A natural gas drilling rig near Sakhalin Island

From the September 7, 2006 article "Exxon Russian Project Provides Boost":

Exxon Mobil Corp. said Thursday that a project off the Russian coast is ready to sell oil globally, helping boost the company's gross daily production by 1 million barrels of oil and 1.5 billion cubic feet of natural gas.

The site is one of eight shared production projects driving the increase, Mark Albers, president of Exxon Mobil Development Co., told analysts at a Lehman Bros. energy conference in New York.

"That's equivalent of the crude production of the entire state of Texas and three times the gas production," Albers said.

This is very good news for Japan and the rest of the world economy, but there is a catch - Kremlin Inc. wants more of the profits from Sakhalin. According to the September 8, 2006 article "Exxon Mobil Warns Russia to Honor Major Contract" the Russian government is disputing whether new deposits found near Exxon's Sakhalin 1 lease are covered by a contract signed with the company in the 1990s. Exxon executives say they are optimistic that a new deal can be negotiated on royalties. If Exxon isn't able to renegotiate, Moscow may create new leases adjacent to their project and auction them off, probably to a state-owned firm.

Meanwhile, Shell's Sakhalin 2 project on the island could be in jeapordy. The BBC reported this week that the Russian Ministry of Natural Resources has accused Shell and its partners Mitsui and Mitsubishi Heavy Industries of creating unacceptable soil erosion while building a new liquefied natural gas (LNG) terminal and pipelines. The runoff from these projects has allegedly harmed salmon and other marine life. The Russian government has also complained about cost overruns and delays on the project, which Shell says are due to the rising cost of construction materials.

Russian environmentalists protesting the project (Source: www.seu.ru)

Regarding the prospect of the Ministry of Natural Resources revoking Shell's lease, the BBC had this to say:

Some analysts believe the Russian authorities are trying to exert pressure on the project's developers to allow state-run gas firm Gazprom to get a stake in the project on better terms.

Gazprom wants to buy a 25% stake in the project in return for giving Shell access to Zapolyarnoye-Neocomian, the world's fifth-largest gas field in western Siberia.

Since Shell announced a doubling of the project's development costs last year, Gazprom has been trying to negotiate a new deal.

It is no secret that the Kremlin regards many of the deals struck with Western energy firms during the Yeltsin years as unfairly favoring foreigners, who were then exploiting Russia's weakness. Now that Russia is once again the world's largest energy producer, whether or not this recent historic grievance is justified is irrelevant. The fact is, the Kremlin is determined to carve out a bigger piece of the pie in future deals.

Nonetheless, it would be a mistake to conclude that all major foreign investors in Russia's energy sector are losing their shirts. Exxon Mobil and BP's TMK joint venture seem to have weathered the shift in Kremlin energy policy better than Shell and its Japanese partners. While some Western analysts may allege that the Kremlin is using oil and gas as a political tool to send a message to America and Japan, Gazprom is probably just trying to eliminate what it sees as the middleman between the "national champion" and Asian markets.

Huge multinational energy corporations like Exxon Mobil and Shell are often blamed by politicians and populists for high gas prices here in America, even as some of the crusaders against "Big Oil" quietly keep these same companies in their stock portfolios. In reality, historically high energy prices actually mean that "Big Oil" gets squeezed by the real monopolistic robber barons of the 21st century - state owned cartels.

UPDATE1: The Japan Today website has more background on Tokyo's efforts to diversify energy supplies, and the fierce competition between Japan and China over access to Russian oil.

Japan and China have lobbied for alternative routes for the East Siberia-Pacific Ocean (ESPO) pipeline. Although major Japanese oil explorer Inpex Corp and a handful of trading houses have considered joining the East Siberian oilfield project, they are waiting for a guarantee from the Russian government that the pipeline will be built to the Pacific coast, from where oil can be tankered to Japan. Tokyo has asked the Russian government to sign an intergovernmental agreement pledging that it will build the entire 4,188-km pipeline from Taishet to a location near Nakhodka, a port city on the Pacific.

However, Moscow has rejected the Japanese request and instead has talked only of the importance of exploring and developing the untapped reserves of East Siberia in order to provide the oil to fill the pipe. The suspicion exists that the ESPO may only reach so far as Skovorodino, the midpoint, which is near the Chinese border. Russian state-run pipeline monopoly Transneft started building the Taishet-Skovorodino phase in late April. It expects to finish this in 2008. No decision has been taken as to when construction on the second half will take place, however.

UPDATE 2: In dinner table remarks to Western journalists this weekend, Putin compared the amicable border settlement between Moscow and Beijing to Japan's alleged intransiagence on the Sakhalin question. The UK Times reports:

On foreign policy Mr. Putin made a pointed contrast between the success of relations with China and the failure to resolve differences with Japan. All border issues with China had now been settled, he said, and relations with Beijing were now better than during the Communist era, when there were tensions despite their ideological alliance.

There had, however, been no success in deciding the future of four former Japanese islands occupied by Russia after the Second World War. Mr Putin accused Japan of reneging on earlier offers of compromise and of playing political games over the issue. The Japanese “unleashed the samurai” at election time and then put the sword back again. “Let’s address this quietly and without rhetoric, ” the President said.