Oily Interests: Exxon Mobil Snatched a Major Arctic Exploration Deal from Competitors in a Sweeping Deal with Russia's Rosneft
Russia's largest oil producer Rosneft has turned to U.S. oil major Exxon Mobil for its expertise and technology needs, after earlier attempts to partner with British Petroleum for ambitious deep-sea exploration in the Arctic fell through in May. Under a landmark deal inked on Tuesday, Exxon Mobil and Rosneft pledged to spend $3.2 billion on deep-sea exploration in the area of the Arctic called the Kara Sea, as well as in the deep waters of the Black Sea. Exxon described the areas as "among the most promising and least explored offshore areas globally, with high potential for liquids and gas."
Tuesday's deal was signed in the presence of Russian Prime Minister Vladimir Putin, Rosneft President Eduard Khudainatov and Exxon Mobil President Neil Duffin, RIA Novosti reported. Putin described the scale of investment in the project as "very large." "New horizons are opening up," Putin, evidently pleased, said. "One of the world's leading companies, Exxon Mobil, is starting to work on Russia's strategic shelf and deepwater continental shelf."
Neil Duffin, the president of ExxonMobil Development Company, said the agreement with Rosneft builds on their 15-year successful relationship in the Sakhalin-1 project. "Our technology, innovation and project execution capabilities will complement Rosneft's strengths and experience, especially in the area of understanding the future of Russian shelf development," Duffin said. Echoing Duffin, Khudainatov said the venture comes as a result of "many years of cooperation with Exxon Mobil and brings Rosneft into large scale world-class projects, turning the company into a global energy leader."
Putin suggested that total investments envisioned under the agreement could reach $500 billion. But the overall investment of both companies within the framework of a strategic partnership agreement could be anything from $200 billion to $300 billion, while "the total economic impact" or multiplier effect could reach $500 billion, Russian Deputy Prime Minister Igor Sechin, who oversees the oil and gas sectors, told journalists after the signing ceremony. Drilling in the potentially oil-rich Kara Sea will require at least ten offshore production platforms, each of which could cost $15 billion, Sechin said. This means that an investment in offshore platform alone requires $150 billion, he added. He explained that as part of the agreement, ExxonMobil has agreed to place major orders for the equipment with Russian shipyards.
Both companies also agreed to spend from $500 million to $600 million on the creation of an Arctic Research and Design Center for Offshore Developments in St. Petersburg, which will be staffed by Rosneft and ExxonMobil employees. Additionally, Rosneft and ExxonMobil will implement a program of staff exchange in technical and management employees, which will help strengthen the relationship between the companies and provide valuable career development opportunities for personnel.
Under the agreement, Rosneft will also participate in ExxonMobil projects in the United States and other countries, including deep-water Gulf of Mexico, as well as oil fields in Texas. Further, the two companies will conduct joint operations to develop western Siberian oil resources. Rosneft will hold a 66.7 percent stake in the joint ventures, while ExxonMobil will hold the remaining 33.3 percent stake. Sechin said the terms offered by Exxon Mobil were "significantly better" than those offered by British Petroleum in an earlier agreement. Under the joint venture with Rosneft, Exxon would explore three blocks, while the BP deal had involved two exploration blocks.
Experts say Tuesday's deal was the final nail in the BP-Rosneft coffin. The deal between BP and Rosneft was voided by a Stockholm arbitration panel after a legal challenge from the Russian co-investors in BP's existing Russian joint venture, TNK-BP. In that arrangement, which was also endorsed by the Russian prime minister, BP and Rosneft agreed to a swap of shares that would have resulted in Rosneft owning about five percent of BP's shares. The Exxon agreement, in contrast, outlined a wide-ranging exchange of assets.
Rosneft became Russia's largest oil company after it acquired the remaining assets of Yukos on bankruptcy auctions in 2007. But despite its size, the company has neither experience nor its own technology for deep-sea drilling, hence the hunt for foreign partners that could offer financial support and proprietary technology. Rosneft estimates that the Kara Sea's East Prinovozemelsky field could contain as many as 35.8 billion barrels of oil and 10.3 trillion cubic meters of natural gas, while the Tuapse field contains 2.2 billion to 7.2 billion barrels.
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