ExxonMobil’s Arctic Coup with Russia

A tieup with Rosneft to explore oil’s icy frontier leaves BP out in the cold

ExxonMobil’s epic win in securing access to Rosneft’s Arctic oil holdings is the culmination of almost 15 years of effort by Chief Executive Officer Rex Tillerson. Exxon’s partnership with Rosneft will allow it to tap into a region potentially containing tens of billions of barrels of oil. Exxon beat rivals, including BP, Royal Dutch Shell, and Chevron, to gain its piece of one of the globe’s last largely 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.

For Tillerson, who oversaw Russia’s first offshore project in Arctic conditions in the 1990s, the agreement with Rosneft, which involves an initial $3.2 billion investment, is his biggest deal since the $35 billion acquisition of U.S. shale gas producer XTO Energy in 2010. Prime Minister Vladimir Putin estimated that the total infrastructure buildout of the region could eventually approach $500 billion. “Between Russia and the XTO deal, Tillerson has put together a big resource base for the end of the decade,” says Jason Gammel, an oil industry analyst at Macquarie Capital in London. Exxon and Rosneft plan to explore Russia’s Arctic offshore and the Black Sea. Exxon has also agreed to give Rosneft stakes in some of its deepwater Gulf of Mexico projects and fields in Texas, making it the first major Russian oil producer to develop U.S. deposits.

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

Tillerson took responsibility for Exxon’s holdings in Russia and the Caspian Sea in the ’90s. In 1998 he was named vice-president of Exxon Ventures (CIS) and president of Exxon Neftegas, a role that included oversight of Exxon’s Sakhalin I oil project in Russia’s Far East. At its height, Sakhalin produced about 250,000 barrels of crude daily. “Sakhalin was a big achievement,” Macquarie’s Gammel says.

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

Tillerson criticized Russia’s legal system, telling the St. Petersburg International Economic 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 its most significant Russian investment to that point, a stake in Yukos Oil, then led by Russian billionaire Mikhail Khodorkovsky. Pressure on Exxon to gain access to Russia’s immense reserves increased after London-based BP formed its TNK-BP joint venture with OAO Tyumen Oil. However, 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 succeed, says 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 says.

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—and the deal flow resumed. In January, BP was the first to secure a deal with Rosneft to develop its Arctic reserves in the Kara Sea. However, BP’s $7.8 billion share swap agreement with Rosneft fell apart after the U.K. explorer’s billionaire partners in TNK-BP blocked the deal earlier this year. (In another blow to BP, Russian authorities on Aug. 31 raided its Moscow office in search of documents in connection with a civil shareholder suit.) Shell and Chevron also had expressed interest in partnering with Rosneft in the Arctic before Exxon won the alliance. 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 many as 100 billion barrels of oil equivalent, according to an earlier estimate by BP. The potential payoff is great—but so are the risks, in a land where business alliances have a way of unraveling fast.


    The bottom line: ExxonMobil’s deal with Rosneft to explore the Russian Arctic for energy is part of what could be up to $500 billion of investment in the area.

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