Last week, oil giant ExxonMobil announced an agreement with Russia’s state oil company, Rosneft, to explore for oil in the Arctic continental shelf in the Kara Sea. America’s largest oil company is taking the place of BP (British Petroleum), whose dealings with Rosneft earlier this year collapsed.
The controversial Rosneft and Exxon will be searching the Russian Arctic waters for black gold. Development of new oil fields has become possible due to the Arctic polar ice caps’ retreat and technological progress that make geological work in the High North a reality.
The obstacle for the agreement between Rosneft and BP was a stock swap agreement intended to bypass BP’s exclusive Russian partner TNK and their joint venture TNK-BP, which was blocked by the Russian partners in TNK through arbitration in Stockholm. Exxon offered an alternative. It agreed to admit Rosneft into its projects in the Gulf of Mexico and Texas as partners and will receive equal share in the Russian projects. The volume of transactions is enormous. By its own conservative estimates, Exxon believes it will need to invest more than $3 billion in the Arctic on prospecting alone, and then tens of billions to start producing. The total direct investment for the project will reach as high as “$500 billion—a scary number,” according to Russian Prime Minister Vladimir Putin.
At present, Exxon is working with Rosneft at Sakhalin Island as part of “Sakhalin-1.” Reserves of “Sakhalin-1” are estimated at 300 million tons of oil and 500 billion cubic meters of gas. Exxon is directing the project, working under a production-sharing agreement with the Russian state, which in the past was revised to Exxon’s detriment. Exxon is also cooperating with Rosneft on a Black Sea project off the Russian port of Tuapse. Experts have long said that exploration in the Black Sea would require at least $1 billion, with no guaranteed returns. The Arctic deal is, however, widely regarded as much riskier than Sakhalin and the Black Sea.
The risks of doing business in Russia are clear. Besides the harsh Arctic Ocean conditions, Exxon must take on implicit obligations that are important to the Russian side. Rosneft is still working on absorbing the remainder of Yukos Oil Company’s assets it acquired in 2005–2007 and is still at risk of having those assets frozen in favor of Yukos’s former shareholders. Ironically, it was Exxon that was trying to buy half of Yukos when it was still owned by its founder, Mikhail Khodorkovsky, who is now in a Russian jail.
The new deal with Exxon will allow Rosneft and Russia the massive lobbying capabilities of a leading U.S. oil company in the event there are any problems. The deal of the century may seriously alter geopolitical balance, moving the U.S. and Russia closer together.
Their arrangement will have to pass the scrutiny of official Washington, as it is one of the first significant attempts to acquire domestic oil fields by a Russian state-owned company. Russia is not an ally of the United States. However, with the current Administration’s “reset” policy with Russia failing, it may ignore the risks Exxon is assuming to create an impression that relations with Russia are on track.
There is also a domestic explanation to this deal. Since the U.S. government has virtually closed off all access to the enormous resources of the Arctic, partnering with the Russians may be an easy way for American companies to reach the energy riches of the High North. The irony is: Exxon will invest tens of billions of dollars in the Russian Arctic while the Arctic waters off the U.S. coast remain inaccessible due to environmental and bureaucratic obstacles.
Environmental legislation is impeding economic expansion in the U.S. Arctic shelf. The American oil company Sunoco tried for five years to attain access to one of the sites in the National Petroleum Reserve, but in the end was refused by the U.S. Corps of Engineers. Exxon ran into the same problems when it sought permission to work on Alaska’s North Slope. The U.S. also lacks icebreakers to map and develop the frozen expanses.
In light of all these obstacles, it is not surprising that Exxon decided to risk an agreement with Rosneft, although judging by previous adventures of foreigners in Russia—especially in the oil sector—the path chosen by Exxon may prove difficult. Caveat emptor—“Let the buyer beware”—is the best policy the U.S. company can pursue when sailing the frigid Russian waters.