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Page added on August 9, 2014
Exxon Drilling Russian Arctic Shows Sanction Lack Bite
Sanctions, what sanctions?
Exxon Mobil Corp. will start drilling a $700 million well in the Arctic Ocean tomorrow, Russia’s government said, showing that for all the talk of action against Vladimir Putin’s oil industry, the largest U.S. energy company is undeterred.
As Russia’s relations with Europe and the U.S. deteriorated to the lowest point since the Cold war over the conflict in Ukraine, the European Union imposed a third round of sanctions last week, restricting the export of equipment used for offshore oil production. That doesn’t affect Exxon’s plans because the contract to hire the rig was signed before the measures were announced.
Developing the Arctic is vital for Russia, where energy provides half the state’s revenue, to maintain oil production near a post-Soviet high of more than 10 million barrels a day. For Exxon, where output fell to a five-year low in the second quarter, a discovery would offer a vital new source of crude.
“The well is very important, it’s probably one of the most interesting wells in the global oil industry for many years,” James Henderson, a senior research fellow at the Oxford Institute for Energy Studies, said in a phone interview.
After more than two years’ planning Exxon and its partner OAO Rosneft, Russia’s state oil producer, will start drilling the Universitetskaya prospect tomorrow, the Kremlin said in a statement today. Putin will give the signal to start Russia’s northernmost well accompanied by Rosneft Chief Executive Igor Sechin, who’s subject to U.S. sanctions himself, and Exxon Mobil Russia head Glenn Waller.
Ship Tracking
Neither Exxon nor Rosneft press service immediately responded to requests for confirmation.
Universitetskaya is the first of as many as 40 offshore wells Rosneft plans by 2018 to test the potential of the unexplored the Arctic Ocean. The geological structure targeted by the drilling is roughly the size of the city of Moscow and may contain as many as 9 billion barrels of oil, according to a presentation on Rosneft’s website.
“It is an anomaly in the current situation and just how long major western companies, such as Exxon, can carry on doing this, is anybody’s guess,” said John Lough, a London-based associate fellow at Chatham House, a London-based foreign policy research group. “They are light sanctions at the moment in terms of the energy industry.”
Exxon isn’t the only western oil company involved. BP Plc, the U.K.’s second-largest oil company by value, has an interest through it’s 20 percent stake in Rosneft.
The West Alpha rig, leased by Exxon from Bermuda-based Seadrill Ltd., is currently in Kara Sea about 72 miles off the coast of Novaya Zemlya, according to data compiled by Bloomberg.
Iceberg Free
Drilling will take about 70 days, a period that should be sufficient to assess the reserves of any discovery, Rosneft’s head of offshore, Zeljko Runje, said on a call with analysts last week. The area is relatively free of icebergs, meaning work is ready to start, he said.
Longer-term, the sanctions announced last week may start to slow the development of the Arctic shelf, said Edward Chow, a senior fellow at the Center for Strategic and International Studies.
“Sanctions were not designed to stop this, but overall the project is bound to slow down as would all long-term, high-risk projects of this sort until how sanctions are enforced and their duration are clear,” he said.
Banning Food
Russia has responded by banning food from the EU and U.S. yesterday and threatened to limit overflights from Europe to Asia. That means that in the future, Exxon-led crews on drilling rigs may not even be able to eat food from America. Air travel will be no problem as the only way to reach the remote deposit is a four-day sail from Murmansk, the Arctic’s largest city.
In addition to the political background, drilling in the Arctic Ocean is controversial because campaigners say it threatens a unique ecosystem.
“The West Alpha platform is fast becoming the most controversial oil rig in the world,” Gustavo Ampugnani, an Arctic campaigner at Greenpeace, said in an e-mailed statement. The companies’ plan “to drill in the ecologically sensitive Arctic is nothing less than absurd.”
Tensions with Russia will make companies pay more attention to risk, said Richard Mallinson, an analyst at Energy Aspects Ltd. in London.
Risk Level
“A company could put a lot of money into a country and sanctions could reach point where you couldn’t carry on, like in Iran,” he said in a telephone interview. “I’m not saying we’re on that path yet with Russia. But from the company’s point of view they have to have an eye on what level of risk there is and whether its acceptable.”
The Exxon-Rosneft cooperation also includes a $300 million investment in Russian shale pilot projects, which now risk being suspended, Rosneft Chairman Alexander Nekipelov said on July 29. Exxon has come under pressure and showed surprising perseverance, Nekipelov said at the time.
Exxon and Rosneft have also invested in a new platform this year to expand oil production at the Sakhalin-1 project in Russia’s Far East.
David S. Cohen, U.S. Treasury Undersecretary for Terrorism and Financial Intelligence, declined to comment on Exxon’s work in Russia on a call with reporters this week.
“We are in close contact with U.S. businesses with respect to all of these sanctions” programs, Cohen said, while declining to discuss the details of those conversations with specific companies.
Exxon’s decision to press ahead with exploration means it maintains plans for development, according to Mallinson. At the same time reciprocal sanctions and Russian troops massed near the Ukraine border have companies legitimately concerned about risk, he said.
“That has big implications for Russia’s future production prospects, if the sanctions do remain in place and companies do scale back plans,” Energy Aspect’s Mallinson said.
8 Comments on "Exxon Drilling Russian Arctic Shows Sanction Lack Bite"
JuanP on Sat, 9th Aug 2014 1:25 pm
I think Russia’s tit for tat, applying specific food import bans from the countries that sanctioned it is a smart move, and Russia has done this before with other countries like Lithuania and Poland.
The EU spends a lot in agricultural subsidies and benefits from that. This move makes Russia more resilient by protecting its local food production. Producing your own food is essential for a country. There is an accompanying plan to increase food production in Russia by assisting farmers and investing in farms and farming.
Smart move to make if preparing for trouble like more sanctions, war, or collapse.
Other food exporting countries will benefit, for a while, from increased exports to Russia, particularly places like Argentina and Brazil.
rockman on Sat, 9th Aug 2014 1:50 pm
Interesting dynamic developing. The west hits Russia with sanctions that will ultimately decrease the amount of energy it has available from Russia to function properly. So Russia bans some imports from the west which includes, most importantly, exports the Ukraine desperately needs. So in retaliation the Ukraine threatens to not transship Russian energy to the EU if sanctions against its exports aren’t lifted. Exports which will become extremely critical to the EU as winter approaches.
So in effect are the sanctions threatened by the Ukraine designed to motivate Russia to change its policies or to force the west to change its sanctions against Russia? And that leads us to the endless debate of who needs who the most. IMHO it’s an easy answer: they all need each other. Except if the EU commissioners drop their opposition to the South Stream pipeline. Which is what a number of EU countries are demanding in order to not be dependent upon Russian NG being shipped thru the Ukraine. This would greatly reduce the Ukrainian leverage…but not for a number of years. This winter, regardless of what happens in the next few months, the EU will suffer more than any of the actors in this kabuki theater if the Ukraine follows thru on its threat. The Russians and Ukrainians will lose revenue. The EU economy and its citizens will suffer. And some will lose their lives.
Ukraine threatened to block Russian oil and gas supplies to Europe in new sanctions against Vladimir Putin’s government, which it blames for a separatist uprising that has ravaged the country’s east. Ukraine, which no longer receives any gas from Russia but acts as a conduit for its neighbor’s European customers, is considering a “complete or partial ban on the transit of all resources” across its territory, Prime Minister Arseniy Yatsenyuk told reporters today in Kiev. It may also ban Russian planes from its airspace and cut defense-industry cooperation. “There’s no doubt that Russia will continue its course — started a decade ago — aimed at banning imports of Ukrainian goods, limiting cooperation with Ukraine, pressure and blackmail,” Yatsenyuk said. “In the most negative scenario for Ukraine, losses during the first year may reach $7 billion, not only because of sanctions but also because of the Kremlin’s aggressive policy.”
And then there’s the motivation created by the latest sanctions against Russia for them to look for financial and tech support from other countries. Such as China which just promised Russia $400 billion for future NG sales. And Iran as seen below. But why would Russia, a very big oil exporter, want to buy 500,000 bopd from Iran? A simple answer IMHO: to control more of the oil export market then it current does. Just because has the right to buy that Iranian it doesn’t mean they’ll import it: they can sell it to China and have it shipped there directly from Iran. If such a deal holds it would remove about $200 billion of oil from the global market place over just the next 10 years. In a world dealing with a developing PO scenario this is not an insignificant issue IMHO:
Vladimir Putin has agreed a $20bn trade deal with Iran that will see Russia sidestep Western sanctions on its energy sector. Under the terms of a five-year accord, Russia will help Iran organize oil sales as well as “cooperate in the oil-gas industry, construction of power plants, grids, supply of machinery, consumer goods and agriculture products”, according to a statement by the Energy Ministry in Moscow. The Russian government issued a new statement on Wednesday after mysteriously withdrawing a similar release on Tuesday. Russian Energy Minister Alexander Novak said on Wednesday that his government will help Iran bring its oil to market. In return, Iran wants to import power and pump equipment, steel products such as pipes, and machinery for its leather and textile industries, wood, wheat, pulses, oilseeds and meat. Iran is also interested in the joint construction of power generation and development of coal deposits. Further talks between the two countries will take place next month, he said. A deal could see Russia buying 500,000 barrels of Iranian oil a day, the Moscow-based Kommersant newspaper has previously reported. That would be about a fifth of Iran’s output in June and half its exports.
synapsid on Sat, 9th Aug 2014 2:10 pm
rockman,
“…and development of coal deposits.”
JuanP on Sat, 9th Aug 2014 2:10 pm
Rock, Russia is buying the Iranian oil to further corner the global oil market and will sell it in Southeast Asia, most likely, as you pointed out, and also to help Iran bypass the US sanctions. The CIA director said in January this deal is not acceptable to the USA. If this deal is closed, the USA would retaliate immediately, IMO. This would signify further escalation in the USA-Russia conflict. All this is to be expected to happen soon.
rockman on Sat, 9th Aug 2014 7:38 pm
Juan – And did he bother to specify exactly how the world’s largest oil importer would retaliate against the world’s largest oil exporter?
Makati1 on Sat, 9th Aug 2014 8:52 pm
Sanctions? What sanctions? Most of the Western countries are ignoring the DC Mafia’s rants. But they will not be able to ignore the depression coming to the West as a result. We shall see.
Nony on Sun, 10th Aug 2014 10:05 pm
I hate sanctions. They drive up the price of oil. I want it cheaper. It’s screwed up to use trade as a weapon anyways. Better to have more trade, not less.
GregT on Sun, 10th Aug 2014 10:49 pm
Of all the positive feedback mechanisms associated with climate change, arctic oil exploration is one that we could actually stop, but we won’t. We will continue to destroy our children’s futures, so we can have more of what we don’t really need, today.
The game being played against Moscow by Washington, has still not been fully played out. Watching these events unfold has been disturbing to say the least. Twenty-first century man has still not grown up.
I still maintain that Iran will be next.