Russia takes control of Sakhalin 1 oil and gas project

Russian authorities have temporarily re-nationalised the foreign-led Sakhalin 1 oil and gas project in the country’s far east, as pressure grows to resume production from the development.

Production from Sakhalin 1 halted in May, when operator Exxon Neftegaz declared force majeure at the project on Sakhalin Island in response to international sanctions imposed on Russia following its invasion of Ukraine in February.

ExxonMobil said the sanctions had hindered exports of oil from the De-Kastri marine terminal on the Russian mainland, which is linked to Sakhalin 1 via a dedicated pipeline.

Exxon Neftegaz is a regional subsidary of US supermajor ExxonMobil, which has had its efforts to sell its 30% stake in the project blocked by Russian authorities.

A new decree signed by Russian President Vladimir Putin at the end of the last week, has now instructed authorities to disband Exxon Neftegaz and transfer the project and all of its assets and equipment to a new operator, in which the government will hold a controlling 80% shareholding for an initial period of one month.

The new operator has yet to be nameed andwill take the duty only when the structure of its shareholders is finalised. Before then, a local company will manage the development, according to the document.

The new decree also said that the Exxon Neftegaz shareholding may be sold at an auction to a third party if authorities discover any damage to the development.

Sakhalin Governor Valery Limarenko welcomed the decree, saying in a social network post that the resolution will be “positive for the regional economy and help to support employment” on Sakhalin Island.

Island authorities have repeatedly called on the Russian government to intervene, with Limarenko saying last week that local authorities “cannot permit the drop of revenues [from the project] in the regional budget”.

Sakhalin regional authorities had earlier gained a ruling from a regional court that Sakhalin 1’s assets should remain impounded, after accusing the operator and ExxonMobil of violating a 2018 agreement.

The 2018 agreement followed ExxonMobil’s plan to start arbitration against the Russian government and extended the Sakhalin 1 production sharing agreement to 2051 in exchange for Exxon Neftegaz paying corporate income tax at 35%, significantly higher rate than normal level of 20%.

Earlier in August, Reuters reported that ExxonMobil was reported to have sent a “note of difference” to the Russian government after Putin signed an order that effectively blocked the supermajor’s efforts to sell its Sakhalin 1 shareholding to an unidentified third party.

The note of difference is a necessary legal step before a complaint can be filed for international arbitration against the Russian government, which is a signatory in the 1995 Sakhalin 1 production sharing agreement.

Uncertainty over Japanese participation

ExxonMobil and Sakhalin 1’s other foreign shareholders — Japan’s Sodeco consortium, and India’s ONGC Videsh, which held stakes of 30% and 20%, respectively in the scheme — are invited to apply to take stakes of similar size in the new operator within the period of one month, according to the new decree.

The Japanese government, which holds a 50% interest in Sodeco, has yet to decide whether it wants to keep its stake in the development.

“It remains an important project for the stable supply of energy,” a senior Japanese Industry Ministry official told news agency Kyodo over the weekend.

However, the ministry also stressed that Japan does not import oil from Sakhalin 1, as its needs are covered mostly by Middle East volumes.

Four Japanese companies — Itochu, Marubeni, Japan Petroleum Exploration and Inpex — hold minority stakes in Sodeco.

In May, Marubeni said it reduced the value of its 12.3% stake in Sodeco by 12.6 billion yen ($97 million) to reduce its exposure in Russia.

A partner at Moscow-based energy consultancy RusEnergy, Mikhail Krutikhin, said he believes there is a only a 50% chance of Sodeco obtaining consent its shareholders to apply for the Sakhalin 1 stake, as relations between Russia and Japan have become more tense recently.

ExxonMobil has not commented on the latest decree and whether it has plans to reapply for its stake in the new operator.

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