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Page added on September 13, 2014
New Sanctions to Stall Exxon’s Arctic Oil Plans
Exxon Mobil’s ambitions in Russia appear to have been dashed, at least until the Ukraine crisis is resolved.
As part of the latest round of sanctions against Russia, the United States government took aim at Exxon’s project in the Arctic Ocean, ordering American companies to cut off exports to Russian oil exploration within 14 days.
The United States and Europe originally banned technology transfers that aided Russia’s deep water, Arctic offshore or onshore shale rock formation projects over the summer, but the language did not stop Exxon Mobil from starting drilling in the Kara Sea with a rig it had just moved. The new measures applied on Friday were meant to close those loopholes by also banning the export of goods and services.
Exxon said its lawyers were studying the sanctions. “We have to look at what was issued today” by the United States and the European Union “and determine how it affects us,” said Alan Jeffers, an Exxon spokesman.
American officials, who spoke on condition of anonymity to discuss the impact of sanctions on individual companies, said they recognized that Exxon Mobil lawyers might look for creative ways around the sanctions. But they said the government’s intention was to shut down the company’s operations in the Kara Sea.
The sanctions won’t hurt Exxon’s profit for years. Exxon, which is working with the Russian energy giant Rosneft, just started exploratory drilling in the Arctic, and it could be a decade before the project started producing oil in meaningful quantities.
But the sanctions, particularly if they last for an extended period, could damage Exxon’s relationship with Russia, crimping the company’s growth strategy. The Kara Sea project in the Arctic Ocean is a central piece of Exxon’s effort to gain new reserves and replace production lost in aging fields and in countries like Venezuela that have grown unfriendly to Western oil companies.
Western governments have been gradually ramping up the pressure on President Vladimir V. Putin of Russia in an effort to halt his support of separatists in Ukraine. The prolonged crisis and the sanctions, against financial, defense and energy companies, as well as individuals, have weighed heavily on the Russian economy.
But the country’s cash-rich energy industry so far has shown few signs of a slowdown. Western energy giants, too, have been largely operating as normal.
The new measures threaten the status quo.
“It will infuriate the Kremlin, and Russia’s sanctions response will now be tougher than had been expected,” said Christopher J. Weafer, a partner at Macro-Advisory, a Moscow-based firm that advises businesses on Russia.
Exxon and other Western energy giants could feel the pinch, too. While the European Union exempted existing contracts from the sanctions, the United States did not.
The United States Treasury put a deadline on its order, saying that American companies engaged in such activities with five big Russian energy companies had until Sept. 26 to “wind down applicable transactions with these entities.” In addition to Rosneft, the American sanctions preclude transfers of technology, goods and services to the Russian energy companies Gazprom, Gazprom Neft, Lukoil and Surgutneftegas.
American officials said the new sanctions would not affect current day-to-day oil production. And even if they had, Russia isn’t a meaningful contributor to Exxon’s bottom line.
Exxon’s primary business in Russia is a partnership on Sakhalin Island with Rosneft, Japan’s Sodeco and O.N.G.C. of India. The project produces 140,000 barrels of oil a day, which translates to less than 50,000 barrels a day for Exxon. That represents a small fraction of the 2.1 million barrels Exxon produces worldwide every day.
But the sanctions are a potential blow to Exxon’s future growth.
Earlier this summer, Exxon, with its Russian partner Rosneft, started drilling in the Kara Sea, the body of water between the northern coast of European Russia and the Novaya Zemlya island chain. The project offers Exxon access to an area with great promise; the Arctic holds an estimated one-fifth of the world’s undiscovered, recoverable oil and natural gas, much of it concentrated in the ocean’s Russian sector.
The Arctic is part of a long-term strategy at Exxon to help bolster production, as many of its fields around the world start to decline. The company reported in the second quarter that its oil and gas output dropped 6 percent from the same period in 2013, largely because of the expiration of its rights to a field in Abu Dhabi.
Mr. Jeffers, the Exxon spokesman, wrote in an email on Friday that a rig brought this summer from Norway continued to drill the joint venture’s first Arctic well. But he added that, “we are assessing the sanctions. It is our policy to comply with all laws.”
The new sanctions will almost certainly lead to serious project delays. The sanctions will prohibit the export of many services for deepwater, shale and Arctic oil exploration and production, including drilling, well testing and advanced well completion techniques like hydraulic fracturing. While previously completed fields can continue to operate, expansions that tie in foreign companies will be far more difficult.
The wording of the United States and European sanctions are not entirely consistent. A Barclays report noted that each uses different clauses for describing deepwater, Arctic and shale projects “in such a way that adds uncertainty for companies involved in the production of both oil and gas in Russia.”
Barclays forecast that Russian oil production would decline by a mere 20,000 barrels a day in 2015 — a drip in a 90 million barrel a day world market. But it added that they would “throw a wrench” into plans to expand the Sakhalin fields.
Richard Mallinson, an analyst at Energy Aspects, a London-based research firm, said that the Exxon joint venture and similar projects would likely have to deal with significant disruptions until sanctions are lifted. Oil service companies like Halliburton and Baker Hughers, major suppliers to the Russian industry, may also face pressure.
The ban on technology transfers could cripple a sweeping plan by Russia to move from declining Siberian fields to ones offshore in the Arctic Ocean, newly accessible because of the thawing sea ice from global warming. In recent years, Russia has also developed ambitious plans to extract oil from its huge onshore shale rock formations, though little such oil has been produced so far.
Exxon, as well as Norway’s Statoil and Italy’s Eni, have Arctic ventures with Rosneft. A number of major companies, including Exxon, BP, Total and Royal Dutch Shell, are engaged in projects to test the potential of Russian shale.
In a presentation, Igor Sechin, the top executive at Rosneft and a close aide to Mr. Putin, said Arctic and so-called tight oil development that relies on Western technology would attract $300 billion to $500 billion in direct investment, and spur the economy with infrastructure work like building roads and railroads in the Arctic.
Without that investment, Russia’s energy future may be in jeopardy. If new offshore and shale oil fields are not developed, Russia’s current oil output of about 10 million barrels per day is expected to decline one million barrels by the end of the decade.
15 Comments on "New Sanctions to Stall Exxon’s Arctic Oil Plans"
rockman on Sat, 13th Sep 2014 8:25 am
“But the sanctions…could damage Exxon’s relationship with Russia”. No, it isn’t a matter of damaging a “relationship”. It’s acquisition of XOM and other US companies forfeiting their rights (and $millions of previous investments) by not complying with the requirements of the Russian concessions. Which is exactly why EU gov’t aren’t doing the same: “While the European Union exempted existing contracts from the sanctions, the United States did not.”
Good to remember some basic facts. First, all the technology Russian needs to develop their resources are viable from non-US companies. Even the nightly ExxonMobil doesn’t own the tech and is completely dependent upon the service companies. An XOM working offshore Arctic can’t even wipe his ass without a contractor delivering toilet paper to the rig,
Russia needs only one thing from XOM: capex. So the US gov’t forces our companies to sit out of the game. And China as well as the EU companies that don’t have to comply with the sanctions are waiting on the sidelines.
Yeah…what could go wrong with this plan? LOL.
Makati1 on Sat, 13th Sep 2014 8:37 am
Bang! Bang! Another inch of each US leg gone. Waiting for the boomerang from Russia.
JuanP on Sat, 13th Sep 2014 9:31 am
These sanctions by the USA and other Western nations against Russia will mostly hurt the Europeans. This will be seen by all Russians as an act of economic and financial war on the part of Western nations against Russia.
Putin will increase his popularity everywhere, particularly in Russia, in spite of already being the most popular political leader in the world according to all polls.
As I have been saying since the beginning, I expect the conflict between Russia and the USA to continue escalating for the foreseeable future, regardless of what happens in Ukraine. Ukraine is nothing more than an excuse to pick a fight with Putin because he dares to say no in public to the US government. The object is to force Russia to comply with the USA’s will unconditionally no matter the damage or cost incurred. And then, the retards in DC would go for China.
I think Putin will be the best loser here. There are no winners other than the Military Industrial Congressional Complex and TPTB, of course.
Davy on Sat, 13th Sep 2014 10:44 am
Juan, you have to admit Czar Putt, the richest man in the world, could give a shit about the rest of the world except for his mother Russia and fellow oligarch noble men in the Russian court. Juan, these are criminals and they will have no problem seeing people die. I have read Putt is a very insular person who trusts very few. Putt is taking a large gamble with his actions both for Russia and all our delocalized locals. As for the DC/Wall street Mafia they are criminal but we are talking a diversity of criminals in different degrees of criminality. And Juan, who cares how popular Czar Putt is with the rest of the world. The rest of the world hates America as a country but not so much the little guys in America. Much of the rest of the world is looking for a strong man to take on America. Those attitudes may make these people feel better but it is not going to put food on the table. The global blame game for which the US is center stage will only ensure the management of the fall in the descent of BAU is nasty, ugly, and painful. It is probably inevitable because it is always been the case that bad blood seeks to eliminate bad blood. We are in an accelerating spiral of dysfunction and incongruous juxtapositions where by society is eating itself like a famished person’s body begins to feed on its vital tissues. One biggest concern will be an all-out war that will destroy any hope of a slow crisis in degree and duration that will massively change lifestyles and attitudes allowing a reboot at a level of resilience and sustainability that may allow pockets of civilization. We may destroy nearly everything. We have already nearly succeeded with our vital ecosystems so why not our civilization.
JuanP on Sat, 13th Sep 2014 11:06 am
Davy, I agree Putin is an oligarch, a criminal, a murderer, a dictator, a thief, and a mean MF, among many things, but he is the best player in the game, and the game is whether the USA or Russia will collapse first, and I think we are closer than they are. The only thing that allowed us to do this is the shale oil bubble, IMO, and it is soon coming to an end. From my point of view, Russia is defending its national interests on its own borders, where millions of its citizens live. What are we doing there? What would we do if those getting cleansed were American citizens? Our government does not have our best interests in their hearts and minds because it has been bought and paid for. I fear things will get worse whoever our next president is. Hillary is like a female Putin, it would be a better match than Obama. Hillary will take us to war with Iran, too, probably.
JuanP on Sat, 13th Sep 2014 11:20 am
The main reason I’m pissed about this is I don’t want them to waste my taxes like this. My wife and I have been living here in the USA 25 years, all our adult lives, and have always been legal aliens, first as non immigrants for 18 years under a diplomatic visa while working for my country’s Ministry of Foreign Relations, then as immigrants for 7 years, and now as legal alien permanent residents, or as Beery says, Greencard holders. One or both of us have filed income tax reports and paid taxes every single one of those years, so it’s my money, too, they are throwing away playing useless games on the other side of the world in a place I don’t give a crap about, basically.
Davy on Sat, 13th Sep 2014 11:57 am
Juan, good point but much will depend on if China collapses and I see the end of China before the US mainly because of the issues of, food, water, and population overshoot. Czar Putt is banking on a China/Russia axis. If China holds together this will be a tough team to beat.
GregT on Sat, 13th Sep 2014 12:14 pm
A very good 45 minute documentary that sums up the US geopolitical game very succinctly.
http://topdocumentaryfilms.com/great-challenge-china-russia/
JuanP on Sat, 13th Sep 2014 12:39 pm
I wouldn’t bet on China, it is a big mess.
GregT on Sat, 13th Sep 2014 1:08 pm
Juan,
China is indeed a mess, but what country isn’t? One must remember, the game is not being played for the masses, it is being played by and for, those in control of the masses. The people are nothing more than workers, consumers, and if need be, cannon fodder.
Austerity for the people, greater riches and control for the oligarchs. The post WW2 boom has ended, we are entering into a very different period in human history. I think most here have some idea as to what this period might look like.
synapsid on Sat, 13th Sep 2014 4:45 pm
JuanP,
You mentioned secessionist sentiment in Navarra in a comment at the Scotland thread. This is news to me. Can you expand on the comment?
Navarra! Who’d have thought? This is exciting.
JuanP on Sat, 13th Sep 2014 8:41 pm
Synapsid, There is no active separatist activist movement in Navarra, but Navarrans consider themselves Navarrans first and Spanish second. My sister’s husband, their children, and all his family and their friends are Navarrans, and very proud of it. This nationality issue does come up in conversations with them more often than I care for. They could not suffer to have less rights or independence than the Catalans or the Basques. My guess is there are other Spanish regions that would feel the same.
synapsid on Sat, 13th Sep 2014 10:53 pm
JuanP,
Valencia, for one?
Makati1 on Sun, 14th Sep 2014 5:01 am
JuanP, I would not be so quick to write off Russia or China. I see them forming the new axis of power in the present world. Their economic problems are no worse than any other country and better than most Western countries, if only because they are NOT “democracies”.
If they can dilute the power of the USD sufficiently, they have effectively crippled the Empire. The USSA needs constant imports and foreign investment to survive. The US shipped 80+% of their factories and business to Asia. The major corporations are already abandoning the US for better shores. Some are even abandoning the USD.
The Dc Mafia is committing slow suicide in its actions and decisions. But then, maybe that is their plan. After all, a one world order cannot have any strong countries to oppose it. Or strong economies to resist their plundering. The world has to be a level playing ground to make it happen. That means ALL countries have to be 3rd world. Even the USSA.
JuanP on Sun, 14th Sep 2014 7:31 am
Mak, I expect them to hang in there for a while, but I think China, in particular has very serious population, depletion, and pollution problems, so I don’t know how long it can last.