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Prime Minister Vladimir Putin will travel to the far eastern city of Khabarovsk on Friday to inaugurate the start of the pipeline to the Pacific port of Vladivostok, which will ultimately liquefy gas from Sakhalin Island for export to Asia.
“I think Exxon Mobil knows that they will twist their arm. It is pure pressure,” said Mikhail Krutikhin, an analyst with RusEnergy.
Exxon signed its Sakhalin-1 deal with Russia in the early 1990s under a production sharing agreement that guarantees stable returns regardless of changes in legislation and exempts the U.S. firm from ’s export monopoly on gas.
The project has been producing about 200,000 barrels per day of oil after starting a few years ago, but its plans to supply gas to China have been on hold despite earlier contracts with Beijing.
Gazprom says it needs gas for domestic use and is holding talks with Exxon about buying all of its gas output from Sakhalin, although industry sources say the company offers prices equal to Russia’s domestic gas prices, which are state-capped.
“Exxon Mobil is studying all options of selling gas from Sakhalin-1,” spokesman Konstantin von Eggert said. He declined further comment.
Gazprom, which has faced demand destruction for its pipeline gas in Europe since the start of 2009, says it wants to expand in the gas liquefaction business to tap new markets and gain flexibility in supplies.
On Sakhalin, it already controls Sakhalin-2, an oil and LNG project previously led by Royal Dutch Shell, which ceded control after months of pressure from the country’s environmental agencies, which threatened to impose huge fines on it.
Valery Nesterov, analyst at , said that despite a growing belief among investors that the government’s grip over resources is easing after deals with Total and Shell in recent months, foreign firms will often remain under pressure.
“Exxon does not have a free choice. Past experience shows that if [Moscow] has a strong desire, the foreign partner has to agree,” he said.
The Khabarovsk-Vladivostok pipeline will run 1,460 kilometers, and Nesterov estimates its cost at $2.9 billion to $4.4 billion.
Sakhalin is already connected to Khabarovsk with a gas link, which is supplying local consumers.
Krutikhin said that even if Exxon is forced to sell all its gas from Sakhalin-1 to Gazprom, volumes will not exceed 7 billion to 8 billion cubic meters per year, while Gazprom is eyeing a peak capacity of up to 47 bcm a year.
“So to fill the pipeline, you need to discover new fields or build a pipeline from Yakutia,” he said.
