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Extortion:
Russian Style
by Joe Duarte,
M.D.
February 9, 2004
Editor's Note: This article was originally posted on 2-5-04 at www.joe-duarte.com
ExxonMobil’s patience, principles, and guile should be tested by the Russian proposal of a $1 billion dollar fee for the rights to explore for oil in the Sakhalin islands. What makes this more interesting is the fact that Exxon has already been exploring the same field for almost a decade, and has already paid the Russian government some $60 million by some accounts.
The Moscow Times reported, on 2-5 that “Energy Minister Igor Yusufov said Wednesday that the government wants up to $1 billion for a license to explore and develop one of the three Sakhalin-3 blocs that a consortium led by ExxonMobil won in a tender a decade ago. The announcement came a week after the government decided to annul the 1993 tender to explore the gas- and oil-rich project in the Pacific Ocean -- a move that U.S. Ambassador to Russia Alexander Vershbow on Wednesday called worrisome and potentially harmful to U.S.-Russia ties. Yusufov said the state wants to auction off Sakhalin-3's Kirinsky block, the largest of the project's three blocks with estimated reserves of 453 million tons of extractable oil and 700 billion cubic meters of gas.”
Bloomberg quoted Yusufov as saying that: “The government must receive money for this field as we cannot live now with the system of closed distribution [of licenses],” adding that “the bloc should fetch $800 million to $1 billion."
The Moscow Times continued with: “Under the terms of the 1993 tender, rights to explore Kirinsky were equally split between ExxonMobil, ChevronTexaco and state-owned Rosneft. ExxonMobil controls two-thirds of the other two blocs, Ayashsky and East Odoptinsky, while Rosneft has the rest.”
According to the Times: “under the terms of the 1993 tender, rights to explore Kirinsky were equally split between ExxonMobil, ChevronTexaco and state-owned Rosneft. ExxonMobil controls two-thirds of the other two blocs, Ayashsky and East Odoptinsky, while Rosneft has the rest. Yusufov indicated Wednesday that ExxonMobil and its partners are welcome to stay on -- providing they pay the money.”
Exxon and the rest of the team will have to think about this very carefully. If they give in, it will only be a matter of time before OPEC countries with exploration deals with the majors, begin to try to extort them as well.
At the same time, the net amount of proven world oil reserves is now in question, and this situation brings the whole thing to what could be a very disruptive time for the oil industry, with the bottom line eventually becoming rising fuel prices.
Exxon is at least initially not taking the situation lightly. The Times wrote: “ExxonMobil and ChevronTexaco had no immediate comment about Yusufov's remarks. But earlier Wednesday, ExxonMobil Russia vice president Glenn Waller reiterated that his company would treat any attempt by the government to auction Sakhalin-3 as a threat. ["It, of course, concerns us because we have business interests in this. But it's an issue of due process, the issue of investors' rights,"] Waller said. "We won an international tender. We should be given the rights to develop those blocs. If those rights are taken away from us, this is a violation of our rights."]
So far the White House, having its own land mines to tiptoe around, closer to home, has been silent. But U.S. Ambassador to Russia Alexander Vershbow said that "We (the U.S.) are very concerned that a decision by the government of Russia not to issue a development license to ExxonMobil and ChevronTexaco for the Sakhalin-3 field despite their having won the 1993 tender could set back our bilateral energy cooperation.”
The comments from the American Chamber of Commerce President Somers, were certainly suggestive that this is just the beginning of something very significant for the global oil markets: "This issue goes way beyond the energy sector, way beyond ExxonMobil. It goes to every sector in Russia -- to whether investors in Europe and the U.S. are going to invest. Is this a signal from the government? Is it not interested foreign investment and strategic assets like energy?"
© 2004 Joe Duarte, M.D.
Dr. Duarte's Bio and Archive
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Joe
Duarte M.D. is founder and Editor in Chief of Joe-Duarte.com. Dr.
Duarte is a board certified anesthesiologist, a registered
investment advisor, and President of River Willow Capital
Management, where he manages individual client accounts.  His
latest books "Successful
Energy Sector Investing" and "Successful
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