Exxon Mobil Takes a Direct Hit from Russia Sanctions
Western sanctions aimed at Russia's oil and gas industry made a mark last week, cutting into one supermajor's big plans for that country.
In turn, the willingness of the United States and European Union to limit their companies' involvement in helping Russia to expand its hydrocarbons sector could be pushing Moscow eastward, toward deeper cooperation with China.
Last week, Exxon Mobil Corp. confirmed that it was suspending an offshore drilling campaign in Russia's Arctic that was underway before the U.S. Department of the Treasury issued the latest economic actions taken against Russia over its involvement in Ukraine's civil strife. Bloomberg News had earlier reported that work on the well had been halted, a direct consequence of tightening restrictions on Western companies' involvement in Russia's oil industry.
The Kara Sea project was originally a target of Greenpeace activists concerned about the push to drill in Arctic waters. With a widening of sanctions on how Russian energy companies can raise debt and on what energy technologies can be exported to the country, the Obama administration accomplished what the environmentalists could not.
The beefed-up sanctions announced on Sept. 12 were put into effect immediately. Exxon Mobil said it had sought and received special permission from Treasury to wind down work on the well before temporarily abandoning the project, assuming the sanctions over the Ukraine conflict are temporary.
"The U.S. Treasury Department, recognizing the complexity of the University-1 well and the sensitive Kara Sea arctic environment, has granted a license to ExxonMobil and other U.S. contractors and persons involved to enable the safe and responsible winding-down of operations related to this exploration well," Exxon Mobil said in a release. Representatives there declined further comment.
"All activities related to the wind-down will proceed as safely and expeditiously as possible," the company added.
Exxon Mobil, Royal Dutch Shell PLC, BP PLC and Statoil ASA are among the Western firms directly affected by sanctions against Russia, which were expanded when Western governments accused Russian forces of direct involvement in pushing Ukrainian troops from areas they were on the verge of seizing from a pro-Russian rebel movement. Major oil-field service companies are also believed to be affected. Thus far, none of the companies potentially affected by the sanctions has provided details into how its investment decisions on future Russian oil projects would be altered (EnergyWire, Aug. 1).
The new round of sanctions added more Russian companies to the list, including a number of other oil and gas companies. Earlier sanctions had already been put in place targeting Russia's two largest energy companies, Gazprom and Rosneft. Rosneft's CEO has been banned from traveling to the United States.
The latest round of sanctions also further limited how Russian energy companies could raise funds in Western financial markets, and made clear that the United States and European Union are forbidden to aid Russia's future development of its Arctic, deepwater offshore and shale oil assets. Though it's not an E.U. member, Norway is going along with the sanctions regime, likely putting on hold Statoil's plans to drill in Russia's Arctic.
Markets and oil and gas investors had already been warned that the newest sanctions would be felt.
"The expanded sanctions add to the already heightened risk and will make it more complicated for European service companies and [international oil companies] to provide technologies for ongoing operations in Russia," investment bank Barclays Capital said in a notification. "Production of Russian oil and gas in the Arctic and offshore is limited to the newly launched Prirazlomnoye field, the foreign PSA operated Sakhalin I and II projects, and two Rosneft subsidiary assets in the Timan Pechora region."
Why the West is needed
Though Russian firms can rely on their own capabilities to continue with a number of projects and planned investments, Michael Bradshaw, an energy economist at Warwick Business School, said he isn't surprised that the Kara Sea drilling has been suspended.
He said that with enough time and determination, Russian energy firms will be able figure out shale oil without Western help, which could then hurt future business opportunities for the West there. But Russia simply doesn't have the capacity to explore Arctic projects alone and needs Western technology and expertise to explore in those rough and remote conditions, he said.
"If they're willing to throw the resources at it, there are a lot of smart people in Russia, and I'm sure they'll work it out, and that might be one of the unintended consequences of sanctions, that we drive import substitution that means those opportunities are lost in the future," Bradshaw said. "But when it comes to the Arctic offshore, we know full well that China can't do it and Russia can't do it, and that's why they have all these deals with Total, with Exxon Mobil, with Statoil."
Nevertheless, immediate plans for onshore shale oil exploration in Russia are also likely on hold until the dispute in Ukraine is resolved. Exxon Mobil had plans to found a joint research and development center committed to exploring shale opportunities in Russia. Royal Dutch Shell has also inked deals with Rosneft that would have tapped Western technology and know-how to develop Russian fields. London-based BP holds a substantial equity stake in Rosneft.
The U.S. Energy Information Administration says Russia holds significant stores of shale oil but that developing these resources will be severely restricted by the sanctions put in place. "These sanctions are likely to have a noticeable impact on Russia's longer-term development of its significant shale and Arctic resources, as well as on existing projects that need substantial investment, such as the Vankor field," EIA said in an overview published Friday.
Bradshaw says the limits on borrowing money are particularly biting to Rosneft.
Russia's response
Russian authorities seem to be responding by quickening the pace of tax reform, an effort to make field development more affordable. Earlier this month, the research and consulting firm GlobalData noted that the Russian Ministry of Finance had begun rolling out changes to the country's mineral taxes and other incentives to encourage offshore development. Analysts there see the pace of tax cuts quickening next year.
"There have been reports of a more substantial change from 2015, which would reduce the oil export duty to 42 percent in 2015, 36 percent in 2016 and 30 percent in 2017," the analysts said in a report. They noted that current law would see the export duty lowered from 59 percent to 55 percent by 2016.
Russia's eagerness to strike energy deals with China seems to also be increasing as the Ukraine crisis and tension over energy trade with the West drags on.
China and Russia have already finalized a deal that will send 1.3 trillion cubic feet of gas per year into China's growing economy beginning in 2018.
Bradshaw, who has studied Russian energy development in the Far East for two decades, said it's possible that news of another pipeline deal with China could be announced during a conference at Sakhalin Island this week in which he'll deliver remarks. He believes that the announcement of a major gas pipeline deal with the Chinese made in March was influenced by developments in Eastern Europe.
"The eastern movement is something that has been long time developing, but the pace of it is certainly been accelerated by the Ukrainian crisis," he said. "Gazprom has understood for a long time that it needs new markets and Asia is the market, but the terms and conditions have probably been set by the need to do deals."
Nathanial Gronewold, E&E reporter
Republished from EnergyWire with permission. EnergyWire covers the politics and business of unconventional energy. Click here for a free trial
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