Jan. 2 (Bloomberg) -- As Barack Obama and Vladimir Putin argue over human rights in Russia and the fate of fugitive U.S. intelligence analyst Edward Snowden, the countries’ biggest oil companies are preparing to drill for giant discoveries together in the Arctic Ocean.
Exxon Mobil Corp. and OAO Rosneft are set to start their first Arctic well this year, targeting a deposit that may hold more oil than Norway’s North Sea. It will kick off a series of landmark projects and cement an alliance begun in 2011. They also plan to frack shale fields in Siberia, sink a deep-water well in the Black Sea and build a natural-gas export terminal in Russia’s Far East.
“We have a unique partnership,” Glenn Waller, Exxon’s Russian chief, said in an interview in Moscow. “They have the world’s biggest reserves and we have the largest market capitalization.”
The deepening alliance shows the two governments’ fractious relationship is no bar to America’s most valuable energy company investing billions in Russia. For Rosneft Chief Executive Officer Igor Sechin, the Irving, Texas-based company brings financial heft and the expertise needed to drill offshore in some of the world’s harshest conditions for rigs.
“There’s a whole stack of reasons why it’s good that Rosneft is working with Exxon,” said Richard Sakwa, an associate fellow at Chatham House in London, who writes on Russia’s oil industry. “There’s technology and management. Between Sechin and Exxon, there’s a degree of trust being built up that can be nothing but to the good” to both and to Russia.
Exxon CEO Rex Tillerson has said his company’s output will decline 1 percent this year, a third straight annual drop, putting pressure on to find new reserves. Tillerson’s decision to expand work in Russia is a switch from his predecessor’s policy.
A decade ago, then-CEO Lee Raymond said he’d be reluctant to invest more after Putin’s government moved against OAO Yukos Oil Co., once Russia’s largest oil producer. Yukos’s assets were confiscated to pay tax claims and billionaire owner Mikhail Khodorkovsky was imprisoned.
Today, Rosneft operates Yukos’s largest fields and is run by Sechin, the former deputy prime minister and a man Khodorkovsky said orchestrated his demise. Khodorkovsky was released last month after Putin pardoned him. He had spent more than a decade in jail.
After swallowing smaller rival TNK-BP earlier this year, Moscow-based Rosneft now produces 5 percent of the world’s oil, with more than 30 billion barrels of proven reserves. Russia’s overall oil and gas condensate output rose 1 percent to a post- Soviet record of 523.28 million tons in 2013, the Energy Ministry said today. That’s about 10.5 million barrels a day.
Shares in Rosneft, 69.5 percent of which are held by the Russian state, dropped 6.9 percent last year. Exxon stock gained 17 percent, the best performance since 2007.
“From Exxon’s point of view, if you want to do business in Russia, you have to do business with one of the chosen few, and Rosneft is clearly first among equals,” said Ed Chow, a senior fellow at the Center for International Strategic Studies. “Up till now, compared to Shell and Total, they have been pretty cautious on Russia,” he said, comparing Exxon with Royal Dutch Shell Plc and France’s Total SA.
Diplomatic relations between the U.S. and Russia soured in 2013 after the Obama administration imposed a travel ban on certain Russian officials over alleged human rights violations, after which Russia banned U.S. citizens from adopting Russian children. Later, Obama skipped a meeting with Vladimir Putin over Russia’s decision to shelter Snowden, the National Security Agency whistle-blower. The companies don’t find all of this to be an obstacle.
“We are very happy about the progress and pace of our strategic cooperation,” Rosneft said in a statement to Bloomberg. “Our companies are long-term partners.”
$3.2 Billion Budget
The Arctic’s Kara Sea, where Rosneft will drill its first well this year, may potentially hold 85 billion barrels of oil equivalent, a number about equal to Russia’s existing, proven oil reserves, according to BP Plc. The first well alone will target a geological structure that may hold 9.4 billion barrels. Norway’s proven reserves are 7.5 billion barrels. Only drilling will determine what part of the prospect is proven.
The companies have committed to spending $3.2 billion exploring three blocks in the Kara Sea and the deepwater Black Sea. They have also added licenses to explore areas of the Arctic’s Laptev and Chukchi Seas.
Onshore, Exxon and Rosneft are targeting so-called tight oil which may reach 9.2 billion barrels within Siberia’s Bazhenov shale formation, according to Rosneft.
The Russian government has supported the partnership, this year writing into law a separate tax regime for offshore drilling, while cutting extraction duties for tight oil.
The Dec. 1 rollback of OAO Gazprom’s monopoly on exports of liquefied natural gas, or LNG, makes space for Rosneft and Exxon’s slated $15 billion LNG plant on Sakhalin Island.
That may give a venture started in the 1990s between the companies the means to sell natural gas and condensate in fields off the coast of Sakhalin Island.
Integration between Rosneft and Exxon has also moved forward on the corporate level after the strategic alliance was signed in 2011. The following year, Zeljko Runje left his post as Exxon Mobil Russia vice president running Sakhalin-1 operations to join Rosneft as vice president for offshore operations.
In addition, earlier this year, Rosneft tapped Donald Humphreys, a former Exxon Mobil senior vice president, as an independent director on its board.
The diplomatic spats are unlikely to derail business relationships, according Chris Weafer, managing director of the Macro Advisory consultants.
“Most big U.S. companies, especially those making long- term strategic decisions, dismiss Russia-U.S. politics as something of a soap opera with frequent script changes,” said Weafer.
--Editors: Will Kennedy, Todd White