Putin Praises Exxon Alliance as Arctic Drilling Starts

Aug. 11 (Bloomberg) -- Bloomberg’s Ryan Chilcote reports on the loopholes that allow Exxon to begin drilling in Russia in spite of the most recent round of sanctions against the nation and it’s drilling partner Rosneft. He speaks on “Market Makers.”

President Vladimir Putin lauded Russia’s “old and reliable partner” Exxon Mobil Corp. (XOM) as he gave the command for the U.S. energy company and ally OAO Rosneft (ROSN) to begin drilling a $700 million Arctic Ocean oil well.

Putin, Rosneft Chief Executive officer Igor Sechin and Exxon’s Russia head Glenn Waller, undeterred by the crisis in U.S.-Russian relations, together welcomed the start of the country’s northernmost well. It’s the first step in a quest for new energy resources to help maintain oil production near a post-Soviet high of more than 10 million barrels a day.

“Despite current political difficulties, pragmatism and common sense prevails,” Putin said at the Black Sea resort of Sochi as he gave the command via video to commence drilling today. “Nowadays, commercial success is defined by an efficient international cooperation. Businesses, including the largest domestic and foreign companies, understand this perfectly.”

The European Union imposed a third round of sanctions last month, 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, the world’s largest energy company, because the contract to hire the rig was signed before the measures were announced. The U.S. also separately sanctioned Russian energy companies Rosneft and OAO Novatek.

Photographer: Andrey Rudakov/Bloomberg

Russia's president Vladimir Putin. Close

Russia's president Vladimir Putin.

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Photographer: Andrey Rudakov/Bloomberg

Russia's president Vladimir Putin.

U.S. Sanctions

The partners plan to drill the Universitetskaya prospect after more than two years of planning. Exxon, which reported a drop in output to a five-year low in the second quarter, isn’t the only western company involved. BP Plc (BP/), the U.K. oil company, has an interest through its 20 percent stake in Rosneft, whose CEO Sechin is subject to sanctions.

Universitetskaya is the first of as many as 40 offshore wells Rosneft plans by 2018 to test the potential of the unexplored 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 volume of resources exceeds the oil and gas resources of the Gulf of Mexico, the Brazilian shelf, the shelf of Alaska and Canada, and it will be comparable to the resource base of Saudi Arabia,” Sechin said by video link from the platform.

West Alpha

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.

“This is a historical moment for global oil industry,” Waller said, speaking in Russian. “Our cooperation is long-term. We see very strong prospects here and are ready, with your permission, to work further.”

Rosneft was added to a list of companies under U.S. sanctions on July 16, triggered by Russia’s conflict with Ukraine. They prevent the company from accessing U.S. debt markets for new financing with a maturity beyond 90 days. The U.S. previously froze Sechin’s assets and issued a visa ban on him.

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.

‘Controversial’ Rig

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.”

(A previous version of this story was corrected to remove the word “equity” in reference to sanctions against Rosneft.)

To contact the reporters on this story: Eduard Gismatullin in London at egismatullin@bloomberg.net; Ilya Arkhipov in Moscow at iarkhipov@bloomberg.net; Stephen Bierman in Moscow at sbierman1@bloomberg.net

To contact the editors responsible for this story: Frank Connelly at fconnelly@bloomberg.net Torrey Clark, Nancy Moran

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