ExxonMobil’s Far East “RUexit” Deals Blow to Rosneft’s LNG Ambitions

The US oil and gas company's exit from Russia amid the ongoing military conflict freezes the Russian Far East LNG project and cripples Rosneft’s ambitions to become a competitive global LNG supplier.

Loading jetty at Gazprom’s Prigorodnoye LNG processing facility on the southern tip of Sakhalin Island.
Source: Sakhalin Energy.

The governor of Russia’s Far East region of Khabarovsk said that ExxonMobil has suspended its long-anticipated Russian Far East LNG (RFE LNG) project to deliver pipeline gas produced offshore Sakhalin Island to a proposed processing facility for LNG exports from the port of De-Kastri on the Russian mainland.

In an interview on the regional radio station Komsomolskaya Pravda, Khabarovsk governor Mikhail Degtyarev said that RFE LNG had “been frozen” pending any “further decision by them” (“them” being ExxonMobil), Russia’s Interfax news service reported on 4 April.

“This is shooting oneself in the foot,” Degtyarev told radio listeners whose region had stood to benefit from the economic development that would have flowed from the project.

On 1 March, ExxonMobil had issued a statement reacting to Russia’s military incursion into Ukraine, stating that its Russian subsidiary Exxon Neftegaz Limited (ENL) would exit its 30% equity stake and role as operator of the Sakhalin-1 offshore oil and gas production project after more than 2 decades and that it would not be investing in any “new developments in Russia.”

ExxonMobil's next investment would have been RFE LNG, a key component of Russia’s state-controlled oil major Rosneft’s strategy to realize its ambition of competing head-on with rival Gazprom which began delivering LNG from its Prigorodnoye plant on the southern tip of Sakhalin Island to Far East markets in 2009.

ENL together with its partners in the Sakhalin-1 production sharing agreement—Japan’s SODECO Consortium (30%), India’s ONGC Videsh (20%), and two Rosneft affiliates, RN-Astra (8.5%) and Sakhalinmorneftegaz-Shelf (11.5%)—had envisioned RFE LNG as a way of monetizing gas flows as the reservoir aged and oil production declined.

In September, Interfax and Reuters both quoted Sakhalin regional governor Valery Limarenko as saying that ENL planned to invest $5 billion over 5 years to boost declining oil output. ENL had produced its first oil in 2005 from the project’s first oil field, Chayvo.

Fast forwarding to RFE LNG, Degtyarev told his radio audience that he had met with ExxonMobil representatives only a month before the Ukrainian conflict erupted on 24 February to receive updates on the pre-design phase of the proposed $4.2 billion, 6.2-mtpa capacity plant that the Russian Ministry of Energy projected would drop its first LNG no later than 2028.

The ExxonMobil-led Sakhalin-1 consortium had awarded the front-end engineering and design contract to Houston’s TechnipFMC and Japan’s JGC in 2020.

This past February, ENL had also initiated tenders to find contractors qualified to assess the quality of construction materials as well as the capabilities of local producers of reinforced concrete, Interfax reported.

ExxonMobil's decision to exit the project coupled with sanctions affecting all manner of foreign contractors along the supply chain delivers a blow not just to regional economies but represents a major setback to Rosneft’s ambitions to become a dominant player in the international LNG market. Only a year ago, Rosneft was shedding underperforming brownfield oil assets so as to tweak its portfolio in the direction of LNG.

Rosneft’s LNG strategy had been two-pronged: a tie-up with ExxonMobil on the Sakhalin-1 and RFE LNG projects, and secondly, its partnership with BP, with which it had signed a memorandum of understanding to create a “strategic gas partnership” that Rosneft CEO Igor Sechin hoped would facilitate his vision to export LNG from the Vostok field on the Kara Sea coast, east and west along the Northern Sea Route and develop gas projects outside of Russia with BP.

But like ExxonMobil and Shell, BP is also leaving Russia, giving up the 19.75% stake it acquired in Rosneft in 2013 when it sold its 50% interest in the TNK-BP joint venture to the Russian major.

For its part, Shell is unwinding its 27.5% stake in Sakhalin Energy Investment Ltd., which owns Sakhalin’s existing (and Russia’s first) LNG plant. Gazprom holds 50% plus one share with Japan’s Mitsui and Mitsubishi at 12.5% and 10%, respectively.