07MOSCOW3161, RUSSIA: EXXONMOBIL ON SAKHALIN 1

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Reference ID Created Released Classification Origin
07MOSCOW3161 2007-06-28 12:47 2011-08-30 01:44 CONFIDENTIAL Embassy Moscow

VZCZCXRO8305
OO RUEHDBU RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHMO #3161/01 1791247
ZNY CCCCC ZZH
O 281247Z JUN 07
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC IMMEDIATE 1691
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEHXD/MOSCOW POLITICAL COLLECTIVE PRIORITY
RUEHBJ/AMEMBASSY BEIJING PRIORITY 4251
RHEHNSC/NSC WASHDC PRIORITY
RHEBAAA/DEPT OF ENERGY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 003161 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR EUR/RUS 
DEPT FOR EB/ESC/IEC GALLOGLY AND GARVERICK 
DOE FOR HARBERT/EKIMOFF 
DOC FOR 4231/IEP/EUR/JBROUGHER 
NSC FOR MCKIBBEN 
 
E.O. 12958: DECL: 05/18/2017 
TAGS: EPET ENRG ECON PREL RS
SUBJECT: RUSSIA: EXXONMOBIL ON SAKHALIN 1 
 
Classified By: Econ MC Pam Quanrud for reasons 1.4 (b and d). 
 
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SUMMARY 
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1. (C)  Summary: In a June 26 meeting, ExxonMobil Russia VP 
Ed Verona (protect) told us that Exxon has agreed with China 
on "price parameters" for gas deliveries from its Sakhalin 1 
project.  Reacting to recent press reports that Gazprom may 
try to force ExxonMobil to sell its gas to Gazprom or to 
domestic markets, Verona said Exxon would consider all 
commercially acceptable offers for its gas, but that it 
firmly believes a recent law granting a gas export monopoly 
to Gazprom does not apply to Sakhalin 1.  He suggested Exxon 
would not bow to pressure to renegotiate its contract.  End 
summary. 
 
------------------------------------------ 
PSAS EXCLUDED FROM GAZPROM EXPORT MONOPOLY 
------------------------------------------ 
 
2. (C) ExxonMobil Russia VP Ed Verona told us June 26 that 
Exxon's Production Sharing Agreement (PSA) allows it to sell 
gas from its Sakhalin 1 project to whomever it wants, 
domestically or abroad.  The same legislation that gave 
Gazprom its gas export monopoly specifically excludes PSAs 
and therefore does not apply to Sakhalin 1.  Negotiations 
continue with China over proposed sales of eight billion 
cubic meters (bcm) of gas annually from Sakhalin 1, and that 
the two sides have signed a "heads of agreement" (HOA) which 
Verona described as more advanced and specific than an MOU. 
The HOA lays out "price parameters" but not specific prices. 
 
---------------------------------------- 
PIPELINE EXPORT TO CHINA MOST PROFITABLE 
---------------------------------------- 
 
3. (C) Brushing off press reports that Gazprom may try to 
force Exxon to sell its gas to Gazprom or to domestic 
markets, Verona said that Exxon would consider all 
commercially acceptable offers.  Internal Exxon analysis 
shows, however, that the current planned export route to 
China via pipeline will be the most profitable, not only for 
the company, but for the Russian government as well.  Russian 
government revenues over the life of the project would be $15 
billion higher under the current plan than if the gas were to 
be sold to Gazprom for export via the Sakhalin 2 LNG 
terminal.  Despite press reports to the contrary, Verona 
reconfirmed on June 27 that Gazprom has yet to make a formal 
proposal to Exxon. 
 
----------------------------- 
RFE CAN'T ABSORB SAKHALIN GAS 
----------------------------- 
 
4. (C) Verona disagreed with recent GOR claims that the 
Russian Far East will need 15 bcm of gas annually.  Exxon 
does not see a market for more than about 5 bcm of gas in the 
region, even under the rosy GOR scenarios involving new 
petrochemical and other "value added" industries. 
 
----------------- 
CONTRACT SANCTITY 
----------------- 
 
5. (C) Verona said ExxonMobil would stand firm against 
pressure from Gazprom or other Russian entities to 
renegotiate its Sakhalin 1 contract.   If Exxon allows itself 
to "be rolled" by Gazprom in Russia, it might invite such 
tactics elsewhere in the world.  He expressed hopes that the 
markets would impose some discipline on Russia. 
 
------- 
COMMENT 
------- 
 
6. (C) Gazprom is likely unhappy that Exxon is coming to its 
own agreement with China and that it may become a price 
setter with China.  Gazprom's test balloon, via the press, is 
unlikely to cause Exxon to yield.  The next move to watch is 
 
MOSCOW 00003161  002 OF 002 
 
 
what, if any, concrete proposal Gazprom is willing to make. 
BURNS

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