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Tillerson’s Arctic Coup Swaps Exxon U.S. Stakes for Russian Oil

Exxon Mobil Corp. Chief Executive Officer Rex Tillerson
Exxon Mobil Corp. Chief Executive Officer Rex Tillerson. Photographer: Jason Janik/Bloomberg

Aug. 31 (Bloomberg) -- Exxon Mobil Corp.’s coup in securing access to OAO Rosneft’s Arctic oil frontier is the culmination of almost 15 years of effort by Chief Executive Officer Rex Tillerson to expand its position in Russia.

Exxon’s partnership with Rosneft will allow the company to tap into a region potentially containing tens of billions of barrels of oil. Exxon beat rivals, including BP Plc, Royal Dutch Shell Plc and Chevron Corp., to gain its piece of one of the globe’s last undeveloped oil provinces. In return, Exxon is providing Rosneft with the capital and expertise it needs to help Russia hold on as the world’s biggest oil producer.

Tillerson, who oversaw Russia’s first offshore project in Arctic conditions in the 1990s, is reversing course in a country that he criticized for its lack of transparency as recently as three years ago. The agreement with Rosneft is his biggest deal since the $35 billion acquisition of U.S. shale gas producer XTO Energy Inc. in 2010.

“Between Russia and the XTO deal, Tillerson has put together a big resource base for the end of the decade,” said Jason Gammel, an oil industry analyst at Macquarie Capital Ltd. in London. “Whoever succeeds him will be very happy with the job he’s done.”

Exxon and Rosneft plan to spend an initial $3.2 billion exploring Russia’s Arctic offshore and the Black Sea. Exxon has agreed to give Rosneft stakes in some of its deep-water Gulf of Mexico projects and fields in Texas, making it the first major Russian oil producer to develop U.S. deposits.

‘Large Scale’

“This large-scale partnership represents a significant strategic step by both companies,” said Tillerson, who attended the signing of the agreement in Sochi, Russia, with Rosneft CEO Eduard Khudainatov, presided over by Prime Minister Vladimir Putin. “This agreement takes our relationship to a new level.”

Exxon has had operations in Russia dating back to the late 1980s. Tillerson took responsibility for the company’s holdings in Russia and the Caspian Sea in the 1990s. In 1998, he was named vice president of Exxon Ventures (CIS) Inc. and president of Exxon Neftegas Ltd., a role that included oversight of Exxon’s Sakhalin I project in Russia’s far east. At its height, the project produced about 250,000 barrels of crude a day.

“Sakhalin was a big achievement,” Macquarie’s Gammel said in an interview. Rosneft “is their next big step into Russia. Insofar as Exxon has a position in Russia it’s due to Tillerson’s efforts.”

Sakhalin Experience

After his Sakhalin experience, Tillerson never lost his appetite for Russian ventures even as then-President Putin’s government rebuffed foreign companies to take tighter control of its oil and natural-gas resources eight years ago.

“We remain interested, we remain engaged,” Tillerson said a few months after stepping into the CEO job at Exxon in 2006. “When the time is right, we’ll find something to do there.”

A lack of faith in Russia’s investment climate may have held him back.

Tillerson criticized Russia’s legal system, telling the St. Petersburg International Forum in 2008, that there was “no confidence in the rule of law in Russia.” That echoed comments made by Lee Raymond, Tillerson’s predecessor as CEO, who said in a 2004 interview that an earlier comment he’d made that Russia was a safe place to invest, may have been “premature.”

In 2003, Exxon was negotiating what might have been the company’s most significant investment in Russia to that point, a stake in OAO Yukos Oil Co., led by Russian billionaire Mikhail Khodorkovsky. Pressure on Exxon to gain access to Russia’s immense reserves had increased after London-based BP Plc formed its TNK-BP joint venture with OAO Tyumen Oil Co.

Yukos Talks

The Yukos talks, confirmed by Putin, fell apart and Khodorkovsky was jailed in 2003. Rosneft bought Yukos’s main producing asset in 2004, after the state claimed it and auctioned it for unpaid taxes. Yukos was forced into bankruptcy in August 2006 as a barrage of tax claims continued. Rosneft acquired the bulk of the remaining Yukos assets at liquidation auctions in 2007.

At the time, it appeared as if no American-Russian oil and gas collaboration was going to be able to succeed, said Amy Myers Jaffe, an energy analyst at Rice University in Houston.

The Russians “weren’t interested in negotiating with anyone, and it got to the point where no one was interested in investing in their country,” Jaffe said.

That thinking began to change as Russia realized it needed the expertise and technology of international oil companies to maintain its position as the world’s biggest oil producer.

Complex Deposits

Unless it was able to develop resources in increasingly complex deposits in harsh environments, production would decline, Chris Weafer, chief strategist at Troika Dialog Group Ltd. said.

“Russia needs to ensure that it remains the world’s largest energy producer for both domestic and external political reasons,” Weafer said.

In January, BP was the first to secure a deal with Rosneft to develop its Arctic reserves in the Kara Sea. Less than two weeks later, Rosneft announced a $1 billion accord with Exxon to explore for oil in the Black Sea.

BP’s $7.8 billion share swap agreement fell apart after the U.K. explorer’s billionaire partners in TNK-BP blocked the deal this year. Shell and Chevron also had expressed interest in partnering with Rosneft in the Arctic before Exxon won the alliance yesterday.

Kara Sea

The three blocks in the Kara Sea fields in the accord are about the size of the U.K. North Sea and may hold as much as 100 billion barrels of oil equivalent, according to BP.

The partnership also allows Rosneft a chance to participate in Exxon’s deep-water projects in the Gulf of Mexico and its unconventional fields in Texas, where oil and gas are extracted by cracking open rocks with sand, water and chemicals. The two companies said they’ll study the potential for similar so-called tight oil fields in western Siberia.

Shell, Europe’s largest oil company, was described by Putin in May as a potential “comfortable partner” to replace BP in the Kara Sea. Shell, which works with state-controlled OAO Gazprom in Siberia and Sakhalin Island, agreed to further expand cooperation with the gas producer in June.

Chevron pulled out as Rosneft’s partner in the Val Shatskogo exploration project in Russia’s Black Sea this year. Chevron is “looking to partner with Rosneft on other opportunities in the Arctic or elsewhere in Russia,” Kurt Glaubitz, a company spokesman, said yesterday.

To contact the reporters on this story: Edward Klump in Houston at eklump@bloomberg.net; Stephen Bierman in Moscow at sbierman1@bloomberg.net

To contact the editors responsible for this story: Will Kennedy at wkennedy3@bloomberg.net; Susan Warren at susanwarren@bloomberg.net

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