No, ExxonMobil's Partnership With Rosneft Does Not "Feel Weird"

Michael Teague |

Given the rather unexpected return of Cold War-era enmity that has resulted from events just west of the Russia-Ukraine border in recent months, it is perhaps not surprising to notice the uptick of McNationalism that has entered much of the discourse in the Western, and especially US, press.

Most often, this has taken the form of commentary and analysis that dwells on either the unconscionable nature or political untenability of ExxonMobil’s (XOM) hard-earned deal with Russian oil giant Rosneft. Their joint venture to search for crude in the daunting waters of the Arctic Circle held by Russia is a venture that has been the basis for ever-deepening ties between the two entities.

The Naysayers' Case

Critics and skeptics of the deal cite the fact that Rosneft, being a state-owned company, is for all intents and purposes synonymous with the Kremlin. Given the Kremlin’s widely assumed role in the “takeover” of Crimea (for which Crimean citizens overwhelmingly and democratically voted) and now other Eastern Ukrainian cities, as well as the potential consequences of those actions for US interests, one could almost get the impression that ExxonMobil is nothing less than a traitor to its country.

And then there are the numerous times that former Exxon Chief Lee Raymond has been quoted recently via Steve Coll’s excellent book on the company as having once said “I’m not a US company, and I don’t make decisions based on what’s good for the US.”

It is indeed a rather outrageous thing for the CEO of the third-largest publicly traded company in the US (and the world) to say, especially given what Coll’s book reveals about the numerous occasions in which Exxon has in fact used the US government to further its own interests. But this recent spate of outrage rings fairly hollow, if for nothing else but the fact that the US government itself has been extremely reluctant to make good on any of its otherwise loud threats to impose sanctions on the Putin clique, much less entire sectors of the Russian economy that are most likely controlled by members of that clique.

Be that as it may, there is likely not much, short of a very unlikely all-out war, that can put the breaks on the Exxon/Rosneft partnership. A brief summary of the deal itself, the impetus behind it, the investment that has already been committed, and the historically unprecedented scope of the exploratory efforts it has and continues to set in motion, should provide a fairly clear explanation as to why.

Territorial disputes aside, Russia sits on 43 of the 61 Arctic fields that are thought to contain significant reserves of fossil fuels. Taken together, the 61 fields are thought to contain up to one fifth of the world’s undiscovered and recoverable oil deposits.

Terms of Engagement

In August of 2011, after years of struggling to find the same foothold in Russia that its other major-integrated competitors had seemed to be enjoying at its expense, ExxonMobil emerged with the game-changer for which it had been toiling since the latter days of Lee Raymond in the form on an agreement signed with Rosneft for a $3.2 billion investment in Arctic exploration, covering three blocks in the Kara Sea as well as two deepwater blocks in the Black Sea.

The agreement initially hinged on seismic studies, as well as the launch of the Arctic Research Center, but was soon expanded to include several more offshore blocks, as well as the following projects:

  • A venture into Siberian shale, most notably the tight oil deposits of the Bazhenov formation that the US Energy Information Administration says contains almost 75 billion barrels of technically recoverable crude.

  • The construction of a $15 billion liquid natural gas plant on the Eastern Russian island of Sakhalin. The addition of this particular project to the partnership, in February of 2013, was notable because it necessitated a substantial portion of Russian gas giant Gazprom’s export monopoly on the country’s vast reserves of gas be cut back.

  • The seriousness with which both companies have been treating the partnership is also visible in the swapping of executives that has taken place. In 2012, Exxon Russia VP Zeljko Runje left the company to join Rosneft in the capacity of VP of its offshore operations. In the current year, Rosneft appointed former Exxon Senior VP Don Humphreys to its board in the capacity of independent director.

  • The agreement between the two companies also gives Rosneft a substantial position in three of Exxon’s North American projects, including a 30 percent stake in 20 exploration blocks in the Gulf of Mexico, a 25 percent stake in the Point Thomson natural gas condensate project in Alaska’s North Slope, a 30 percent stake in ExxonMobil’s West Texas La Escalera Ranch project in the Delaware Basin, as well as a 30 percent stake in Exxon’s acreage in the Cardium formation in Alberta, Canada.

Business and Energy Needs Trump Politics

Behind the massive sums of money involved in all of this, and the diverse array of projects, is a very simple trade-off. Exxon, along with the rest of the world’s publicly traded oil and gas majors, is hurting for fresh new reserves to replace their ever-diminishing assets.

The vast Russian territory contains just what they need in this regard, but the Russian oil and gas industry itself is in need of the technological know-how to exploit these reserves. While the country is and has been among the world’s top producers and exporters for some time now, with 10 million or so barrels per day pumping from onshore wells, the scenario is one that cannot last since these are legacy wells subject to ever-increasing depletion rates.

From the perspective of how entrenched and broad the Rosneft/Exxon partnership has already become, then, it would seem that just too much has been invested to cause any significant disruption to the proceedings. In any event, Arctic exploration is already well underway, and drilling is likely to begin this year. While it is certainly not possible to totally rule out some cataclysmic escalation resulting from events in Ukraine, there is simple too much at stake for both companies and both governments, to do anything to jeopardize the work both companies are doing together in any substantial way.

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

Companies

Symbol Name Price Change % Volume
XOM Exxon Mobil Corporation 87.48 0.44 0.51 11,742,196
IGPG Ignis Petroleum Group Inc 0.00 0.00 0.00 0

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