Rosneft has wasted no time in finding a strategic partner to replace BP following the acrimonious collapse of their accord three months ago. And ExxonMobil doesn’t seem to have hesitated about taking the British group’s position as Moscow’s favourite oily sister.
Rosneft and Exxon announced plans on Tuesday for a multi-year accord under which Exxon will cooperate with Rosneft in developing the Russian Arctic and Black Seas, while Rosneft will have the chance to work with ExxonMobil in the Gulf of Mexico and Texas.
As with BP, the accord has been signed in the presence of Russian prime minister Vladimir Putin. Rosneft will want make sure that this time, the relationship doesn’t go wrong. And so will ExxonMobil: Moscow has been fickle in the favours it has shown to western oil groups over the past decade. Putin and colleagues wouldn’t think twice about changing partners once more, if they thought they could profit from it.
In a joint statement, Rosneft and ExxonMobil said they “plan to undertake joint exploration and development of hydrocarbon resources in Russia, the United States and other countries throughout the world, and commence technology and expertise sharing activities”.
The companies said:
The agreement, signed by Rosneft President Eduard Khudainatov and ExxonMobil Development Company President Neil Duffin in the presence of Russian Prime Minister Vladimir Putin, includes approximately US $3.2 billion to be spent funding exploration of East Prinovozemelskiy Blocks 1, 2 and 3 in the Kara Sea and the Tuapse License Block in the Black Sea, which are among the most promising and least explored offshore areas globally, with high potential for liquids and gas.
…The agreement also provides Rosneft with an opportunity to gain equity interest in a number of ExxonMobil’s exploration opportunities in North America, including deep-water Gulf of Mexico and tight oil fields in Texas (USA), as well as additional opportunities in other countries. The companies have also agreed to conduct a joint study of developing tight oil resources in Western Siberia.
…The companies will create an Arctic Research and Design Center for Offshore Developments in St. Petersburg, which will be staffed by Rosneft and ExxonMobil employees.
Rosneft president Eduard Khudainatov, said following the signing ceremony:
The partnership between Rosneft with its unique resource base, and the largest and one of the most highly capitalized companies in the world reflects our commitment to increasing capitalization of our business through application of best-in-class technology, innovative approach to business management, and enhancement of our staff potential.
Rex Tillerson, chairman and chief executive officer of ExxonMobil (NYSE:XOM), also waxed lyrical about the deal:
This venture comes as a result of many years of cooperation with ExxonMobil and brings Rosneft into large scale world-class projects, turning the company into a global energy leader.
ExxonMobil knows Russia well, having worked in the country for 15 years on the Sakhalin-1 offshore gas project in Russia’s Far East. It announced a preliminary agreement back in January to cooperate with Rosneft on the Tuapse block in the Black Sea. Presumably the $3.2bn development spending mentioned in the statement includes this amount.
But this modest investment will be just the beginning of projects that could cost tens of billions to bring to fruition. Russian sources on Tuesday were talking about a $500bn multi-year investment programme.
Allen Good, ExxonMobil analyst at Morningstar, told Reuters, that there was still a lot about the agreement that had not been revealed:
Ultimately these deals come down to the economics: What are they giving up to get in there? What are the returns they’re going to see out of Russia? Those are the type of things they’re never going to disclose, so it’s really tough to look at these deals and estimate what their actual value is.
But, for Exxon, the attractions of getting into the Arctic, one of the world’s last remaining large undeveloped oil reserves, outweigh all the potential risks, including the political risks of investing in Russia.
Often these are long-term, such as what happens in Moscow when Putin, one day, leaves office. But they can be very short-term, as BP discovered to its cost. Its January deal with Rosneft started to unravel within days, as it emerged that its existing Russian partners – billionaire oligarchs with shares in the TNK-BP joint venture, opposed the accord. They felt, not unreasonably, that they would lose out if they were ditched as BP’s main partner in Russia.
After they won arbitration rulings in their favour, BP was obliged to pull out of the Rosneft plan to the embarrassment of everybody from Putin down. Presumably, Bob Dudley, the BP ceo, who has worked in Russia, bet that Putin would force the TNK-BP partners to eat humble pie. But he couldn’t, or wouldn’t.
The deal with Exxon comes without all this corporate baggage and is simpler to execute, coming as it does without a share swap of the kind envisaged under Rosneft-BP.
But this is only the beginning. Western groups have struggled long and hard to develop big investments in Russia. So far, the only mega hydrocarbon projects that Russian and western groups have successfully developed together in Russia are the Sakhalin schemes, and even these were hit by serious disputes notably in 2006 when Shell was forced to cede control of Sakhalin-Two to Russia’s Gazprom.
Even smaller deals have often got nowhere – for example the 2004 cooperation agreement between Russia’s Lukoil and ConocoPhillips of the US that was quietly dissolved in 2010.
Against this, BP’s partnership with TNK is one of its biggest profit-earners, despite all the ferocious arguments between the partners, including the bitter recriminations – and law suits – that have followed BP’s abortive Rosneft alliance.
So Exxon will have no illusions. But the very fact that so many of western groups are fighting for a share of the action shows that the potential rewards are well worth the considerable risks.
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