Ukraine Crisis Endangers Exxon’s Black Sea Gas Drilling: EnergyStephen Bierman
Crimea’s hastily organized vote this weekend on whether to leave Ukraine to join Russia is threatening Black Sea oil and natural gas drilling prospects coveted by Exxon Mobil Corp. and Eni SpA.
Before violent protests in Kiev overthrew pro-Moscow President Viktor Yanukovych and Russian troops occupied parts of Crimea, a group including Exxon and Royal Dutch Shell Plc planned to spend $735 million drilling two wells about 50 miles (80 kilometers) from the region’s southwest coast.
Today it’s not even clear whether the government in Kiev will have the power to award oil and gas licenses in Black Sea waters around the disputed region. The parliament in Crimea, where Russian speakers are in the majority, said last week it voted to join the Russian Federation and would put the plan to a referendum on March 16.
“Exxon and Shell are now in a legal limbo,” said Chris Weafer, a partner at Macro Advisory in Moscow. They pursued an “exploration deal with a government which may soon no longer have jurisdiction over the region.”
Exxon sought the rights to drill the Skifska license off Ukraine after discovering the Domino field in 2012 in neighboring Romania, a find large enough to offer that country the prospect of becoming a gas exporter. Exxon Mobil Senior Vice President Andrew Swiger said in an investor presentation last week it still remains interested in getting permission to explore off Ukraine.
The Irving, Texas-based company’s chairman and chief executive officer, Rex Tillerson, said last week Exxon isn’t choosing sides in the dispute. Yuriy Prikhodko, a spokesman for Exxon in Ukraine, declined to comment on how the vote in Crimea would affect its plans.
For the government in Kiev, offshore exploration is part of a strategy to wean itself off gas imports from Russia, which supplies more than 50 percent of Ukraine’s fuel. It also signed shale-gas exploration deals with Shell and Chevron Corp. and has worked to reduce consumption.
The referendum’s other option, to increase Crimea’s autonomy while remaining a part of Ukraine, could also inject uncertainty into Black Sea oil and gas rights, according to Richard Mallinson, a London-based geopolitical analyst at Energy Aspects.
“You could draw allusions to Iraq and Kurdistan or the debate on Scottish independence but each situation is specific,” Mallinson said.
Eni, Italy’s largest oil and gas producer, last year reached an agreement to explore 1,400 square kilometers (540 square miles) off Crimea’s eastern coast. CEO Paolo Scaroni said last week he didn’t know how the situation in Crimea would affect the license.
“We wait to see if the situation gets normal, and then I would certainly get back in touch with the new authority there,” he said in an interview with CNN. “We have been living through changing of governments in many countries in our life, and normally contracts are respected by new governments.”
An Eni official declined to comment further.
Eni operates the block with a 50 percent stake, Electricite de France SA holds 5 percent, while state-owned companies Vody Ukrainy and Chornomornaftogaz have 35 percent and 10 percent respectively.
Russia is wresting control of Crimea, home to its Black Sea Fleet, from Ukraine after last month’s toppling of Yanukovych. The U.S. estimates Russia now has 20,000 troops confronting a smaller Ukrainian force.
Given the situation, exploring the Ukrainian part of the Black Sea is unlikely to be high on the agenda of any international oil and gas company right now, said Julian Lee, an analyst at the Center for Global Energy Studies in London.
“I can’t imagine any foreign investor wanting to commit people or money in the current state of uncertainty,” he said.
Sergei Tsekov, deputy speaker of the Crimean parliament that voted to leave Ukraine for Russia, said in a phone interview that the new regime would respect the rights of investors. He declined to comment on specific contracts.
The push to drill the waters off Crimea was part of a wider campaign to explore for oil and gas in the Black Sea, where fewer than 100 wells have been drilled, according to data compiled by Bloomberg. That compares with more than 7,000 in the North Sea.
Exxon also has plans to explore in the Bulgarian and Russian parts of the Black Sea as well as off the Romanian coast. In Turkey, Shell, Chevron and Petroleo Brasileiro SA hold drilling rights.
In Ukraine, however, the future of offshore drilling is unknowable until the crisis is resolved, said Aleksandr Tolkach a spokesman for billionaire Rinat Akhmetov’s DTEK energy holding, which owns a share in another venture with exploration licenses off Crimea.
“The situation with Crimea currently is totally unpredictable,” he said.