Blow to Exxon as Putin orders seizure of oil and gas project

Moscow/Houston — Russian President Vladimir Putin has signed a decree that establishes a new operator for the ExxonMobil-led Sakhalin-1 oil and gas project in Russia’s far east.

Putin’s move, which affects Exxon’s largest investment in Russia, mimics a strategy he used to seize control of other energy properties in the country.

The decree gives the Russian government authority to decide whether foreign shareholders can retain stakes in the project.

Exxon holds a 30% operator stake in Sakhalin-1, with Russian company Rosneft, India’s ONGC Videsh and Japan’s Sodeco as partners.

Oil production at the Sakhalin-1 project fell to just 10,000 barrels per day (bpd) in July from 220,000 bpd before Russia invaded Ukraine.

Exxon has been trying to exit its Russia operations and transfer its role in Sakhalin-1 to a partner since March, after international sanctions imposed on Moscow.

Russia’s government and Exxon have clashed, with the oil producer threatening to take the case to international arbitration.

Exxon declined to comment on Friday’s decree.

Japan’s Sodeco was not immediately available to comment, but an official of the industry ministry, which owns a 50% stake in the firm, said it is gathering information and talking with partners. Japan stopped buying crude from Russia in June.

Exxon took an impairment charge of $4.6bn in April for its Russian activities and said it was working with partners to transfer Sakhalin-1’s operation. It also reduced energy production and moved staff out of the country.

In August, Putin issued a decree that Exxon said made a secure and environmentally safe exit from Sakhalin-1 difficult. The US producer then issued a “note of difference”, a legal step before arbitration.

Friday’s decree said the Russian government was establishing a Russian company, managed by Rosneft subsidiary Sakhalinmorneftegaz-shelf, that will own investors’ rights in Sakhalin-1.

Foreign partners will have one month after the new company is created to ask the Russian government for shares in the new entity, the decree said.

Putin used a similar strategy in a July decree to seize full control of Sakhalin-2, another gas and oil project in the far east of Russia, with Shell and Japanese companies Mitsui & Co and Mitsubishi as partners. Russia has approved applications by the two Japanese trading houses seeking to transfer their stakes to a new operator.

Reuters