Exxon Russia Exposure Surges as Long View Outweighs Politics

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Exxon CEO Rex Tillerson
Rex Tillerson, Chief Executive Officer of Exxon Mobil Corp., is scheduled to brief a gathering of investors and analysts on the company’s growth outlook at the New York Stock Exchange on Wednesday. Photographer: Andrey Rudakov/Bloomberg

Exxon Mobil Corp. shook off the chill of sanctions and continued to snap up drilling rights in Russia last year, giving it more exploration holdings in Vladimir Putin’s backyard than in the U.S.

Taking the long view, Exxon boosted its Russian holdings to 63.7 million acres in 2014 from 11.4 million at the end of 2013, according to data from U.S. regulatory filings. That dwarfs the 14.6 million acres of rights Exxon holds in the U.S., which until last year was its largest exploration prospect.

While U.S. and European Union sanctions against Russia forced Exxon to shut down an Arctic drilling project in October, there were no legal obstacles barring the company from staking claims to areas that could yield tens of billions of barrels in coming decades. The bet on Russia follows a string of drilling failures elsewhere and spending cuts that will likely be addressed in Chief Executive Officer Rex Tillerson’s investor meeting Wednesday.

Exxon is “definitely looking at the longer-term opportunity,” Brian Youngberg, an analyst at Edward Jones in St. Louis, said in an e-mail. “Even before oil fell, it was going to be a longer-term play with no contribution until at least 2020.”

Sanctions to punish Russia for supporting separatists in eastern Ukraine and for the annexation of Crimea prohibit companies based in the U.S. and EU from probing Russia’s deep-sea, shale and Arctic fields. They don’t bar activities such as seismic surveying or acquiring drilling rights, opening an avenue for Exxon’s bold campaign.

Drilling Rights

The producer, based in Irving, Texas, added drilling rights in the Laptev and Chukchi seas last year to holdings it already had in the Kara and Black seas under joint-venture agreements with state-controlled OAO Rosneft, the filings showed. The exploration rights have various expiration dates spanning from 2017 to 2023.

Geologists have no estimate of how much oil is trapped beneath the acreage Exxon amassed. In 2012, Russian officials said the resources were so vast that they would require new airports to be built to handle thousands of roughnecks and scores of offshore platforms to manage crude production.

The Kara and Black sea assets alone will cost as much as $350 billion to develop, Igor Sechin, the Rosneft chairman who was deputy prime minister at the time, said in April 2012.

The work with Rosneft that was halted by sanctions in late 2014 may produce a maximum loss of $1 billion, Exxon said in a public filing last week.

No Siding

Tillerson is scheduled to brief a gathering of investors and analysts on the company’s growth outlook at the New York Stock Exchange on Wednesday. Exxon closed the transaction for the additional acreage in May, completing an agreement made 15 months before, said Patrick McGinn, a company spokesman. The May closing was about two months after the Russian annexation of Crimea that spurred U.S. and EU leaders to escalate sanctions.

“We don’t take sides in any geopolitical events,” Tillerson said of the conflict in Ukraine in a meeting with reporters a year ago. “We have navigated these kinds of challenges before.”

The company’s fourth-quarter output tumbled to a 15-year low, and its shares lost 8.7 percent of their value in 2014, the steepest annual decline since 2009.

The U.S. oil explorer’s willingness to expand in Russia when western governments are working to isolate President Putin’s regime may indicate it expects sanctions to be short-lived, said Timothy Ash, chief economist for emerging markets at Standard Bank Plc in London.

“They’ve got people much better at reading geopolitics internationally than anyone else,” Ash said. Still, the EU appears more likely to “extend, deepen, enlarge” sanctions rather than suspend them.

Ukraine Situation

Exxon has scant prospect of exploiting those holdings as long as Russia remains committed to separatists in eastern Ukraine and the annexation of Crimea, said Philipp Chladek of Bloomberg Intelligence.

European leaders “cannot accept one country annexing another’s territory like that,” said Chladek, a petroleum analyst based in London and former strategist at OMV AG, central Europe’s biggest oil company. “Europe is very keen on not creating any precedents for similar moves.”

Worldwide, Exxon’s exploration failure rate worsened last year to 39 percent from 33 percent in 2013. The company had so-called dry holes, or wells that failed to locate commercially viable amounts of oil or gas, in two-thirds of the regions in which it operates.

Of the seven exploratory dry holes Exxon drilled in 2014, four were in the U.S. The company’s costs to extract a barrel of crude from the ground rose 9.3 percent last year to a global average of $12.55.

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