probably wish to work there on similar terms," the Russian official stated. Aleksey Perepelkin added, it would be logical to hold another auction. However, he concluded that it will be the Russian government which will solve the question of the licence.

Glenn Waller, director of external affairs for Exxon Mobil in Moscow, has not commented on the situation. Yet, he affirmed that ExxonMobil strictly observes legal norms and environmental requirements in any country where it works, including Russia. ExxonMobil's lobbyists in Russia are reportedly conducting negotiations with the interested sides, trying to solve the problem. PRAVDA.Ru's source in the Russian government said there is a chance for Pegastar to obtain the licence for the development of the Sakhalin-3 project. A source said it may happen under certain conditions, although the details were not specified.

In general, it seems that ExxonMobil is not the only foreign oil company experiencing problems in Russia. American and British experts believe that British Petroleum has wasted almost seven billion dollars when acquired Russia's TNK oil company. BP's CEO John Browne tried to prove the opposite to investors several days ago in London. To all appearance, he did not manage to succeed. The capitalization of the British giant has dropped by 1.4 billion pounds sterling, RusEnergy reports. Probably, it is only a start. According to the British press, an old conflict has occurred between the British and the Russia side of the alliance.

The Guardian wrote, BP's CEO was trying to smooth out the contradiction between his corporation and the Russian partners in the BP-TNK alliance: the companies Alpha, Access and Renova. Lord Browne had to acknowledge that the conflict had taken place and a certain aftertaste of distrust had remained. The conflict took place five years ago, the Guardian wrote, when Lord Browne accused the three above-mentioned companies of the illegal purchase of Sidanko's assets - the first Russian company BP invested in. BP managed to win with the help of its entire political weight. They even won Tony Blair over to its side. According to the Guardian, BP's Russian partners have been concerned with the recent scandal around the Russian oil giant Yukos. However, Lord Browne set out his certainty that TNK-BP would not be implicated this recent political struggle.