January 20, 2012
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Home / Issue Archive / 2011 / October #10 / ExxonMobil in Right Place at Right Time Rosneft Trades a Share of the Arctic for Texas Shale and the Mexican Gulf

№ 10 (October 2011)

ExxonMobil in Right Place at Right Time Rosneft Trades a Share of the Arctic for Texas Shale and the Mexican Gulf

   Rosneft’s selection of ExxonMobil as a strategic partner in the Russian Arctic may have as much to do over the long term with Russian investment in the U.S. energy sector, as it does with the U.S. investment in Russia.

By Galina Starinskaya

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   The agreement signed on August 30 between Russia’s largest oil company, state-owed Rosneft, and global independent ExxonMobil was consumated quickly, after BP (Rosneft’s first choice among prospective brides) was forced to pass on the deal because of a dispute with TNK-BP.  

   The seriousness of Rosneft’s intent was underscored by the presence at the signing ceremony of none other than Russian Prime Minister Vladimir Putin himself. Joining Putin was Rosneft President Eduard Khudainatov and Neil W. Duffin, President of ExxonMobil Development Company.

   So who is ultimately getting what from the deal? On the Russian side of things, the partners are to develop three license areas on the Arctic shelf, namely East Prinovozemelsky 1, 2, 3 in the Kara Sea, as well as the Tuapse site in the Black Sea. Arrangements had been made regarding the Black Sea project earlier this year at the World Economic Forum in Davos. Through these projects, the companies should create joint ventures in which  Rosneft will hold 66.7 percent, and ExxonMobil – 33.3 percent. The catch for the American IOC is that ExxonMobil won’t be able to book the reserves. Russian law reserves this right for the license holder. And it is state-owned Rosneft that holds the license.
Direct investment is estimated at $200-300 billion. With the infrastructure, construction of the required facilities, and the area planning included, the amount could reach $500 billion. Up to $3.2 billion is expected to be allocated in support of exploration work to be taken on by Exxon. First exploration drilling in the Kara Sea and Black Sea should commence in 2015, while the investment decision to proceed with development will follow sometime between 2017 and 2020.

   As for the U.S.  side of things, Rosneft is being offered the chance to acquire stakes in a number of exploration and already up and running projects of ExxonMobil in North America and elsewhere. These include offshore fields in the Gulf of Mexico, and “tight oil” fields in Texas and Canada. ExxonMobil projects elsewhere in the world are also on offer.

   Rosneft will receive a share in at least six projects run by ExxonMobil. “For a number of projects, Exxon has decided to allow Rosneft in. These are the projects where the company owns 100 percent. Where there is a third party, you’ll need to discuss it with them,” Deputy Prime Minister Igor Sechin explained. According to some unofficial estimates, one of the projects likely to be joined by Rosneft may be Hibernia, Canada. ExxonMobil has a 33.1 percent share in that project; the rest belongs to Chevron, Suncor, Canada Hibernia, Statoil, Murphy.

   Analysts from Uralsib Capital believe that Rosneft is primarily interested in North American shale fields and technology. Prior to the purchase of XTO Energy in 2010, the traditional ExxonMobil oil fields  were only 25 percent of the company’s reserves, while after the acquisition, Exxon got a large area in the  prospective Eagle Ford Formation in south Texas. This might be of interest to Rosneft in terms of equity participation in its development and use of appropriate technologies in the fields of Western Siberia, experts say. They stress that their interest in the U.S. shale oil and gas fields was also announced in May by Lukoil, though no concrete steps in this direction of the company are known yet.

   The companies also agreed on the joint feasibility study of the development of the hard-to-recover oil reserves in the Western Siberia. In particular, the question is about the development of the Rosneft-operated fields in the so-called Bazhenov Formation (“oil shale”) with the deposits of 2.5 billion tons, and production of oil from the low permeability reservoirs in the Priobskoe field.
Under the agreement, the partners will establish the Arctic Research Center (ARC) for offshore development in St. Petersburg to be staffed with experts from these companies. The centre will use ExxonMobil and Rosneft technologies and develop some new technologies to facilitate the implementation of joint projects in the Arctic, including drilling and production vessels and platforms with ice reinforcement, as well as other projects of the Russian state-owned company. Exxon will fund the initial costs of establishing and functioning of the centre.
The American company was generous enough, agreeing to take on the first costs. However, only last year (2010) ExxonMobil had refused to share exploration of the Arctic shelf with Rosneft, referring to high cost of the projects. This time, Russian officials gave a little and assured the U.S. IOC that the suitable tax exemptions would be granted.

   If you assume an oil price of $100 a barrel, you break even in the Russian Arctic considering that mining and transportation in harsh conditions costs almost $30 a barrel, and taxes take the remaining $70 a barrel. With oil prices falling off their $100 peak now, Russia’s Arctic becomes a losing proposition unless taxes are cut. The Russian government is currently discussing preferential treatment for Arctic projects. For example, the Ministry of Energy believes that the internal rate of return for the shelf should be 20 percent or higher.

   “The partnership with Rosneft, with its unique resource base featuring the largest and most highly capitalized company in the world reflects our commitment to increase the capitalization of the company through application of advanced technologies, to bring an innovative approach to business and to strengthen the human resource capacity,” Eduard Khudainatov, President of Rosneft said in reference to the ExxonMobil deal.

   “This transaction is the result of many years of cooperation with ExxonMobil, tracking Rosneft out to the large-scale world-class projects, which turn the company into a global energy leader,” he said.

   For his part, Neil Duffin, President of ExxonMobil Development Co. said, “Our technology, innovation and capacity to implement the projects will add to strong presence and experience of Rosneft, especially in seeing the prospects for the development of the Russian shelf.”

   And not to be outdone, Prime Minister Putin named ExxonMobil as “one of the leading companies to be included in the severe Arctic latitudes.”
Rosneft is already cooperating with ExxonMobil in the Russian Far East, in Sakhalin-1(30 percent ExxonMobil, being the project operator, 20 percent Rosneft). And the U.S. super major has for many years hungered for a share of the Russian European Arctic.

   When Rosneft’s negotiations with BP fell apart at the 11th hour, ExxonMobil was in the right place at the right time. However, while the BP deal would have included an exchange of shares, the ExxonMobil deal does not. “We do not need it,” Rosneft’s head  Eduard Khudainatov told the media. Igor Sechin, deputy prime minister for energy, said there was no need to exchange shares initially, but such a decision was ultimately up to the companies involved.
“Rosneft was keen on the share swap with ExxonMobil, therefore, negotiations dragged on for six months,” said Alexei Mukhin, General Director of the Center for Political Information.

“It was one of the conditions for joining the project, but American company shareholders rejected it. In addition, it required U.S. government consent. It is unlikely that the exchange will occur in the future,” he says. Despite this, Rosneft went on to sign an agreement with Exxon, since, Mukhin said, rejecting the deal would mean “losing face”.

   Rosneft had announced an alliance with BP in January. The contract involved a mutual exchange of shares, which would give Rosneft access to its partner’s international projects. Rosneft was to obtain 5 percent of ordinary voting shares in BP in exchange for 9.5 percent of its own shares (each basket valued at about $7.8 billion).

   But because of constraints imposed by the shareholder agreement concluded between BP and the AAR Consortium within TNK-BP, the deal was not closed.
In June, Rosneft started negotiations with other foreign oil companies. The list included the CNPC, CNOOC and Sinopec of China, the ONGC, India, Shell, and Petrobras of Brazil. None of these companies offered Rosneft to a share in their assets. As a result, Exxonmobil,  which has the necessary drilling expertise to work in severe Arctic environments, became state-owned Rosneft's partner of choice.

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