Russia is taking over the Sakhalin-1 oil and gas project the same way it took over Sakhalin-2 earlier this year. Foreign investors who put politics ahead of production will soon be gone.
The Western investor – Shell last time, ExxonMobil this time – has once again shown itself the door. The Japanese, on the other hand, stuck around last time for Sakhalin-2 and will almost certainly do so again.
At the end of August, at Japan’s request, Russia allowed trading companies Mitsubishi Corp and Mitsui & Co to maintain their ownership stakes in Sakhalin-2.
On October 7, Russian President Vladimir Putin signed a decree ordering the establishment of a new company to take responsibility for Sakhalin-1 and replace ExxonMobil as its operator.
Foreign investors were given a month to decide whether or not to transfer their ownership stakes to the new company, which will be managed by a subsidiary of Russian energy giant Rosneft.
Those who do not will be offered compensation – adjusted for the near-complete loss of production since April, when ExxonMobil declared force majeure and wrote off its business in Russia.
Sakhalin-1’s current ownership structure is ExxonMobil 30%, SODECO 30%, ONGC 20% and Rosneft 20%.
SODECO (Sakhalin Oil and Gas Development Co) is a Japanese public-private consortium including the Ministry of Economy, Trade and Industry (METI), the Japan Petroleum Exploration Co. (JAPEX) and trading companies Itochu and Marubeni. ONGC stands for India’s national Oil and Natural Gas Corp.
On March 1 this year, ExxonMobil announced that, in response to Russia’s military action in Ukraine, “we are beginning the process to discontinue operations and developing steps to exit the Sakhalin-1 venture.”
It added: “The process to discontinue operations will need to be carefully managed and closely coordinated with the co-venturers in order to ensure it is executed safely … Given the current situation, ExxonMobil will not invest in new developments in Russia.”
“Discontinue operations” turned out to mean shutting down production and not transferring operational responsibility to one or more of its joint venture partners.
On August 3, in its Form 10Q report for the quarterly period ended June 30, 2022, ExxonMobil wrote that it “is currently engaged in transitioning Sakhalin-1 operating activities to another party.” That party was not named.
Two days later, on August 5, President Putin signed Decree No 520, “On Application of Special Economic Measures in Finance and Fuel and Energy Areas related to Unfriendly Actions of Certain Foreign States and International Organizations,” which prohibited ExxonMobil from making the transfer it had planned.
ExxonMobil threatened to sue but the October 7 decree has probably put an end to that. It seems obvious that the Russian government wanted to make sure that it, not ExxonMobil, chose Sakhalin-1’s new operator.
The most logical candidate for the job is Rosneft, which is both a major shareholder and Russia’s second-largest oil and gas company after Gazprom. Gazprom holds a majority stake in Sakhalin-2.
ExxonMobil’s 10Q report for the June quarter also states that “earnings included after-tax charges of $3.4 billion, largely representing the impairment of its operations related to Sakhalin. On a before-tax basis, the charges amounted to $4.6 billion.”
The report added: “The Corporation’s exit from the project would result in quantities estimated at 150 million oil-equivalent barrels no longer qualifying as proved reserves, which represented less than one percent of the Corporation’s 18.5 billion oil-equivalent barrels of proved reserves at year-end 2021.”
That $4.6 billion might sound like a lot of money, but it is equivalent to less than 2% of ExxonMobil’s revenues in the year to June and also less than 2% of its total assets.
On October 4, ExxonMobil executive Liam Mallon told the Energy Intelligence Forum conference in London that production at Sakhalin-1 was shut down due to Western sanctions and that “We continue to work very diligently with the Russian Federations and our partners … to progress our exit.”
They now have less than a month to work diligently on something that is already a fait accompli.
Withdrawing from Sakhalin-1 is a statement that ExxonMobil can easily afford to make. The same cannot be said for Japan.
Speaking on NHK TV on October 9, Japan’s Minister of Economy, Trade and Industry Yasutoshi Nishimura said:
“Japan is 90% dependent on oil supplies from the Middle East but the Sakhalin-1 project is important in terms of diversifying import channels and ensuring stable supplies. Therefore, we would like to clarify the intentions of the Russian side and decide on specific further actions in close consultation with the parties involved.”
That’s consistent with Japanese policy. “Sakhalin-1 is a valuable non-Middle East source for Japan,” Nishimura’s predecessor, Koichi Hagiuda, said shortly after President Putin’s August decree. “There is no change in maintaining the interests of Japanese companies in it.”
In July, the Japanese decided to maintain their interests in Sakhalin-2.
Russia is Japan’s fifth largest supplier of oil and gas, accounting for about 4% of its crude oil and 9% of its LNG imports, most of that coming from Sakhalin. In addition, Japan generates about 30% of its electricity from natural gas.
High energy prices are a rising problem in net energy-importing Japan. Getting Sakhalin-1 back in operation is thus important both economically and politically for Tokyo.
Some Western commentators have criticized Japan for not cutting off energy supplies from Russia, in line with EU moves, but their critiques have fallen on deaf ears. Apart from not wanting to follow Europe into what could be seen as a self-inflicted energy crisis, the Japanese are worried that any investments they abandon could end up in Chinese hands.
Western critics haven’t gotten anywhere with India either. In July, The Times of India reported that India’s ONGC “hopes that any takeover of the Sakhalin-1 project by Russia will not impact its stake in the asset.” It probably won’t.
Follow this writer on Twitter: @ScottFo83517667