ExxonMobil pays too much to Russia

Sakhalin 1ExxonMobil wants to get back the money, which the company overpaid as profit tax within the Sakhalin-1 project, the Russian Kommersant newspaper reports. The amount sum is claimed to be dozens of billions rubles. According to Mikhail Krutikhin, partner at a Moscow-based consulting company, the parties can settle the dispute out of court.

On March 18, the Russian energy minister Alexander Novak met with the company’s management team. “During the meeting the two sides discussed issues concerning the Sakhalin-1 project, including export gas sales and tax regime”, the ministry’s press-service said. According to Kommersant, possible amendments to profit tax as well as returning billions of rubles to ExxonMobil as overpaid tax topped the agenda. From 2009 ExxonMobil left 35% of its profit in Russia, but since then the tax rate in the country has dropped to 20%. In case the two sides don’t find common ground the American company threatens to file a suit to the Stockholm Court of Arbitration.

“The company has several times raised this issue but it vanished in the Russian red tape. Obviously, the Russian side thought ExxonMobil would continue to overpay billions of rubles for the right to work in the country. But ExxonMobil thought otherwise,” said Mikhail Kritikhin, partner at the RusEnergy consulting company. The expert considers the company’s claims to the Russian government to be well justified and doesn’t give the Russian side many chances in case of arbitration in Stockholm.

“ExxonMobil needs to make benefit from its investment,” says Krutikhin. “They have lost around $1 billion in a joint shale project with Rosneft. The loss needs to be compensated at least partly by restoring tax justice. If the management let this opportunity slip, it will be regarded as a big failure by the company’s shareholders”.

The issue hasn’t been settled as yet, writes Kommersant. However, there is still a chance to find a compromise and fix it out of court.

“The Russian government could bargain better conditions by giving ExxonMobil additional opportunities,” explains Krutikhin. “They could lean on Gazprom so that the Russian state-owned gas giant allowed the American company to run gas through its gas pipeline, the Sakhalin-2 project, to the south. Currently they are not authorized to do that, but if the Russian government puts extra pressure on Gazprom the situation may get off the ground.” The expert believes such an opportunity is the main bargaining chip of the Russian side.

Krutikhin is certain that Rosneft and ExxonMobil will continue cooperation despite the current tax controversy and sanctions.

Background:

The Sakhalin-1 project has been functioning under PSA, ExxonMobil is the project operator and holds 30% of shares, Japanese Sodeco holds 30% of shares, Rosneft – 20%, Indian ONGC – 20%.