Exxon Reaches Arctic Oil Deal With Russians
By ANDREW E. KRAMER
MOSCOW — Exxon Mobil won a coveted prize in the global petroleum industry Tuesday with an agreement to explore for oil in a Russian portion of the Arctic Ocean that is being opened for drilling even as Alaskan waters remain mostly off limits.
The agreement seemed to supersede a similar but failed deal that Russia’s state oil company, Rosneft, reached with the British oil giant BP this year — with a few striking differences.
Where BP had planned to swap stock, Exxon, which is based in Texas, agreed to give Rosneft assets elsewhere in the world, including some that Exxon owns in the deepwater zones of the Gulf of Mexico and on land in Texas.
In announcing the arrangement at a surprise signing in the Russian resort town of Sochi, Prime Minister Vladimir V. Putin described a sweeping global alliance — and a potentially vast investment by Exxon in the Russian Arctic.
“The scale of the investment is very large,” Mr. Putin said. “It’s scary to utter such huge figures.”
But while Russian news agencies said Mr. Putin had stated the potential investments by both companies to be as high as $500 billion, Exxon officials said the figures, at least initially, would more likely be in the tens of billions of dollars.
For Exxon, which is America’s largest company and is a spinoff of the original Standard Oil, the deal means wading deeper into Russia’s risky business environment. As a result of the agreement, which is almost certain to require a review in Washington, more of the company’s investments and future earnings will partly hinge on policies set in the Kremlin.
Russia has reneged on deals with Western oil companies before. In 2006, for example, it compelled Royal Dutch Shell to sell 50 percent of a Sakhalin offshore development to Gazprom, a state company — after Shell spent a decade and more than $20 billion of its own money and that of other investors to build the project’s infrastructure.
Until now, Exxon’s principal investment in Russia has been a production sharing agreement on Sakhalin Island, on Russia’s eastern coast. That arrangement, which waives local taxes and provides the Russian government a share of the oil produced, is regarded as less risky than the deal made Tuesday.
Under the new agreement, the state-owned Rosneft could become a part-owner of drilling operations in the United States. Those operations could include two of the industry’s most contentious oil extraction methods — drilling for oil in the deep waters of the Gulf of Mexico and using the so-called hydraulic fracturing, or fracking, technique on land. The Russians want to learn about both types of drilling for use at home.
The Rosneft deal would also be among the most significant attempts by a company from a country that is not an American ally to acquire United States oil fields since Cnooc, the large Chinese oil company, tried to buy the California oil company Unocal. Although it was not formally banned, that deal fell apart in 2005 after members of Congress criticized the potential Chinese ownership of American oil assets.
Having an American company win the Rosneft deal could also suggest that the Obama administration’s policy of détente toward Russia, known as the reset, can benefit United States businesses, said Cliff Kupchan, a senior analyst at the Eurasia Group, a consultancy.
The Exxon-Rosneft deal, if completed, would further a long-held goal of the Russian petroleum industry to diversify internationally. It would allow Russia to do that by using access to reserves at home to gain the necessary capital and technological expertise.
Russia’s economy is dependent on petroleum for about 60 percent of its export revenue. Policies here are also important for world oil supplies, as Russia now pumps more oil than Saudi Arabia. Yet Russia’s onshore fields in Siberia are in decline, threatening the prosperity and geopolitical clout that has come with oil wealth in the last decade.
Despite the varying accounts of the overall potential value of the agreement, a fact sheet released by the companies indicated an initial commitment to invest $3.2 billion in exploration in the Kara Sea, the body of water between the northern coast of European Russia and the Novaya Zemlya island chain.
Once seen as a useless, ice-clogged backwater, the Kara Sea now has the attention of oil companies. That is partly because the sea ice is apparently receding — possibly a result of global warming — which would ease exploration and drilling.
This summer, Gazprom, the Russian natural gas giant, moved a rig into a shallow part of the sea. Still, Russian scientists say the extent of the ice floes varies greatly from summer to summer, and conditions remain formidable during the polar night, which lasts months.
In the waters off Alaska, drilling has remained largely off limits because of environmental restrictions and lawsuits by conservation organizations.
Rosneft’s attempt to strike a similar pact with BP this year fell apart because the British company had a joint venture with a separate group of private Russian investors, who blocked the Rosneft deal in an international court. The collapse was an embarrassment for Mr. Putin, who had endorsed the BP-Rosneft deal.
After the failure of that deal, the onus fell on Russia to demonstrate it could uphold an agreement, Mr. Kupchan, the analyst, said. “They got away with BP, because the deal was seen as BP having two Russian wives,” he said.
Exxon, in contrast, has no exclusivity clause with a competitor in Russia that could come up in court.
Still, if Rosneft’s participation in American projects leads to objections in the United States, Exxon’s investment in Russia could also be vulnerable. Russian officials say reciprocity, or mutual dependence, is a condition for foreign investment in their petroleum fields.
Igor Sechin, a deputy prime minister in Russia and one of the country’s top energy officials, said Rosneft would obtain shares in at least six of Exxon’s oil fields in the United States. He said that the value of these assets would be “in proportion” to the ones Exxon would own in Russia.
Alan T. Jeffers, a spokesman for Exxon, said Rosneft would be subjected to the same regulatory oversight in the United States as any other oil company.
For Russia, the agreement is a result of a new openness to foreign investment in its oil industry that is meant to address the declining output in Siberia. The Kremlin opened discussions last year with Western oil companies whose prospects on the other side of the Arctic Ocean — above Alaska and Canada — had at least temporarily dimmed with the moratorium on offshore drilling in the aftermath of BP’s oil spill in the Gulf of Mexico.
This summer, the American Interior Department eased the restrictions somewhat by granting Royal Dutch Shell conditional approval to drill exploratory wells in the Arctic Ocean off Alaska’s coast starting next year.
But American and Canadian regulators worry about the special challenges in the Arctic. The ice pack and icebergs pose threats to drilling rigs and crews. And if oil were spilled in the winter, cleanup would take place in the total darkness that engulfs the region during those months.
Still, the United States Geological Survey estimates that the Arctic holds one-fifth of the world’s undiscovered, recoverable oil and natural gas.