Putin orders seizure of Exxon-led Sakhalin 1 oil and gas project

RUSSIAN President Vladimir Putin on Friday (Oct 7) signed a decree that creates a new operator for the Exxon Mobil Corp-led Sakhalin-1 oil and gas project in Russia's Far East.

Putin's move affecting Exxon's largest investment in Russia mimics a strategy he used to seize control of other energy properties in the country.

Friday's decree gives the Russian government authority to decide whether foreign shareholders can retain stakes in the project. Exxon holds a 30 per cent 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.

Navigating an exit

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

Exxon took a US$4.6 billion impairment charge in April for its Russian activities and said it was working with partners to transfer Sakhalin-1's operation. It also reduced oil and gas production and removed personnel from the country.

In August, Putin issued a decree that Exxon said made a secure and environmentally safe exit from Sakhalin-1 difficult. The U.S. producer then issued a "note of difference," a legal step prior to 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 Russian Far East, with Shell and Japanese companies Mitsui and Mitsubishi as partners. REUTERS

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