U.S. Sanctions, Low Oil Prices Doomed Exxon's Russian Projects--2nd Update

03/01/18 03:23 PM EST
By Russell Gold 

U.S. sanctions against Russia prevented Exxon Mobil Corp. from pursuing ambitious plans to explore for oil north of Siberia. But the final blow, some experts said, may have been delivered by lower oil prices.

The Texas oil giant said in a regulatory filing late Wednesday that it would walk away from the joint venture with state-controlled PAO Rosneft to seek oil in the ice-choked waters of the Kara Sea, a hard-fought deal signed in 2012 by the company's former chief executive, Rex Tillerson, now U.S. secretary of state.

Mr. Tillerson touted the agreement as a breakthrough giving Exxon access to one of the world's great unexplored oil and gas basins. The company reportedly spent about $700 million to drill the first well, likely making it the most expensive ever. It struck oil, according to Rosneft, but further exploration was halted because of U.S. sanctions imposed by the Obama administration following Russia's intervention in Ukraine in 2014.

Exxon unsuccessfully sought waivers that would allow it to proceed in some areas in Russia -- a campaign that formally ended with President Donald Trump declining to waive sanctions for the company's Rosneft ventures last year. The U.S. also added new sanctions on Moscow last year for its alleged interference in the 2016 presidential election.

But in the meantime, something else happened: Oil prices plunged, and the global chase for new supplies changed. The deal was struck when oil prices topped $90 a barrel and prospects for them remaining high seemed likely. Oil is now trading at just over $60 a barrel, and many companies, including Exxon, are pursuing shorter-cycle projects such as drilling in the Permian Basin of Texas and New Mexico that can deliver returns more quickly.

"A high-risk Arctic project that maybe looks good at $100 oil does not look like anything anyone would touch at $60," said Edward Chow, a senior fellow at the Center for Strategic and International Studies in Washington, D.C. "I think that is a fundamental to the Exxon decision."

Exxon declined to comment on the reasons for its decision. The company said it would formally begin to withdraw from the Rosneft joint ventures this year, taking a $200 million loss after taxes.

Rosneft said in a statement carried by Russian news agencies that it would support the return of Exxon to the projects in the future if it were legally possible.

Drilling an offshore well in a remote Arctic region is technically and logistically complex. Every piece of equipment needs to be brought in from hundreds of miles away, through inhospitable weather.

Royal Dutch Shell PLC ended a $7 billion exploration effort in the seas north of Alaska in 2015 after prices fell and one of its drilling rigs ran aground in foul weather.

Exxon CEO Darren Woods, who took over after Mr. Tillerson resigned to become secretary of state, has steered the company in a new direction in a bid to reverse slumping oil output and financial struggles. He plans to triple production in the Permian Basin and has touted vast new discoveries off the coast of Guyana in South America.

Exxon is still heavily invested in Russia via an oil project off the Pacific island of Sakhalin that predated the U.S. sanctions. In 2016, it produced 234,000 barrels a day of oil from Russia and the Caspian Sea region, about 10% of its output.

But given the state of U.S.-Russia relations, it was unlikely work on the other deal Mr. Tillerson had brokered would recommence anytime soon. The joint venture between Exxon and Rosneft included exploration in the Kara Sea, as well as other collaborative efforts in Russia and the U.S. Exxon funded the exploration work entirely, earning a 33.3% stake in any discoveries.

"It's a combination of financial decision making but also recognizing that the risk-reward balance is out of whack in Russia right now," said Ken Medlock, director of the Center for Energy Studies at Rice University in Houston. "If we were in a $120 oil world, I highly doubt this decision would have been made."

If oil prices rise and sanctions are removed there is nothing stopping Exxon from rekindling its relationship with Rosneft. Experts say it is unlikely Rosneft will be able to find another company able to step in to Exxon's role -- either due to European sanctions or a lack of technical capabilities to drill offshore wells.

Thus, Exxon's decision, and the sanctions, will slow the Kremlin's efforts to unlock significant new resources that could help Russia maintain its position as the world's largest crude producer.

Russia's federal budget relies on oil and gas sales for around one-third of its revenues. Without technology from partners such as Exxon, Russia will struggle to access those resources, analysts say, although it has plenty of other onshore fields to maintain production.

--James Marson and Michael Amon contributed to this article.

Write to Russell Gold at russell.gold@wsj.com


(END) Dow Jones Newswires

March 01, 2018 15:23 ET (20:23 GMT)

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