Russ Oil-Gas

// Though Gazprom will probably hold control
July 18, 2008 - RBC News - The Sakhalin-1 consortium will sell an additional 1.5bn-2bn cubic meter of natural gas to Russia’s Far-Eastern regions, Deputy Prime Minister Igor Sechin has announced. The price of supplies will be no lower than export prices minus transportation costs. Rosneft will step in to help Gazprom in negotiations with the project’s owners. From now on, it will be possible to export part of the natural gas produced at Sakhalin-1, whereas previously, Gazprom had wanted to use all the gas from the project for supplies to the domestic market, experts say. Igor Sechin has reported to President Dmitry Medvedev on the progress made with an order given during a meeting on the Far East’s regional development in Khabarovsk in February. He said that an agreement between Gazprom and Rosneft on interaction in providing gas supply to Far-Eastern regions had been signed. Under its terms, the two state companies were to lift any previous disagreements and join their efforts to modernize the existing gas supply system, as well as join in the talks with the Sakhalin-1 project’s consortium. “An agreement in principle has been reached with the consortium to sell surplus volumes of the project’s gas in the amount of 1.5bn-2bn cubic meters at a price that would not be lower than that for gas sold under contracts,” Sechin stated. By limiting Gazprom’s share - previously the company had wanted to receive all of Sakhalin-1’s gas for the domestic market - the government has made an attempt to level out the relative positions of the gas monopoly and Rosneft, a source at Gazprom told RBC Daily. However, the fact that a certain surplus quota will eventually go towards providing the region’s gas supply system, is good news, as otherwise it was impossible to strike a balance, the source said. Only the lower end of the gas price has been fixed, to be no lower than the price of gas intended for exports, minus transportation costs. No upper end has been set, and further discussions are to follow to take into consideration the consumption structure, which is yet to be determined. If gas is to be supplied at regulated prices, then Gazprom will not be able to pay too much for it – otherwise it would be operating at a loss. Both Gazprom and Rosneft declined to make a formal comment. As RBC Daily was told by Dilyara Sadykova, a representative of the Sakhalin-1 project operator, ExxonMobil, under the current contracts, Sakhalin-1 is planning to double its supplies to 3bn cubic meters per year. “As to additional gas supplies to the domestic market, I can confirm that we are in talks with Gazprom and are considering all the options available to us regarding gas sales,” Sadykova said. Gas output from Sakahlin-1 is expected to increase to 11.4bn cubic meters per year by 2009, 3bn cubic meters of which was intended for the domestic market, analysts reiterated. The parties have now agreed to expand that figure by 2bn cubic meters, leaving 6.4bn cubic meters for exports, which is not bad, considering that Gazprom previously wanted to scoop up all of the gas produced at the project. To say more, the gas monopoly did not want the gas in order to provide it to Russian consumers, but to ensure that there is no other alternative for China to receive Russian gas but through Gazprom. Experts are convinced that the gas concern wanted to be the monopoly supplier of gas from Russian to China. The price of gas to be exported under contracts, net of transportation costs, is estimated at nearly $80 per 1,000 cubic meters. Sakhalin-1’s gas operations will inevitably be controlled by Gazprom, and any price offered by the monopoly is certainly going to be considerably lower than the market price, as such are the rules of the game on the Russian gas market, analysts believe.