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ExxonMobil: From Russia (or not) With Love

By  +Follow March 27, 2014 11:25PM
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Escalating political tensions on the Crimean Peninsula in recent weeks have contributed to their share of erratic price swings over a period of several weeks, most notably whenever the US and Russia have engaged in bombastic rhetorical disputes over one another’s roles in the struggle for control over the lachrymose beauty of the coastal territory. It isn’t too difficult to see why the markets would get nervous under such circumstances, given the non-chalance with which the two superpower patrons seem to have simply relapsed into hostile cold war-era postures and attitudes that under normal circumstances would be considered a grotesque, even masochistic form of nostalgia by most of the world.

As is all too often the case when two nations are forced to carry out a dispute under the watching eyes of the international community, the loftiest expressions and ideals are almost invariably used to conceal what turn out to be the same old parochial objectives. In the present case, earnest expressions of concern for either Ukrainian territorial sovereignty or Crimean self-determination, respect for international law, human rights, and so on, are inseparable from the struggle over natural resources.

Energy Distribution as Politics Through Different Means

Indeed, Russia wields an enormous, perhaps even undue amount of influence over its European neighbors as a result of the enormous quantities of natural gas it produces and sells to them, much of it through a pipeline that runs underneath a significant portion of Ukrainian soil. Furthermore, Russia has famously not been bashful about using this pipeline to gain political leverage over the rest of the continent, with the most recent instance having occurred back in 2009 when a dispute between Russia’s massive state-run gas producer Gazprom turned off the spigot in order to compel its Ukrainian counterpart Naftogaz to pay down the some admittedly quite large sums of money it was owed. Southwestern Europe was cut off from its energy supply for half of the month of January, right in the middle of an exceptionally brutal European winter.

While echoes of this earlier crisis are discernible in the one that is currently in progress, there are other notable aspects of the westward trajectory of natural gas across the European continent. For instance, it is well known that major integrated oil and gas companies have invested no small amount of effort and cash in order to curry favor with Russian President Vladimir Putin, with the eventual goal of securing any sort of placement in one of the vast country’s many plentiful reserves of oil and gas.

The company that has so far overwhelmingly outpaced its peers in the quest for Russia’s oil and gas wealth is without question ExxonMobil (XOM) . In 2011, after many years spent patiently developing a building an intimate relationship with Putin’s regime, the supermajor to end all supermajors was duly rewarded in the form of a multi-billion dollar joint-partnership with Russia’s own in-house oil colossus Rosneft to drill for crude in the treacherous waters of the Arctic circle.

The mere mention of Arctic drilling will yield the most hideous of scowls from any good environmentalist, but it must be admitted that the ambition in itself is truly impressive, and the logic of choosing Exxon as a partner in such an experimental and risky undertaking is difficult to dispute.

And while other major players like BP plc (BP), Total SA (TOT), and Chevron (CVX) have all been granted some sort of access to Russia, none have managed to establish anywhere near the level of intimacy with Putin as has ExxonMobil CEO Rex Tillerson. Accordingly, none can boast of nearly as many projects.

In addition to the Arctic circle project, Exxon has been selected for directional drilling projects in Siberia, as well as offshore work in the Black Sea, and a natural gas export terminal on the Eastern coast of the country that will allow it a lucrative means of exporting product to market throughout Asia, where demand is expected to increase drastically in the years ahead.

Exxon has been pretty content with all of this, as has the Russian energy industry which is badly in need of the company’s expertise. But ever since the Crimean dust-up, there has been a backlash of sorts against the company, and from the US news media of all places.

Many financial news outlets have taken to wild speculation about how the Ukraine-Russia conflict would dash the company’s chances of realizing the projects it has so patiently worked to attain, and have harped to various degrees on the notion that these losses would be disastrous. But if there is any truth to what has been written, Tillerson himself has not revealed a hint of anxiety over the possibility. When asked about just this earlier this month, he simply said that he saw no threats to the company’s work in Russia resulting from the political situation.

But for the sake of argument, let’s say Exxon was affected negatively by its perceived collaboration with an authoritarian regime that is flagrantly trampling international law. Even without Russia, ExxonMobil looks like it will be having an impressive 2014, with 10 plants coming online, and a huge ramp up in non-petroleum chemicals production that will allow it to tap the US shale boom thanks to the chemical feedstock from the bonanza of hydraulic fracturing currently taking place.

But that’s not all, as the company has its liquid natural gas project in Papua New Guinea coming online, as well as its partnership with PetroVietnam, huge upgrades to petrochemical plants in Baytown, Texas and Singapore, as well as the expansion of its oil shale operations in Colorado’s Green River basin, where it has access to some 80 percent of total US oil shale reserves

Furthermore, despite its late entry into US shale, Exxon has become the US’s largest natural gas producer, beating out even the much-heralded independents but is exiting a significant portion of its acreage before it suffers from the diminishing returns that come with these assets.

But this is jumping the gun, because the company has only continued to deepen ties with its friends in Russia, and is projecting sincere confidence about the relationship. Perhaps this is what Obama was getting at when he spoke this week about a sanctions regime for Russia designed specifically to minimize losses to US and European companies. At the very least, it should come as no surprise if the foremost descendant of Standard Oil suffers anything more than cosmetic losses.

Heading into Friday’s closing bell, the company was trading up by 1.5 percent on volume for the second consecutive day, with shares at $97.75.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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By  +Follow March 27, 2014 11:25PM



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