“Sakhalin-1” for one – Newspaper Kommersant No. 187 (7388) dated 10/10/2022

The Russian authorities, in an attempt to revive the Sakhalin-1 project, delivered an ultimatum to the American ExxonMobil, which back in March pulled back from participating in it. Russian President Vladimir Putin handed over project management to Rosneft, and also ordered the project operator to be re-registered in Russian jurisdiction, by analogy with Sakhalin-2. At the same time, the Prosecutor General’s Office filed a lawsuit against the old operator, Exxon Neftegas Ltd. According to Kommersant’s interlocutors, Exxon is unlikely to remain in the project, and Rosneft can get its share. But, according to experts, it will be very difficult to restart the project.

A subsidiary of Rosneft, Sakhalinmorneftegaz-shelf, received the functions of a temporary operator of the Sakhalin-1 project, follows from the decree of the President of the Russian Federation of October 7. Previously, they were carried out by Exxon Neftegas Limited, registered in the Bahamas, a structure of the American ExxonMobil (which owns 30% in the project), which in March announced the termination of participation in the project due to the fact that Russia began hostilities in Ukraine. Exxon estimated its losses from the actual withdrawal from the project at $3.4 billion. paralyzed operating activities of Sakhalin-1, and production at the project had practically ceased by April.

The oil companies and the secretariat of Deputy Prime Minister Yuri Trutnev, who oversees the Far East, did not comment.

The shareholders of Sakhalin-1, in addition to Exxon, are Rosneft structures Sakhalinmorneftegaz-shelf and RN-Astra (11.5% and 8.5%), Japanese Sodeco (30%), Indian ONGC (20%). In 2021, Sakhalin-1, which includes the Chaivo, Odoptu, and Arkutun-Dagi fields, produced over 11 million tons of oil. The project is being implemented on the basis of a production sharing agreement (PSA).

As noted in the presidential decree, there were “threats of natural and man-made emergencies and the national interests and economic security of the Russian Federation as a result of violations by some foreign legal entities and individuals of their obligations under the PSA.”

According to the interlocutor of Kommersant, who is familiar with the position of the authorities, we are talking about Exxon, “which began to impede the functioning of the project.” He assures that after the transition of management in the project, production will be resumed, although it is not clear to what extent.

According to the decree, the government of the Russian Federation forcibly transfers the property of the consortium to the Russian LLC being created, by analogy with the scheme already used in another PSA project, Sakhalin-2.

After the creation of the LLC, the foreign shareholders of the project must notify the Russian Federation one month in advance of their readiness to continue participating in it, otherwise their share will be sold by the Russian authorities to the Russian company. Until then, Rosneft will remain the operator of the project, and then the operator will be elected by the general meeting of LLC participants. This decree actually implements a mechanism for removing American and European persons (who are required to comply with the relevant sanctions restrictions) from the project by forcibly transferring it completely to Russian jurisdiction, says Ekaterina Orlova, head of the legal practice at CM Grace Consulting.

According to Kommersant’s interlocutors, Exxon will not claim a stake in Sakhalin-1, and it is highly likely that it will pass to Rosneft, which will eventually provide a majority stake. Japanese and Indian companies are likely to remain in the project. The head of the Ministry of Industry and Trade of Japan, Yasutoshi Nishimura, told the NHK television channel on October 8 that Sakhalin-1 is important for Japan’s energy supply. Recall that Japanese companies retained their participation in Sakhalin-2 in a similar situation.

Exxon has previously threatened to take legal action against the Russian Federation if the authorities do not give it the opportunity to sell its stake in Sakhalin-1. On October 9, it became known that the Prosecutor General’s Office and the Ministry of Finance of the Sakhalin Region filed a lawsuit against Exxon Neftegas Limited, the content of the claims is still unknown. According to experts, the resumption of production at Sakhalin-1 may be associated with technological difficulties and sanctions obstacles. It may take up to six months to restart the project, says Sergei Kondratiev from the Institute of Energy and Finance, among the possible problems is the need for additional personnel, as well as building a sales system. Ekaterina Orlova notes that the sanctions do not allow the full operation of the existing imported equipment, as there are problems with licenses and the use of IT solutions, and “large-scale work will be required to reformat the project and resume production in the same volume.”

Dmitry Kozlov