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Exxon in Russia: Why It May Come Head-to-Head With Gazprom

Exxon in Russia: The difficulty to find new oil and gas reserves worldwide, added to states’ increasing protection of natural resources (especially in Latin America and Africa), and political instability across the Middle East, have placed increasing pressure over the industry. Meeting a rising demand for fossil fuels gets more complicated every day. Hence, it comes as no surprise that Oao Gazprom (OTC:OGZPY) has voiced its discontent with Russia’s majority state owned Rosneft (LSE:ROSN) and American Exxon Mobil Corp (NYSE:XOM)’s plans to build an LNG plant in Russia.

Rex W. Tillerson with gas pump

The telling fact behind Gazprom’s opposition is that the $15 billion new LNG plant will challenge Gazprom’s monopoly on Russian gas exports. Currently, Gazprom operates the only LNG plant in Russia, Sakhalin 2, after acquiring a majority share in 2007 through an operation with Royal Dutch Shell Plc (NYSE:RDS.A). Having failed to reach an agreement with Chinese authorities for additional volume, and not coming to terms with Exxon for additional sales from Shakhalin 1, Gazprom has been shorthanded. In other words, it is suspected that Exxon discarded any agreement with Gazprom, knowing beforehand that negotiations between Chinese authorities and Russian gas giant would fail.

The agreement between the American and Russian counterparts was reached at the beginning of the year. However, opposition to the project continues to be made public in an effort to bring other options to the table. This time, Gazprom has made public intentions to continue talks in regards to gas purchases form Exxon’s operated Sakhalin-1 project. At the same time, Victor Timoshilov, the head of the company’s Oriental Projects Coordination Directorate, said “We think that the project is a superfluous… They don’t have to build the plant, the infrastructure is already in place.”

At last, Chinese demand for gas continues to rise, and the new supplier -after a heavy investment- will be Exxon, through a partnership with Rosneft. Hence, for the short term, China has made an agreement with Turkmenistan for the provision of 65 billion cubic meters a year. The deal will give Exxon and Rosneft the time needed to develop required facilities, while the Chinese government avoids to enter into a long-term less favorable deal with Gazprom. Check back here for more updates on Exxon in Russia.

Disclosure: Jodor Jalit holds no position in any of the mentioned stocks.

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