ExxonMobil contests Kremlin decree blocking its pullout from Russia

ExxonMobil is contesting a presidential decree signed by Vladimir Putin earlier this month that it says has stymied its efforts to exit Russia, setting the stage for a potential legal showdown with Moscow.

The US oil supermajor was part of a wave of western oil companies that said they would cut ties with Russia after the Kremlin launched its invasion of Ukraine, abruptly ending a years-long effort to tap into Russia’s energy riches.

But the Russian president complicated those efforts with a decree that barred energy and other companies from shifting control of operations or selling off stakes in certain projects until the end of 2022.

In a June regulatory filing, Exxon said it was “engaged in transitioning” operations at the Sakhalin-1 oil project, its main asset in the country, to another company. That came after it had taken a $4.6bn pre-tax charge on the loss of its Russian business.

But Exxon said on Tuesday that its exit “has been blocked by the recent presidential decree” and that the company had provided a “notice of difference” to the Russian government.

“We announced in March our plans to exit the venture, and we continue to take the necessary steps to do so. Exiting is a complex process, and as the operator, we must protect the safety of employees, the environment and the operation,” the company said. The Wall Street Journal first reported Exxon’s notice to Russia.

The “notice of difference” will trigger negotiations between Exxon and Russian officials over the company’s proposed exit from the venture. Those talks could run through to the end of the year. If there is no resolution, Exxon could then take its case to international arbitration, where it could seek financial damages as well as the ability to leave the project.

BP, Shell and Total are among the western oil majors that have said they plan to leave Russia since the war in Ukraine began but have been ensnared in legal and operational difficulties that in some cases have prevented a swift exit.

The Sakhalin-1 venture was producing about 220,000 barrels of oil a day before the war, making it one of the largest western-run projects in Russia. But Exxon declared force majeure at the project in April as sanctions impeded normal operations. Output has since plunged to about 10,000 b/d along with some associated natural gas production.

The project’s operators have kept oil and gas flowing in part because it provides power to local communities around Sakhalin Island in Russia’s Far East region, according to a person familiar with its operations. There are also concerns about the region’s bitterly cold winter, which could require the project to increase output or shut down completely to avoid damage, said the person.

Exxon has a 30 per cent stake in Sakhalin-1. Its partners in the project include Russia’s state-owned oil producer Rosneft, Japan’s Sodeco and India’s state-backed ONGC Videsh. The Japanese and Indian companies, which hold stakes of 30 per cent and 20 per cent respectively, are not subject to the same sanctions regime as Exxon and both countries have continued to import Russian fuel.

In July, Putin ordered the nationalisation of the Sakhalin-2 project, which was developed in part by Shell. Analysts have been expecting further nationalisations as western companies look to exit, and have speculated that energy companies from Moscow’s ally China could swoop in to secure access to Russia’s oil and gasfields.