(C) EXXONMOBIL TELLS AMBASSADOR POLITICS HOLDING

C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 000266 SIPDIS DEPT FOR EUR/RUS, FOR EEB/ESC/IEC GALLOGLY AND WRIGHT EUR/CARC, SCA (GALLAGHER, SUMAR) DOE FOR HEGBURG, EKIMOFF DOC FOR JBROUGHER E.O. 12958: DECL: 02/02/2018 TAGS: EPET ENRG ECON PREL RS SUBJECT: (C) EXXONMOBIL TELLS AMBASSADOR POLITICS HOLDING UP NEW SAKHALIN 1 FIELDS REF: A. MOSCOW 3110 ¶B. MOSCOW 2802 Classified By: Ambassador John R. Beyrle for Reasons 1.4 (b/d) -------------- SUMMARY -------------- ¶1. (C) ExxonMobil Russia President Stephen Terni (protect) and ExxonMobil's Sakhalin 1 project manager Zeljko Runje (protect) told the Ambassador on January 31 that GOR refusal to approve project budgets has halted development of new Sakhalin 1 fields. Runje said Deputy Energy Minister Stanislav Svetlitsky had openly told him that Sakhalin 1 would continue to "have problems" until a Russian entity takes 51% of the project. Kremlin advisors Sergey Prikhodko and Alexander Abramov had independently told Runje that Svetlitsky's actions were motivated by an anti-American mood at the top of the Russian government and had the tacit approval of Deputy Premier Igor Sechin (ref B). Terni and Runje told the Ambassador they believed a warming of U.S.-Russian relations could help reverse the refusal to approve the Sakhalin 1 budget. On potential gas sales from Sakhalin 1 (ref A),Terni and Runje said ExxonMobil was continuing to negotiate with Gazprom, but that the two sides were very far apart on price. End summary. -------------- NEW FIELDS ON HOLD -------------- ¶2. (C) Terni and Runje told the Ambassador the Sakhalin 1 consortium, which is led by ExxonMobil (30%) and includes a group of Japanese companies (30%),India's ONGC (20%),and Russia's state-owned Rosneft (20%),had decided to stop new Sakhalin 1 developments due to a refusal by the GOR to provide needed budget approval. The ExxonMobil executives said Deputy Energy Minister Stanislav Svetlitsky (see bio note below),one of two GOR representatives of the "Authorized State Body" (ASB) overseeing Sakhalin 1 development, had simply refused to approve the budget. ¶3. (C) Terni and Runje said the consortium had already spent over $500 million to develop the Odoptu field and other needed Sakhalin 1 infrastructure, but that without an approved budget, they could not legally recoup this investment and have thus decided to halt further work. Terni and Runje said the halt of the next phases of Sakhalin 1 had not yet been made public by either the GOR or the Consortium but that publicity would soon be inevitable as layoffs begin. They said the Sakhalin governor, the other GOR representative on the ASB, was fully supportive of moving forward with the project but had little sway over Svetlitsky. They said some 2,000 workers would be directly affected by the work stoppage. ¶4. (C) Development of Sakhalin 1's first field, Chayvo, has been a widely cited success, having produced a peak of 250,000 barrels of oil per day in 2008, in addition to limited amounts of natural gas. The project has, according to ExxonMobil, contributed more to the Russian state in taxes, royalties, and the state's share of Rosneft earnings from the project, than the other consortium members have received jointly. ExxonMobil estimates that if development of future phases, starting with the Odoptu field, is allowed to move forward, the total revenues to the Russian state from Sakhalin 1 could reach $50 billion. -------------- POLITICS IS THE ROOT OF THE PROBLEM -------------- ¶5. (C) Runje described Svetlitsky as having been openly hostile toward ExxonMobil since he took office in June 2008 and assumed oversight of Sakhalin 1. He said the Deputy Minister had told him that Sakhalin 1 would continue to "have problems" until a Russian entity controlled 51% of the project. Runje and Terni said they had been stunned by the boldness of a Deputy Minister -- who they said would generally not be so powerful in Russia's top-down MOSCOW 00000266 002 OF 003 decision-making system -- so blatantly taking on the largest oil company in the world. ¶6. (C) Terni said ExxonMobil had since discovered that Svetlitsky is operating with the approval of his superiors in the GOR. Runje said two of his contacts in the Kremlin, presidential advisors Sergey Prikhodko and Alexander Abramov, had independently told him that ExxonMobil's troubles had been driven by an anti-American mood in the GOR, and that Svetlitsky's actions had the tacit approval of Deputy Premier Igor Sechin. Terni and Runje said they did not believe that Sechin or anyone else had directed Svetlitsky's specific actions, but instead had provided a general green light to harass American companies. They said even Rosneft CEO Sergey Bogdanchikov had been unsuccessful in changing Svetlitsky's mind on approving Sakhalin 1's budget. ¶7. (C) Terni and Runje told the Ambassador that based on what Prikhodko and Abramov had told them, ExxonMobil believed that a warming in U.S.-Russian relations, coinciding with the advent of the new Administration in Washington, could result in Svetlitsky being overruled on the budget issue. In that regard, they asked the Ambassador for USG support in pressing the GOR to act on the matter. They added that Sakhalin 1's Japanese and Indian partners were also seeking their respective governments' support in removing this roadblock to the project's development. -------------- GAS SALES -------------- ¶8. (C) With respect to the on-going question of the sale of Sakhalin 1's gas reserves, Terni and Runje said ExxonMobil was continuing negotiations with Gazprom (ref A),but that the two sides were very far apart on price. Gazprom was still opposed to allowing Sakhalin 1 gas to compete with it on exports to China and therefore the only option available to the Consortium was to sell the gas to Gazprom. However, according to Terni and Runje, Gazprom had offered only one-tenth the price ExxonMobil had negotiated with the Chinese. ¶9. (C) Terni and Runje said the "Authorized State Body" overseeing the project had separately ordered the Consortium to sell 1.5 bcm to Vladivostok regional authorities but that Sakhalin 1 currently has only enough gas to do so off-season (outside of winter) as the Consortium already had a contract for 1.5 bcm with the municipality of Khabarovsk. They suggested the GOR might use this issue and the lack of agreement with Gazprom on gas sales to paint ExxonMobil as the "bad guy" in the Consortium. They said ExxonMobil might try to link selling gas to China to providing additional domestic gas supplies, presenting the idea as "letting China subsidize domestic gas." The argument would be that if the Consortium could sign a gas deal with China, then it could invest in developing Sakhalin 1's gas reserves and provide cheaper gas throughout the Russian Far East. -------------- BIO NOTE -------------- ¶10. (C) Terni and Runje said Svetlitsky is close to Energy Minister Shmatko and that both are close to Sechin. They said he has been very unpleasant to deal with and has a "shady reputation." -------------- COMMENT -------------- ¶11. (C) Sakhalin 1 is one of the last oil production projects here that is not majority-Russian-owned, and so it's not surprising that it is encountering this kind of trouble. What has changed, though, is the economic backdrop. If the GOR doesn't reverse course quickly on the Sakhalin 1 budget, the direct consequences will include the loss of several billion dollars of investment activity related to the project and the loss of thousands of jobs -- both much needed in the midst of Russia's worsening recession. We will raise this in MOSCOW 00000266 003 OF 003 upcoming meetings with Russian economic and political advisers to President Medvedev as an example of an approach to investments -- and major U.S. firms -- that Russia can no longer afford to indulge. BEYRLE