Putin Oil Deals With Exxon, Shell Imperiled by Sanctions

Putin’s Oil Deals With Exxon, Shell Under Threat From Sanctions
Oil workers operate drill sections while working on the drilling floor beneath the travelling block, right, on a derrick operated by Salym Petroleum in Salym, Khanty-Mansi autonomous region, Russia. Gazprom Neft and Shell have begun exploring for tight oil in Siberia within their Salym Petroleum Development project, while state-run competitor OAO Rosneft has brought in Exxon Mobil Corp., Statoil ASA and Eni SpA to develop shale and offshore projects. Photographer: Andrey Rudakov/Bloomberg

The U.S. and European Union are poised to halt billions of dollars in oil exploration in Russia by the world’s largest energy companies in sanctions that would cut deeper than previously disclosed.

The new sanctions over Ukraine would prohibit U.S. and European cooperation in searching Russia’s Arctic, deep seas or shale formations for crude, according to three U.S. officials who spoke on condition of anonymity because the measures haven’t been made public. If implemented, they would affect companies from Dallas to London, including Exxon Mobil Corp. and BP Plc.

EU ambassadors met today and will resume deliberations tomorrow in Brussels on whether to trigger added sanctions or wait longer to see if a cease-fire holds between Ukraine and pro-Russian separatists and if Russia backs moves toward a longer-term agreement.

Once the EU implemented the new ban on sharing energy technology and services, the U.S. would follow suit with a similar package, including barring the export of U.S. gear and expertise for the specialized exploration that the Russians are unequipped to pursue on their own, the U.S. officials said.

EU governments agreed on these oil-related sanctions on Sept. 8 as part of a wider package of measures intended to hobble Russia’s finance, defense and energy industries, pending evaluation of the cease-fire declared in Ukraine last week, according to two European officials who also spoke on condition that they not be named.

Future Impact

The added sanctions wouldn’t interfere with drilling and production from conventional land-based wells and those along the shallow edges of inland seas, some of which have been pumping crude for decades. The sanctions target reserves that wouldn’t begin providing crude to global energy markets for five to 10 years.

The move would go beyond previously reported proposals to widen curbs on technologies for the oil industry by banning such cooperation, levying a heavy toll on Russia’s $425 billion-a-year petroleum industry.

No companies outside the U.S. and Europe have the specialized techniques for extracting crude from deep-sea fields and shale formations.

‘Big Deal’

“If true that new sanctions were to ban technology and services for Arctic, deep-sea and shale exploration, that would be a very big deal,” Jason Bordoff, former energy adviser to President Barack Obama and founding director of the Center on Global Energy Policy at Columbia University in New York, said today in an e-mail. “It would significantly curtail Russia’s future oil production capacity, although it is important to note that it would require close collaboration between Europe and the United States to be effective.”

While the U.S. doesn’t intend to allow exemptions for existing contracts that would be affected, the American officials said they weren’t certain whether the EU would provide more leeway.

The stakes are high for Russian President Vladimir Putin because of his government’s dependence on the energy industry to drive economic growth, with a growing reliance on U.S. and European technology and services to exploit fields that pump one of every eight barrels of crude produced worldwide every day.

Since Russia’s annexation of Ukraine’s Crimea peninsula six months ago, the U.S. and EU have imposed steadily more painful sanctions on Putin’s inner circle of politicians and billionaires as well as on banks, energy and defense companies close to the Kremlin in an effort to force Putin to abandon efforts to divide and destabilize Ukraine.

Economic Hammer

The U.S. and EU wield a massive economic hammer: Combined, the allies account for 39 percent of the globe’s economic output, compared with Russia’s 3 percent. While the economic penalties taken before this week have been significant -- including limiting Russian banks’ and energy companies’ ability to raise debt financing -- a ban affecting key types of oil exploration would go a significant step further toward choking Russia’s future economic growth.

U.S. and EU explorers operating in Russia would be barred under the new decrees from bringing in experts and rig crews crucial to unlocking billions of barrels of crude locked in offshore Arctic or Siberian shale fields, according to the government officials.

In the Arctic, drill bits that can cost thousands of dollars apiece need to be replaced constantly and some of the world’s best-trained engineers, geophysicists and geologists must be flown in when needed to troubleshoot problems as they arise.

Exxon-Rosneft

The ban on cooperation would close gaps in previous rounds of sanctions that left room for a unit of Bermuda-based Seadrill Ltd. to sail the West Alpha floating rig into Russian waters in late July on behalf of Irving, Texas-based Exxon Mobil and Moscow’s state-controlled OAO Rosneft.

The arrival of the rig, as well as the signing of six new Seadrill contracts with Rosneft on July 29, just as the last round of sanctions was imposed, angered U.S. and European officials who said the moves flew in the face of the intention behind the economic restrictions: to freeze Arctic exploration by Russia.

Some of the costliest, most complex drilling forays ever attempted in Russia may be in limbo, including a $700 million well that Exxon and Rosneft began to drill last month in the Kara Sea.

Tillerson’s Stance

For Exxon, Russia represents its biggest exploration prospect outside its home country. Exxon owns drilling rights across 11.4 million acres of Russian land and seafloor, an area twice the size of Massachusetts. Exxon’s $411.3 billion market valuation makes it the world’s largest energy company; its annual sales exceed the economic output of all except 28 nations.

Exxon, which has partnered with Rosneft on Russian oilfields for more than a decade, expanded its relationship with the Moscow-based company in 2011 by signing a $3.2 billion exploration pact. Chairman and Chief Executive Officer Rex Tillerson expressed doubts in May that sanctions on Russia would prove effective. In June, he appeared on stage alongside Rosneft CEO Igor Sechin, a former Soviet spy who is under personal sanctions barring him from traveling to the U.S., at the World Petroleum Congress in Moscow.

‘Reliable Partner’

Putin called Exxon “an old and reliable partner” during a ceremony last month marking the start of drilling at an offshore Arctic prospect called Universitetskaya that may hold 9 billion barrels of crude. At current market prices, that would be a $894 billion bonanza.

“We are assessing the situation,” Alan Jeffers, an Exxon spokesman, said yesterday in a telephone interview when asked about the prospect of further sanctions. “We always follow the law.”

Other vulnerable international operators include Royal Dutch Shell Plc, the world’s second-largest energy company by market value. Multiple investments by The Hague-based company in Russia include ventures to use advanced reservoir-management techniques to revive and increase crude output from Soviet-era fields and to explore some of the nation’s vast, untapped shale formations.

“We are continuing to review the latest sanctions to assess the potential impacts on our business, and engaging with the respective authorities to gain further clarity,” Kayla Macke, a Shell spokeswoman, said in an e-mail. “We are taking action to ensure we comply with all applicable sanctions or related measures. We’re keeping the situation under close review.”

Total, Statoil

BP’s 19.75 percent ownership stake in Rosneft is the biggest foreign direct investment in Russia.

“We will look at any new sanctions and we will of course comply with all applicable sanctions,” Toby Odone, a spokesman for BP, said by phone.

In addition to Shell and BP, Russia’s deals with marquee European oil companies includes Paris-based Total SA and Stavanger, Norway-based Statoil ASA. Total relies on Russian wells for almost 10 percent of its global output. A spokeswoman for Total declined to comment.

“This is something we’re monitoring closely,” Statoil Chief Financial Officer Torgrim Reitan said in an interview in Oslo today. “Our positions in Russia have a very long time horizon.”

Last month, Statoil CEO Helge Lund said at a conference in Stavanger, Norway, the existing sanctions regime would delay some of the company’s planned joint-venture projects with Rosneft. Statoil, which is 67 percent owned by the Norwegian government, was bracing for longer approval processes for exporting equipment and services to Russia, Lund said at the time.

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