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Exxon Mobil: Sakhalin-1 environmental issues ‘normal’

Stuart McGill.jpg

Exxon Mobil Corp.'s experience with environmental issues at Russia's Sakhalin-1 project in Russia has been "normal," the company said Wednesday.

"I would characterize our experience on Sakhalin as being very, very normal," said Stuart McGill, ExxonMobil senior vice president.

"The system is being fully commissioned," McGill said, speaking at an energy conference in New York hosted by Merrill Lynch. "Our expectation is that around the end of the year we will be up at full capacity."

ExxonMobil owns 30% of the international consortium developing Sakhalin-1. Total recoverable reserves are estimated to be 2.3 billion barrels of oil (307 million tons) and 17.1 trillion cubic feet of natural gas (485 billion cubic meters), according to the project's Web site.

Russian authorities have reportedly postponed an environmental inspection of the ExxonMobil-operated Sakhalin-1 project until November. Russia and Exxon have disagreed on the project's costs, which have grown to $17 billion, from an estimate of $12.8 billion in 2002. The Russian government has balked at the cost increase because it will delay Russia's take of revenues that will flow from the project.

In a move widely seen as an attempt to maximize its benefits from production sharing agreements with foreign oil companies, Russia has been stepping up regulatory oversight of coastal areas off the Sakhalin Islands. The scrutiny has led to clashes over environmental and cost issues with foreign oil companies that have signed partnership agreements to develop the oil and gas fields.

Analysts have expressed concern that disputes over Sakhalin oil and gas fields could result in billions of dollars in expenses and months of delay for these high-profile developments.

The Russian government has threatened to pull operating licenses from the neighboring Sakhalin-2 project run by 55% shareholder Royal Dutch Shell PLC (RDSB.LN) because of environmental damage and violations of environmental regulations.

An ongoing inspection of the project revealed hundreds of millions of dollars worth of environmental damage, Russian officials said last week.

Shell is also facing opposition from the government to its bid to increase the estimated cost of the project to $20 billion from $12 billion.

"You will read from time to time that there are questions about environmental permits," McGill said. "If we were starting up in Colorado there would be questions about environmental permits, that is someone's responsibility, our responsibility is to comply with the permits."

"What is important is the environment of cooperation. I would characterize our experience in Sakhalin as being absolutely normal."

McGill also said ExxonMobil expects to migrate its commissioning permit to a full-scale operating permit in 2007.

"That is exactly according to plan, both the Russian authorities' plan and our plan, and we expect to conclude that process sometime early in the new year," McGill said.

McGill also said ExxonMobil continues to pursue export gas sales from Sakhalin.

The company signed a heads of agreement with China National Petroleum Corp. last month for a pipeline gas sale from Sakhalin to northeast China.

"The forward plan is to convert the heads of agreement to a fully-termed gas sales and purchase agreement and to agree with Gazprom an appropriate delivery structure," he said, adding that discussions with other potential customers continue.

© MarketWatch

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