Wednesday, April 18, 2012

ExxonMobile Bets Big On Oil Deal In Russia

When is an oil deal more than just an oil deal?  Maybe when it is US-based ExxonMobile teaming up with Russia's state-run oil firm Rosneft.  The two companies announced a series of joint ventures on Tuesday that will give ExxonMobile access to Russian oil reserves in the Black Sea as well as the remote and frigid Kara Sea in Russia's far north.  The Arctic is widely believed to be the site of the world's last remaining major untapped oil fields; early surveys indicate that the Kara Sea field in question could by itself hold 36 billion barrels of recoverable oil – more oil, the New York Times notes, than in all of ExxonMobile's holdings in the United States. 

But the deal is even more interesting from the Russian side since it gives Rosneft a share in an ExxonMobile-owned shale gas field in Texas.  Thanks to hydrofracking and other advanced drilling techniques, shale gas and oil fields that were long thought to be near worthless due to the limitations of older drilling equipment have sparked an energy boom in the past few years.  The glut of natural gas now coming to the world marketplace were enough to prompt current Russian Prime Minister and soon-to-be President Vladimir Putin to discuss the “threat” shale gas posed to the Russian energy sector during his annual address to the Russian Duma (parliament) last week, and order the Russian energy sector to “answer this challenge”.  Rosneft seems then to be taking the “if you can't beat 'em, join 'em” approach with their partnership in ExxonMobile's Texas shale gas field.  They become the latest in a line of foreign companies who have invested in similar American fields as a way of gaining practical experience in using hydrofracking, horizontal drilling and other advanced recovery techniques to access their own domestic shale gas and oil reserves.

There's also a sense of going back to the future for ExxonMobile in the Rosneft deal.  In 2003, ExxonMobile was on the verge of signing a similar agreement with Russia's then-largest oil conglomerate, Yukos, when Yukos' chairman Mikhail Khodorkovsky was arrested on charges of tax evasion.  Khodorkovsky had hoped that the partnership would literally provide him with a krisha (Russian slang for “protection”) in his increasingly hostile personal relationship with Vladimir Putin.  Khodorkovsky was arrested before the Yukos-ExxonMobile deal could go through.

The Khodorkovsky affair could serve as a cautionary tale about doing big business deals in Putin's Russia, as could the Kremlin's forcing of Royal Dutch Shell to sell half their stake in a $20 billion natural gas project on Russia's Sakhalin Island to Russia's Gazprom.  But Russia is jockeying for position with Saudi Arabia as the world's top oil producer, which means that despite the risks, the rewards could be huge for ExxonMobile.
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