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Exxon Caught in Deja Vu Dispute

The government rejected a proposal by ExxonMobil, the world's largest company by market value, to invest $3.5 billion this year in the Sakhalin offshore fields, putting the oil producer's plans at risk again, Sakhalin Governor Alexander Khoroshavin said Thursday.

Higher expenses in production sharing agreements — such as Sakhalin-1, which is operated by an Exxon-led consortium — would delay the government in receiving its share of revenues until the companies that develop fields recoup their investment.

"We believe it is an inflated amount," Khoroshavin told reporters after a Cabinet session Thursday that discussed unrelated issues. "The consortium can't substantiate it for us, this $3.5 billion."

Exxon said it had to suspend work on a Sakhalin field for several weeks at the start of last year as it argued with the government about the 2009 investment budget for the project that it co-owns with Rosneft, Japan's Sodeco and India's ONGK Videsh. The consortium has been producing oil at a field off Sakhalin for a few years and is investing in another field.

An ExxonMobil spokesman said the company was working to respond to the government's concerns and hoped to return to discussions on the matter in the spring.

Khoroshavin said Exxon would submit a revised spending plan to the government in March.

Khoroshavin's spokesman Alexei Bayandin said Sakhalin-1 was not going to suspend work as negotiations go on this year. The consortium can continue to operate because it has an approved original budget of about $1 billion, he said.

The spending dispute has been recurring as Gazprom seeks to buy all future gas from Sakhalin-1 to prevent it from flowing to China, which would create competition for Gazprom's own plans to sell gas on that market. Exxon has said the project would sell gas to the highest bidder.

Gazprom also needs the Sakhalin-1 gas to fill a pipeline that it is constructing from the island to Vladivostok to supply clean fuel in time for the Asia-Pacific Economic Cooperation forum in the port city in 2012.

"Much will depend on Sakhalin-1, that is, whether Gazprom can buy their gas for the pipeline," Khoroshavin said, referring to the prospect of fully loading the pipeline by 2012.

Khoroshavin flew from Sakhalin to participate in the Cabinet session because it discussed additional measures to help the victims of a 2007 earthquake in the region.

The Cabinet also approved a new federal program, scheduled to run through 2020 and worth 110.4 billion rubles ($3.7 billion) in federal funds, to develop a new generation of nuclear power technology, Rosatom chief Sergei Kiriyenko said after the meeting.

Under the program, researchers will choose from three types of reactors, cooled by sodium, lead or lead-bismuth, Kiriyenko said.

Kiriyenko sounded celebratory that the government agreed to fund the program despite the economic woes, but he said the investment amount was just one-fifth to one-seventh of what competing countries, such as Germany and France, invested in nuclear power technology. Russia has a chance to stay competitive because Communist governments spent as much as $10 billion on such research, he said.

"We have a lead because huge money was invested in the Soviet time," he said.

The Cabinet also discussed canceling payments for the use of state geological data for natural resources exploration. Such payments have earned 500 million rubles ($16.8 million) for the state budget over the past three years.

Prime Minister Vladimir Putin said he supported the measure, which could encourage private companies to develop small deposits.


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