Rosneft courts trouble with Sakhalin partners
Chief executive Igor Sechin has sharpened his knife for another corporate spat
Rosneft is putting the squeeze on its consortium partners in the Sakhalin-1 project in the Russian Far East, in a lawsuit that's likely unsettling other foreign majors considering investment in the country.
The Kremlin's national oil champion is suing all the Sakhalin-1 co-owners, including ExxonMobil and its own Rosneft units, for 89 bn roubles ($1.3bn) over alleged "unjust enrichment" over the past three years, according to filings made with the Sakhalin Oblast Arbitration Court seen by Petroleum Economist.
One of Russia's biggest foreign investment projects, 80% of Sakhalin-1 is owned by US, Japanese, and Indian companies. It is located on and offshore at Sakhalin island, which lies some 6,329 km east of Moscow.
This is not the first time Rosneft has resorted to using Russian courts to get its own way. It snapped up the Yuganskneftegaz oil unit from the bankrupt Yukos at a third of its market value in 2005, and received a refund worth 100bn roubles ($1.4bn) in December last year from privately-held conglomerate Sistema, following a dispute over the so-called privatisation of Bashneft. Analysts have also linked it to the arrest in April of billionaire Ziyavudin Magomedov on embezzlement charges in a long-running row over control of Novorossiysk Commercial Sea Port (NCSP).
Victory in the case may raise Rosneft's market cap, but critics argue that this mightn't be worth it in the long run.
"Rosneft winning the case creates a possible 2% upside in its market value, but the litigation may hurt relationships with foreign partners," Kirill Tachennikov, senior oil analyst at BCS Financial, told Petroleum Economist.
The lawsuit has been filed against five entities: $146m from Rosneft's Sakhalinmorneftegaz, $392m from Exxon Neftegaz, $392m from Sakhalin Oil and Gas Development Co, and $261m from India's ONGC Videsh and $110m from Rosneft's RN-Astra, according to filings seen by Petroleum Economist.
Vedomosti , a Russian-language business news website, has reported that the documents allege "unjust enrichment" between July 2015 and May 2018. This suggests the complaint relates to the breach of an agreement on the balancing of oil extraction in relation to flows between structures in neighbouring license areas. In other words, oil has been flowing from Rosneft's license areas to its neighbours and Rosneft is claiming its rights under an agreement that deals with this situation.
According to a disclosure by ONGC, Rosneft has calculated its losses from the transfer of oil from its own North Chayvo field to Sakhalin-1's Chayvo field since 2005, although Rosneft did not own the licence for North Chayvo at that time.
The parties also signed a preliminary agreement on fluid migration in August 2017, but it had expired by April 24 this year and the consortium has started arbitration against Rosneft in the International Chamber of Commerce in Paris. The latter move is likely aimed at avoiding any favouritism Rosneft might receive from the Sakhalin court where it filed the suit in July.
The preliminary hearing is set for 10 September, but the foreign firms are seeking to reach a settlement away from the Russian courts. According to the Kommersant newspaper, the consortium is now trying to negotiate an out-of-court settlement for less than 10% of the project's average annual budget, which is about $200-300m.
Source: Petroleum Economist
Sakhalin-1 is unique insofar as its operated by ExxonMobil, a foreign entity which owns 30% of the project. Rosneft and ONGC each control 20% each, while Japan's Sodeco has a 30% stake.
The control of the project by a US rival likely riles Igor Sechin, the Kremlin's energy guru, who has run Rosneft since 2012. A decade ago, the Kremlin's gas monopoly Gazprom managed to eject then-operator Shell out of the Sakhalin-II venture, using environmental violations as a pretext.
Sechin may ultimately be striving to secure a bigger slice of the pie or to gain full control of Sakhalin-1. Recent history shows that courts cases and arrests related to Rosneft's rivals seem to have forwarded his ambitions to rival ExxonMobil, the world's largest traded oil company, on the global stage.