The Oil and the Glory

Horse-trading with Russia wins Exxon the Arctic gold

ExxonMobil has emerged the surprising big winner from the breach made earlier this year by BP’s fumbling of its blockbuster agreement with Russia’s state-owned Rosneft oil company. In a $3.2 billion agreement presided over today by Russian Prime Minister Vladimir Putin and Exxon chief Rex Tillerson, Exxon gains the hugely prized right to explore for ...

Dmitry Kostyukov   AFP/Getty Images
Dmitry Kostyukov AFP/Getty Images

ExxonMobil has emerged the surprising big winner from the breach made earlier this year by BP’s fumbling of its blockbuster agreement with Russia’s state-owned Rosneft oil company. In a $3.2 billion agreement presided over today by Russian Prime Minister Vladimir Putin and Exxon chief Rex Tillerson, Exxon gains the hugely prized right to explore for oil and gas underneath Russia’s fabulously rich Arctic region. It’s the same three Arctic fields that BP lost earlier this year, and the agreement puts Exxon in the same leading catbird seat next to Rosneft that BP lost.

Chris Weafer, chief strategist for Moscow-based Troika Dialog Bank, says that given Exxon’s lobbying pull in Washington, the deal is “a major prize for Putin and has very direct implications for U.S. relations. It is a major step that puts the ‘reset’ back on track. Moscow has a new major ally in Washington.”

In an email exchange, Weafer said that as Russia works to maintain its daily production of 10 million barrels of oil a day, the deal hits at two layers of vital Russian need. “Ten million barrels a day is both an important base for the economy, but is also the justification for Moscow’s geo-political standing,” he said. “It is critical for the Kremlin to maintain that average for as long as possible.”

That Exxon would horse-trade with Rosneft to obtain this sweet deal is not surprising — the Arctic holds some 25 percent of the world’s remaining untapped oil and gas reserves, according to the U.S. Geological Survey, most of it underneath Russia’s part of the region. But BP had been prepared to swap shares with Rosneft for that right, and it did not seem possible that any other Big Oil company — and certainly not Exxon — would be willing to have Rosneft potentially sitting on its board of directors.

Exxon neatly skirted this conundrum. It did so by offering Rosneft not shares of Exxon itself, but equity participation in some of its U.S. projects. This still gives Rosneft what it cherished — a way to break out of Russia and become a global player. And as stated, Exxon gets what it most wants — access to the Russian Arctic.

Yet the deal is still risky. Exxon, which jealously guards its preferred methods of exploration and development and is widely regarded as the best in the business at big projects, is simply not going to listen very much to Rosneft as a partner in difficult regions such as the Arctic. The public announcement nonsensically says that the two companies will combine their respective "proprietary technology" in their venture in the Kara Sea. Just what proprietary technology does the flat-footed Rosneft have? No, all that Rosneft brings to the table is access to reserves.

In an email exchange, Exxon spokesman Alan Jeffers told me that Exxon has offered Rosneft an equity position in exploration projects in the United States "and other countries." Jeffers said:

Projects include deepwater Gulf of Mexico and tight oil properties in Texas,. We don’t have any further details at this time, but Rosneft’s entry will be subject to the agreement of other equity partners and approval of host governments.

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