Russia's Restrictions on Exxon Mobil: It All Fits Together

A few days back I wrote that ExxonMobil (XOM) was facing the prospect of losing its right to export gas from its Sakhalin I project to China, and sell it instead in the Russian domestic market at below market prices. Yesterday Bloomberg carried another article that dovetails perfectly with that story:

OAO Gazprom, the world’s biggest natural-gas producer, plans to start piping East Siberian gas to Asia, where an increase in demand over the next 20 years may outpace growth in its traditional European markets.

Gazprom will send surplus gas east from the Yakutia fields, Deputy Chief Executive Officer Alexander Ananenkov said last week at a ceremony in the eastern town of Khabarovsk, as work began on a new pipeline to the Pacific Ocean.

A boom in Asian demand may open export opportunities as Gazprom taps new Siberian fields. The Moscow-based company, which in 2008 sent all its exports west, entered the Asian market this year by shipping liquefied gas from its Sakhalin Island development. It’s seeking to add customers in the region after pricing disputes with Ukraine disrupted shipments to Europe twice since 2006.

“Gazprom is targeting Southeast Asia because it is a logical, or natural, market” for gas from Yakutia, Mikhail Korchemkin, executive director at Pennsylvania-based consultants East European Gas Analysis, said in an e-mailed response to questions on Aug. 2. “It is a big growing market.”

. . . .

The Russian government has instructed Gazprom to coordinate its Eastern gas development plan, prioritizing supply to local residents isolated from the grid. Most gas from Sakhalin Island, which is only 100 miles from the northern tip of Japan, will be used domestically, meaning Gazprom will need to tap new Siberian fields for export, Deputy CEO Ananenkov said.
. . . .

The company entered the market for liquefied natural gas in March when it started shipments to Asia from Russia’s first LNG plant on Sakhalin Island. [Gee. Remind me how Gazprom got Sakhalin gas?] Sakhalin Energy, led by Gazprom, has so far sent 27 tankers loaded with LNG, Galina Dubina, a company spokeswoman, said by telephone on Aug. 3. It plans to ship about 55 tankers this year, she said.

Just note how it fits together. ExxonMobil, unique among foreign firms operating in Russia, has the right to export gas to Asia. Gazprom (OGZPY.PK) covets that market because it represents a major growth opportunity, and because it permits the company to lessen its dependence on European sales. But Gazprom is also short of gas and needs to serve domestic demand.

How to resolve that dilemma? Well, force ExxonMobil to sell the gas it had planned to sell to Asia inside Russia instead (at lower prices), and use its own gas to export to the more lucrative Chinese/Asian market.

I’d put heavy odds on it turning out that way. It makes strategic sense, in an opportunistic way, and hence fits in with the Russian/Gazprom MO.

Comments

[john s. gordon:]

remember - deal with the KGB thugs @ your peril.
> jack

Aug 07 09:48 AM

[Ferdinand E...:]

Very good article. Very informative. Thank you.

But let me add a few things. Since the European 'devotees' of the Bush government listened to the crazy babbling of George and Condoleeza about freedom and democracy, they have decided that they can treat the Russians like South Sea islanders, which among other things involves telling them where to put their pipelines. The simple truth of the matter is that the Russians want to sell gas and not kick ___. They want money so that they can buy all those wonderful things that are available when you have some heavy bread in your pocket.

This is one of the reasons why President Obama should be shown more respect and tolerance. He comes from a part of Chicao where people think more of cash money than ideology, and so he is the perfect president to deal with the Russians and North Koreans.

Aug 07 10:04 AM

[hwood007:]

Having lived with both the Koreans and Russians I would suggest Obama does not have a clue. The north Koreans think some one might come and take their land. No one would because if you did, you could not afford to pay for the Marshall Plan required to bring that country into the current age. It is like talking with people from another world. The north use to send goon squads into the south and the goons believed the citizens of the south would help them kill local government leaders. It never worked that way, the south Koreans would drop a dime on the hit squads all day. The Russians usually judge you by how they think. If you tell them a lie which sounds like something they would do, they believe it to be true just because they would do it that way. Newspeople used to go out and live with the people on which they reported. Now they may get to the country for a week and stay in a big hotel. I have worked and lived with these folks and they are nothing like US.

Aug 07 05:57 PM