Exxon Escalates Dispute With Russia Over Barred Exit From Giant Oil Project

Exxon Mobil Corp.

XOM -3.81%

has notified Russian officials it will sue the government unless Moscow allows the company to exit a major oil-and-gas project, according to people familiar with the matter.

A Kremlin decree banning certain transactions through the end of the year has blocked Exxon since early August from transferring operatorship and selling its 30% stake in the Sakhalin-1 venture in Russia’s Far East. Before the decree, Exxon had said in regulatory filings that it was transitioning operating activities to another party following Russia’s invasion of Ukraine.

Russia’s move to bar such transactions, which President

Vladimir Putin

can decide to extend beyond 2022, inhibits Exxon’s rights and impedes its ability to safely exit the project’s operations, the company said.

Exxon spokesman

Casey Norton

said the company recently sent the Russian government a notice of difference, which lawyers said is a common requirement in commercial contracts as a step to remedy conflicts before litigation. It triggers a deadline by which parties reach an agreement or the matter can proceed to litigation.

Exxon has been blocked from selling its 30% stake in the Sakhalin-1 venture in Russia’s Far East.


sergei karpukhin/Reuters

“Exiting is a complex process, and as the operator, we must protect the safety of employees, the environment and the operation,” Mr. Norton said.

The Russian government, through its embassy in the U.S., declined to comment. State-controlled Rosneft, which is a partner in the Sakhalin project, said the financial disagreements between the Sakhalin-1 partners stem from Exxon’s unilateral decision to reduce production, a move that has resulted in losses for the consortium.

“The return to normal production activities of the Sakhalin-1 project could create the necessary conditions for resolving all contentious issues,” a Rosneft representative said.

Exxon, the largest Western oil company, has cultivated ties with Russia for decades. But it withdrew from at least 10 joint ventures with Russian entities after the U.S. and its allies imposed sanctions on Russia following its 2014 invasion of Crimea. Exxon had still planned to invest billions of dollars for years to come in the Sakhalin project, which wasn’t covered by previous sanctions. It declared force majeure in April, and has since reduced production to about 10,000 barrels of oil and gas a day from 220,000.

Western companies have found it difficult to untangle their business interests from Russia following the war in Ukraine. For Exxon, the task not only involves finding a buyer for its stake in Sakhalin-1, but also finding a company technically capable of taking over its complex operations. The U.S. oil company took a $3.4 billion accounting charge related to its Russia exit in the first quarter.

Exxon is taking steps to file a lawsuit with the expectation the matter is unlikely to be resolved by the deadline, the people familiar with the matter said. The exact date the notice was filed couldn’t be determined.

The length of time between a company providing a notice of difference and filing a lawsuit can vary greatly depending on the contract, but is often between 30 and 90 days, people familiar with the process said. The dispute is expected to be filed outside of Russia but could take years to resolve in an international arbitration court, lawyers said.

Sakhalin-2, one of the world’s largest oil-and-gas projects, was transferred from an international consortium to a Russian entity earlier this year.


Sergei Karpukhin/REUTERS

A lawsuit would be a logical move for Exxon because of the size of its investment in Russia, said

John McCarrick,

a lawyer and former energy adviser at the State Department during the Trump administration. Russia could choose to ignore a court judgment but has other assets outside the country that could be used to compensate Exxon, he said.

“There are damages,“ Mr. McCarrick said. “Their business is negatively affected by lack of compliance by the Russians. And I don’t think the Russians are judgment-proof.”

Exxon and its partners have had a production-sharing agreement in place since the 1990s. Exxon Neftegas Ltd., a unit of the U.S. oil company, owns 30% of the project and is its operator. Rosneft owns 20%, while Japan’s Sodeco and India’s ONGC Videsh separately own portions.

An official at Japan’s Ministry of Economy, Trade and Industry said Japan wants to preserve its stake in Sakhalin-1 as long as that is consistent with G-7 agreements.

Exxon’s exit is particularly complicated because it operates the project and is responsible for safety and environmental measures. The project hasn’t been fully shut down, in part, because it provides power to the residents of Sakhalin island, also an environmentally sensitive area.

The environmental risks are likely to rise if Exxon departs, said Mr. McCarrick. Russian companies don’t have as sound an environmental record as their Western counterparts and it is unclear they have the motivation to work as cautiously as Exxon typically does, he said.

Analysts have said Russia’s oil-and-gas operations have greatly benefited from Western technical expertise and that Russia could struggle without that partnership. Western sanctions have impeded Russian energy companies’ ability to get critical equipment underpinning oil-and-gas operations.

People walked among destroyed Russian tanks on display in Kyiv as Ukraine marked the country’s Independence Day and six months since the start of the war. President Zelensky said Russian missiles struck a train station and house in eastern Ukraine on Wednesday that killed at least 22 people. Photo: Evgeniy Maloletka/Associated Press

Other Western companies with interests in Russia have been tracking Exxon’s moves and could follow suit, say analysts.

In February,


PLC announced it would exit the Sakhalin-2 venture, another major oil-and-gas project in Russia’s Far East, and


PLC said it would exit its nearly 20% stake in Rosneft.

Russia in late June moved to take control of an international consortium that had run Sakhalin-2, transferring it to a new Russian entity. Shell, with a 27.5% stake in that project, took a $3.9 billion charge following its decision to leave Russia. BP took a $25.5 billion pretax accounting charge after it chose to exit Russia.

Shell declined to comment. BP didn’t respond to a request for comment.

Write to Collin Eaton at collin.eaton@wsj.com and Timothy Puko at tim.puko@wsj.com

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