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Saturday, September 16, 2006

In Russia, Written Contracts are not Worth the Paper they are Printed on

The Houston Chronicle reports that Russia is trying to cheat Exxon as part of its latest assault on property rights:

Exxon Mobil Corp. on Thursday warned Russia to honor a decade-old production-sharing agreement to develop the Sakhalin-1 oil and gas block or risk spooking other foreign investors in the country.

The statement comes as Russia and Irving-based Exxon Mobil squabble over whether the company has automatic rights to develop newly discovered reserves around existing deposits in the Sakhalin-1 project.

Russia plans to auction off the new deposits, while Exxon Mobil believes its license territory should be automatically enlarged to include them. Exxon Mobil said it was in talks with the Russian government to resolve the issue.

But Exxon Mobil said that any resolution should account for the rights of consortium members and strictly comply with the Sakhalin-1 agreement and Russian laws.

Analysts have said the Kremlin — which had already alarmed foreign investors with its dogged pursuit of oil company Yukos for back taxes — is showing signs of increasing unhappiness with major projects controlled by foreign investors.

Weeks of pressure by Moscow on the rival Sakhalin-2, led by Royal Dutch Shell, culminated this week with Russia's environment watchdog saying it had asked a court to recognize that the scheme did not comply with ecological rules. Work would have to stop at that project if the suit is successful.

Exxon Mobil meanwhile said it had started the process of exporting oil from Sakhalin-1 on schedule, marking a major milestone for the closely watched project.

That met Exxon Mobil's own forecast of exports starting in August, despite some reports earlier in the summer that they could be delayed to October.

Sakhalin-1 is the biggest new oil find in the area in many years and is expected to boost supply in a tightly stretched global market. It could help ease high crude prices and displace sales of competing African and Mediterranean crude into Asia.

First oil from Sakhalin-1 began flowing into the export system on Aug. 29, and the initial tanker will begin loading at the newly built DeKastri terminal this month, Exxon Mobil said.

Oil production from the project should ramp up to a peak rate of 250,000 barrels a day by the end of 2006, it said.

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