Identifier
Created
Classification
Origin
07MOSCOW3161
2007-06-28 12:47:00
CONFIDENTIAL
Embassy Moscow
Cable title:
RUSSIA: EXXONMOBIL ON SAKHALIN 1
how-toVZCZCXRO8305 OO RUEHDBU RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR DE RUEHMO #3161/01 1791247 ZNY CCCCC ZZH O 281247Z JUN 07 FM AMEMBASSY MOSCOW TO RUEHC/SECSTATE WASHDC IMMEDIATE 1691 INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY RUEHXD/MOSCOW POLITICAL COLLECTIVE PRIORITY RUEHBJ/AMEMBASSY BEIJING PRIORITY 4251 RHEHNSC/NSC WASHDC PRIORITY RHEBAAA/DEPT OF ENERGY WASHDC PRIORITY RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 003161
SIPDIS
SIPDIS
DEPT FOR EUR/RUS
DEPT FOR EB/ESC/IEC GALLOGLY AND GARVERICK
DOE FOR HARBERT/EKIMOFF
DOC FOR 4231/IEP/EUR/JBROUGHER
NSC FOR MCKIBBEN
E.O. 12958: DECL: 05/18/2017
TAGS: EPET ENRG ECON PREL RS
SUBJECT: RUSSIA: EXXONMOBIL ON SAKHALIN 1
Classified By: Econ MC Pam Quanrud for reasons 1.4 (b and d).
-------
SUMMARY
-------
C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 003161
SIPDIS
SIPDIS
DEPT FOR EUR/RUS
DEPT FOR EB/ESC/IEC GALLOGLY AND GARVERICK
DOE FOR HARBERT/EKIMOFF
DOC FOR 4231/IEP/EUR/JBROUGHER
NSC FOR MCKIBBEN
E.O. 12958: DECL: 05/18/2017
TAGS: EPET ENRG ECON PREL RS
SUBJECT: RUSSIA: EXXONMOBIL ON SAKHALIN 1
Classified By: Econ MC Pam Quanrud for reasons 1.4 (b and d).
--------------
SUMMARY
--------------
1. (C) Summary: In a June 26 meeting, ExxonMobil Russia VP
Ed Verona (protect) told us that Exxon has agreed with China
on "price parameters" for gas deliveries from its Sakhalin 1
project. Reacting to recent press reports that Gazprom may
try to force ExxonMobil to sell its gas to Gazprom or to
domestic markets, Verona said Exxon would consider all
commercially acceptable offers for its gas, but that it
firmly believes a recent law granting a gas export monopoly
to Gazprom does not apply to Sakhalin 1. He suggested Exxon
would not bow to pressure to renegotiate its contract. End
summary.
--------------
PSAS EXCLUDED FROM GAZPROM EXPORT MONOPOLY
--------------
2. (C) ExxonMobil Russia VP Ed Verona told us June 26 that
Exxon's Production Sharing Agreement (PSA) allows it to sell
gas from its Sakhalin 1 project to whomever it wants,
domestically or abroad. The same legislation that gave
Gazprom its gas export monopoly specifically excludes PSAs
and therefore does not apply to Sakhalin 1. Negotiations
continue with China over proposed sales of eight billion
cubic meters (bcm) of gas annually from Sakhalin 1, and that
the two sides have signed a "heads of agreement" (HOA) which
Verona described as more advanced and specific than an MOU.
The HOA lays out "price parameters" but not specific prices.
--------------
PIPELINE EXPORT TO CHINA MOST PROFITABLE
--------------
3. (C) Brushing off press reports that Gazprom may try to
force Exxon to sell its gas to Gazprom or to domestic
markets, Verona said that Exxon would consider all
commercially acceptable offers. Internal Exxon analysis
shows, however, that the current planned export route to
China via pipeline will be the most profitable, not only for
the company, but for the Russian government as well. Russian
government revenues over the life of the project would be $15
billion higher under the current plan than if the gas were to
be sold to Gazprom for export via the Sakhalin 2 LNG
terminal. Despite press reports to the contrary, Verona
reconfirmed on June 27 that Gazprom has yet to make a formal
proposal to Exxon.
--------------
RFE CAN'T ABSORB SAKHALIN GAS
--------------
4. (C) Verona disagreed with recent GOR claims that the
Russian Far East will need 15 bcm of gas annually. Exxon
does not see a market for more than about 5 bcm of gas in the
region, even under the rosy GOR scenarios involving new
petrochemical and other "value added" industries.
--------------
CONTRACT SANCTITY
--------------
5. (C) Verona said ExxonMobil would stand firm against
pressure from Gazprom or other Russian entities to
renegotiate its Sakhalin 1 contract. If Exxon allows itself
to "be rolled" by Gazprom in Russia, it might invite such
tactics elsewhere in the world. He expressed hopes that the
markets would impose some discipline on Russia.
--------------
COMMENT
--------------
6. (C) Gazprom is likely unhappy that Exxon is coming to its
own agreement with China and that it may become a price
setter with China. Gazprom's test balloon, via the press, is
unlikely to cause Exxon to yield. The next move to watch is
MOSCOW 00003161 002 OF 002
what, if any, concrete proposal Gazprom is willing to make.
BURNS
SIPDIS
SIPDIS
DEPT FOR EUR/RUS
DEPT FOR EB/ESC/IEC GALLOGLY AND GARVERICK
DOE FOR HARBERT/EKIMOFF
DOC FOR 4231/IEP/EUR/JBROUGHER
NSC FOR MCKIBBEN
E.O. 12958: DECL: 05/18/2017
TAGS: EPET ENRG ECON PREL RS
SUBJECT: RUSSIA: EXXONMOBIL ON SAKHALIN 1
Classified By: Econ MC Pam Quanrud for reasons 1.4 (b and d).
--------------
SUMMARY
--------------
1. (C) Summary: In a June 26 meeting, ExxonMobil Russia VP
Ed Verona (protect) told us that Exxon has agreed with China
on "price parameters" for gas deliveries from its Sakhalin 1
project. Reacting to recent press reports that Gazprom may
try to force ExxonMobil to sell its gas to Gazprom or to
domestic markets, Verona said Exxon would consider all
commercially acceptable offers for its gas, but that it
firmly believes a recent law granting a gas export monopoly
to Gazprom does not apply to Sakhalin 1. He suggested Exxon
would not bow to pressure to renegotiate its contract. End
summary.
--------------
PSAS EXCLUDED FROM GAZPROM EXPORT MONOPOLY
--------------
2. (C) ExxonMobil Russia VP Ed Verona told us June 26 that
Exxon's Production Sharing Agreement (PSA) allows it to sell
gas from its Sakhalin 1 project to whomever it wants,
domestically or abroad. The same legislation that gave
Gazprom its gas export monopoly specifically excludes PSAs
and therefore does not apply to Sakhalin 1. Negotiations
continue with China over proposed sales of eight billion
cubic meters (bcm) of gas annually from Sakhalin 1, and that
the two sides have signed a "heads of agreement" (HOA) which
Verona described as more advanced and specific than an MOU.
The HOA lays out "price parameters" but not specific prices.
--------------
PIPELINE EXPORT TO CHINA MOST PROFITABLE
--------------
3. (C) Brushing off press reports that Gazprom may try to
force Exxon to sell its gas to Gazprom or to domestic
markets, Verona said that Exxon would consider all
commercially acceptable offers. Internal Exxon analysis
shows, however, that the current planned export route to
China via pipeline will be the most profitable, not only for
the company, but for the Russian government as well. Russian
government revenues over the life of the project would be $15
billion higher under the current plan than if the gas were to
be sold to Gazprom for export via the Sakhalin 2 LNG
terminal. Despite press reports to the contrary, Verona
reconfirmed on June 27 that Gazprom has yet to make a formal
proposal to Exxon.
--------------
RFE CAN'T ABSORB SAKHALIN GAS
--------------
4. (C) Verona disagreed with recent GOR claims that the
Russian Far East will need 15 bcm of gas annually. Exxon
does not see a market for more than about 5 bcm of gas in the
region, even under the rosy GOR scenarios involving new
petrochemical and other "value added" industries.
--------------
CONTRACT SANCTITY
--------------
5. (C) Verona said ExxonMobil would stand firm against
pressure from Gazprom or other Russian entities to
renegotiate its Sakhalin 1 contract. If Exxon allows itself
to "be rolled" by Gazprom in Russia, it might invite such
tactics elsewhere in the world. He expressed hopes that the
markets would impose some discipline on Russia.
--------------
COMMENT
--------------
6. (C) Gazprom is likely unhappy that Exxon is coming to its
own agreement with China and that it may become a price
setter with China. Gazprom's test balloon, via the press, is
unlikely to cause Exxon to yield. The next move to watch is
MOSCOW 00003161 002 OF 002
what, if any, concrete proposal Gazprom is willing to make.
BURNS