Drilling into Exxon's $500 Billion Deal with Rosneft

Joel Anderson  |

Exxon Mobil (XOM)
may not be the most valuable company in the world anymore, but it proved it can still swing a pretty hefty stick. The company unveiled plans to invest upwards of $500 billion in a deal with Russian company Rosneft (RNFTF) to drill in vast energy reserves in the Arctic and Black seas.

Exxon's negotiations with Rosneft have gone on for almost a year, with a mutual distrust between Russian and American oil companies dating back to the Cold War. However, in making the final deal, Exxon has gained access to three Arctic oil reserves that have some an estimated 85 billion barrels of oil reserves, with the major attraction for Exxon coming in the Kara Sea prospect and its estimated 37 billion barrels of oil reserves. Rosneft will receive royalty payments of 5 percent for Kara Sea projects and 10 percent for deep water projects elsewhere. Wells in the Kara Sea are expected to be drilled as soon as 2014-5, with a final decision on full scale coming by 2016-7 and Kara Sea production estimated to begin by 2027.

Getting to this oil, though, will be a massive endeavor, requiring a tremendous investment of resources from Exxon.

"Experts say that this project, in terms of its ambitions, exceeds sending man into outer space or flying to the moon," said Russian Deputy Prime Minister Igor Sechin.

Exxon CEO Rex Tillerson also addressed the considerable difficulties that the project could present.

"There is a recognition that these are some of the most challenging parts of the world in which we will work as an industry," Tillerson said. "I think their commitment is to put in place what is necessary to see them developed. If they're not developed, Russia receives nothing either."

The deal also includes 20 "promising structures" in the Tuapse block of the Black Sea that three-dimensional seismic surveys have estimated could contain up to 9 billion barrels of oil.

The deal by Exxon comes after a previous deal cut with BP (BP) fell apart when shareholders in BP's Russian arm blocked the deal in court. The deal is not without controversy as some media voices continue to criticize Rosneft for its role in the bankruptcy and subsequent government takeover of Yukos that allowed Rosneft to purchase Yukos' assets at state run auctions. Bruce Misamore of the Moscow Times elaborates on this in an article from Wednesday:

"Rosneft was directly involved in the bogus bankruptcy of Yukos. In December 2005, Rosneft struck a deal with Yukos' primary group of lending banks. If the banks forced Yukos into bankruptcy, Rosneft would then buy all the loans that the banks had outstanding to Yukos. The loans were duly purchased by Rosneft within a couple of days after the banks forced the bankruptcy.

"The truth has not changed after the Exxon-Rosneft deal. More than 55,000 shareholders in Yukos, including about 50,000 in Russia, saw their investments stolen by the Russian government. There is no doubt that those shareholders would not agree with the Kremlin's toadies that any form of 'legitimization' whatsoever has occurred."

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