Russia launches Far East pipeline, eyes Exxon gas

KHABAROVSK, Russia - Russia will push ExxonMobil Corp hard to secure gas for a new pipeline in the Far East after Prime Minister Vladimir Putin called on Friday for domestic energy needs to take priority over exports.

By (Reuters)

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Published: Fri 31 Jul 2009, 7:06 PM

Last updated: Sun 5 Apr 2015, 10:34 PM

Russian gas export monopoly Gazprom has begun welding a major trunk pipeline to link offshore gas fields around the Pacific island of Sakhalin with the port of Vladivostok. Gazprom needs gas from the ExxonMobil-led Sakhalin-1 project to fill it.

‘I would like to stress that the domestic market will be a priority for the gas from East Siberia and the Far East,’ Putin said at a ceremony to mark the launch of construction.

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 US energy major from Gazprom’s export monopoly on gas.

The 1,350 km (844 mile) first phase of the Sakhalin-Khabarovsk-Vladivostok pipeline is due to come on stream in the third quarter of 2011, but Gazprom and ExxonMobil have yet to agree on gas supplies.

‘We will need to work intensively with Exxon to obtain these 8 to 10 billion cubic metres of gas from Sakhalin-1,’ Gazprom Deputy Chief Executive Alexander Ananenkov told Putin after the inauguration ceremony.

Putin questioned Ananenkov on whether Gazprom can guarantee gas supplies for domestic consumers such as the new car assembly line built by car maker Sollers, which has just received a $158 million loan from state bank VEB. Ananenkov responded by saying Gazprom did not have gas for Sollers because it could not contract enough for the new pipeline from the operators of the Sakhalin-1 consortium. He asked for state help.

Ananenkov later told Reuters in an interview that Gazprom was hoping to conclude negotiations with Exxon this year..

Gazprom plans to build a liquefied natural gas (LNG) plant near the pipeline’s southern terminus in Vladivostok, which would produce gas for export by sea to Asia. It launched Russia’s first LNG plant this year, linked to the separate Sakhalin-2 project.

The Sakhalin-1 consortium’s earlier plans to supply gas to China have been put on hold, despite contracts with Beijing.

Analysts expect Russia to step up pressure on the consortium, which also includes Russia’s Rosneft, Japan’s Itochu and Marubeni and India’s ONGC, to sell cheap gas.


Russian Energy Minister Sergei Shmatko estimated the cost of the entire far eastern pipeline project at $11 billion. He said Gazprom’s costs could be passed on to consumers by a nationwide increase in tariffs.

The pipeline will initially have capacity for 6 billion cubic metres of gas per year, rising to about 30 bcm after subsequent stages increase its length to 1,800 km (1,125 miles).

‘This will satisfy the priority gas demands of a number of far eastern Russian regions and create additional potential for gas exports to the Asia-Pacific region,’ Gazprom said in a statement.

Shmatko, also at the inauguration ceremony in Khabarovsk, said any potential supply problems related to the project would be temporary.

‘There is gas there. There is the possibility of agreeing with Exxon and receiving at least 8 billion cubic metres,’ he said.

ExxonMobil spokesman Konstantin von Eggert said on Wednesday the company was studying all options on sales from Sakhalin-1.

The project has been producing around 200,000 barrels per day of oil after starting a few years ago. But production sharing agreements such as that signed by Exxon lost favour in Russia during the economic revival from the 1998 crisis.

Under such deals, foreign partners start paying Russian taxes only after they have recouped their original investment.

‘The Energy Ministry thinks that current projects, in today’s environment, are not particularly attractive for Russia,’ Shmatko said. ‘We do not want to have more production sharing agreements, and we will not have them.’

At the Sakhalin-2 oil and LNG project, Royal Dutch Shell ceded control after months of pressure from Russian ecological agencies, which threatened to impose huge fines on it. Gazprom now runs the project.

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