Publication: Eurasia Daily Monitor Volume: 4 Issue: 156

On August 2, during a meeting of a special government commission, the Russian government formally notified Sakhalin-1 consortium stakeholders that they should prioritize the domestic delivery of all natural gas to the Russian Far East, according to a statement from the Russian Industry and Energy Ministry. Thus the meeting, which also discussed the project’s plans for 2008, effectively ruled out the consortium’s earlier hopes to export gas to China (Interfax, RIA-Novosti, August 2).

The consortium’s initial response was rather muted. ExxonMobil said it would continue negotiating sales of Sakhalin gas with all potential partners, notably Gazprom and the China National Petroleum Corp. (CNPC). State-run Rosneft, a member of Sakhalin-1 consortium, declined to comment (Interfax, August 2).

ExxonMobil operates the $12 billion Sakhalin-1 project, which includes three offshore fields: Chayvo, Odoptu, and Arkutun Dagi, with potential recoverable resources estimated at 2.3 billion barrels of oil and 17.3 trillion cubic feet of gas.

The Sakhalin-1 project has become a cornerstone of Sakhalin’s emerging oil and gas sector. In January-June 2007, Sakhalin region produced 6.84 million tons of crude — three times the amount for 2006 — and 3.24 billion cubic meters (bcm) of gas, up from 1.07 bcm, the regional government said in a statement on July 20. Production at Sakhalin-1 reached 5.8 million tons of crude, up five times year-on-year, and 2.7 bcm of gas, up from 0.4 bcm. In 2007, Sakhalin region plans to produce 14.5 million tons of crude and 4 bcm of gas, the statement said.

The Sakhalin-1 consortium was hoping to sell natural gas to Japan by constructing a pipeline stretching 2,400 kilometers from Sakhalin to Japan. However, the plan to pump 6 million tons of liquefied natural gas a year has remained in limbo due to the lack of progress in negotiations with Japanese companies. In 2006, the Sakhalin-1 consortium signed a memorandum of understanding with CNPC over the sale of up to 8 bcm of gas a year from the project.

In 2006, the state-run natural gas monopoly Gazprom was reportedly planning to buy all gas from Sakhalin-1 for re-export to China. But then the Russian gas giant started negotiating to purchase all gas from Sakhalin-1 for domestic consumption, which is the only source of gas supplies for the Far East. However, local demand in Khabarovsk region, Sakhalin, and Primor was estimated at about 13 bcm/year, while the Sakhalin shelf is believed to be able produce up to 70 bcm of gas annually.

Gazprom was understood to be trying to use the company’s unique position to pursue monopolistic pricing policies. The gas giant has criticized license owners and regional authorities for negotiating directly with potential Chinese and South Korean importers on direct gas supplies at low prices, below $100 per thousand cubic meters (tcm). Meanwhile, Gazprom was insisting on international gas prices for China, currently well above $200/tcm, although domestic gas prices still remain regulated by the government and gas is still sold to Russian customers at little more than $50/tcm.

In recent months, Gazprom has moved to control major natural gas deposits in Sakhalin. Last December, Gazprom reached an agreement to become the major shareholder in the $20 billion Sakhalin-2 oil and gas project, now 80% complete. Earlier this year, Gazprom acquired a 50% stake in Sakhalin-2 from Royal Dutch Shell, Mitsui, and Mitsubishi for $7.5 billion.

Gazprom has also indicated plans to join the Sakhalin-3 project, aiming to start gas production there in 2013-2014. In 2004, the Russian government annulled the results of the Sakhalin-3 tender, which had been won by a consortium led by ExxonMobil back in 1993. Now state-owned Rosneft holds a 75% stake in Sakhalin-3.

The Russian media views the government’s decision to prioritize Sakhalin-1 gas supplies for the Russian market as consistent with Gazprom’s plans. The Russian government is trying to sustain Gazprom’s monopoly rights to export gas from Russia, Kommersant daily commented on August 3.

Simultaneously, Russian officials have stepped up pressure on Sakhalin-1, presumably seeking to force the consortium to accept Gazprom’s terms. On August 3, Konstantin Pulikovsky, head of Russia’s technical oversight agency Rostekhnadzor, ordered an audit of the Sakhalin-1 and Sakhalin-2 projects. The results were due to be announced in September this year (Interfax, August 3).

Yet despite an apparent bid to block independent gas exports from Sakhalin-1, the Kremlin has continued to insist that it views the Sakhalin-1 and Sakhalin-2 projects and the East Siberia-Pacific Ocean export pipeline as major contributions to energy security in the Asia-Pacific region. “We hope that the Sakhalin projects and the construction of the East Siberia-Pacific Ocean export pipeline would help ensure energy security in Asia-Pacific,” Russian Foreign Minister Sergei Lavrov told the meeting of the ASEAN regional forum in Manila on August 2 (Itar-Tass, August 2). It remains to be seen how Russian pledges to prop up energy security in Asia-Pacific could be reconciled with attempts to block independent exports and push gas prices up.