Exxon Mobil Corp. (XOM) and OAO Rosneft (ROSN), the world’s largest publicly traded oil companies by output, will start drilling a $700 million well in the Arctic Ocean today, undeterred by the crisis in U.S.-Russian relations.
Vladimir Putin, Rosneft Chief Executive Officer Igor Sechin, who’s subject to U.S. sanctions, and Exxon’s Russia head Glenn Waller will bless the start of Russia’s northernmost well, the government said yesterday. It’s the first step in a quest for new oil resources to help maintain oil production near a post-Soviet high of more than 10 million barrels a day.
The European Union imposed a third round of sanctions last week, restricting the export of equipment used for offshore oil production to Russia after its relations with Europe and the U.S. deteriorated to the lowest point since the Cold War over the conflict in Ukraine. That hasn’t stopped Exxon because the contract to hire the rig was signed before the measures were announced.
“In the area of oil, the sanctions are more symbolic perhaps at this stage, but if they remain in place for a long period then they will have some significant consequences,” said John Lough, a London-based associate fellow at Chatham House, a London-based foreign policy research group.
The partners plan to drill the Universitetskaya prospect after more than two years of planning. Exxon, where output fell to a five-year low in the second quarter, isn’t the only western oil company involved. BP Plc, the U.K.’s second-largest oil company by value, has an interest through its 20 percent stake in Rosneft.
Universitetskaya is the first of as many as 40 offshore wells Rosneft plans by 2018 to test the potential of the unexplored the Arctic Ocean. The geological structure targeted by the drilling is roughly the size of the city of Moscow and may contain as many as 9 billion barrels of oil, according to a presentation on Rosneft’s website.
The West Alpha rig, leased by Exxon from Bermuda-based Seadrill Ltd. (SDRL), is currently in the Kara Sea about 72 miles off the coast of Novaya Zemlya, according to data compiled by Bloomberg.
Drilling will take about 70 days, a period that should be sufficient to assess the reserves of any discovery, Rosneft’s head of offshore, Zeljko Runje, said on a call with analysts last week. The area is relatively free of icebergs, meaning work is ready to start, he said.
Tensions with Russia will make companies pay more attention to risk, said Richard Mallinson, an analyst at Energy Aspects Ltd. in London.
In addition to the political background, drilling in the Arctic Ocean is controversial because campaigners say it threatens a unique ecosystem.
“The West Alpha platform is fast becoming the most controversial oil rig in the world,” Gustavo Ampugnani, an Arctic campaigner at Greenpeace, said in an e-mailed statement. The companies’ plan “to drill in the ecologically sensitive Arctic is nothing less than absurd.”
The Exxon-Rosneft cooperation also includes a $300 million investment in Russian shale pilot projects, which now risk being suspended, Rosneft Chairman Alexander Nekipelov said on July 29. The partners have also invested in a new platform this year to expand oil production at the Sakhalin-1 project in Russia’s Far East.
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