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Excerpts from the JRL E-Mail Community :: Founded and Edited by David Johnson

Big oil, big risks

Exxon's mega deal with Rosneft, cutting out BP, has been widely hailed as win-win-lose for the three companies, respectively. But few have spared a thought for the potential damage to the environment, or whether ordinary Russians will benefit from drilling in the Arctic.

Exxon will see the deal as the retying of the knot that was severed when Mikhail Khodorkovsky's ill-fated attempt to sell part of Yukos came unstuck in 2003. Exxon will gain a slice of the oil and gas Holy Grail ­ bookable Arctic reserves ­ and get one over its BP, its longtime rival.

The gains to Rosneft seem clear: they will acquire a Big Oil partner with experience in Arctic conditions. Exxon will put up a lot of the development cash, leaving Rosneft to reap the giant's share of the long-term profits. And Rosneft will get equity in Exxon's Gulf of Mexico fields.

BP, in big trouble ever since its Gulf of Mexico spill, had been looking to Rosneft to solve its problems. The collapse of Bob Dudley's deal shows how business threesomes in Russia can be even more complicated than getting into bed with the Kremlin.

But Exxon will essentially face the same problems that BP did: exploiting the Kara Sea will be costly ­ and vulnerable to revision of the rules of the game down the road.

Rosneft could also risk being too successful. The Arctic prize may be big, but so could the hubris factor: Look what happened to the last firm that dominated the Russian oil industry.

And then there are the environmental risks. In Norway, Canada and Alaska, there are at least are some checks and balances on Arctic drilling. Who will monitor the melting of the ice cap and permafrost that results from the Kara Sea projects?

Then there is economic viability. Exxon and Rosneft are happy to pump in cash at $100-a-barrel oil, but what happens if a new global recession causes the oil price to plummet? That could leave the grandiose figure of $500 billion looking rather fantastical.

And finally, there is the skewing effect of yet another huge bet on oil and gas on the lopsided Russian economy. Experience shows us that Big Oil is the main winner from big oil projects, while the rest of us are left out in the cold.

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