Taking the Reset to the Russian Oil Rigs
by Anders Aslund, Peterson Institute for International Economics
Op-ed in the National Interest
September 5, 2011
© National Interest
On August 30, ExxonMobil CEO Rex Tillerson concluded a big oil and gas deal with Rosneft president Eduard Khudainatov in the Russian seaside resort of Sochi. The world's largest private energy company had made the biggest deal in Russian history between any foreign energy company and the largest state-dominated oil company. The signing ceremony was overseen by Prime Minister Vladimir Putin, who acts as the real chairman of "Russia Energy Inc.," and Deputy Prime Minister Igor Sechin, suggesting that the deal has Moscow's full political support. This is a huge success for both ExxonMobil and Rosneft.
The companies agreed on two huge joint ventures in Russia for offshore exploration of 126,000 square kilometers in the Arctic Kara Sea and in the 11,200 square kilometer Tuapse block in the Black Sea. The first field may contain 36 billion barrels of crude and the latter 9 billion barrels, according to preliminary Russian estimates. Rosneft will hold two-thirds of the equity, and ExxonMobil the other third. ExxonMobil has pledged to spend $3.2 billion on this exploration. In return, it is offering Rosneft minority stakes in at least six of its projects in the Western hemisphere, including an onshore oil project in Texas and offshore exploration in the Gulf of Mexico.
The Rosneft managers are painfully aware that no Russian company can explore the difficult offshore fields in the Arctic or the deep waters of the Black Sea, which only a handful of oil majors are actually capable of doing. ExxonMobil has proven its skills in these difficult waters. At the same time, Rosneft will be invited to participate in energy projects in the US heartlands, learning ExxonMobil technology and management from the inside.
The deal is attractive for ExxonMobil as well. The biggest challenge for the oil majors is gaining access to large new oil and gas findings. Most of the Middle East is closed to them, and in Russia the two state companies, Rosneft and Gazprom, have a monopoly on the unexplored large offshore fields. Thus the only window of opportunity open to ExxonMobil was reaching an agreement with one of them. In doing so it achieved an exclusive deal for huge tracts of offshore areas. Moreover, its down payment is small, and it did not have to give up any equity.
Yet, last January the big news was that BP had made a similar deal with Rosneft about the same Kara Sea bloc, but by May it had fallen apart and Rosneft had started negotiating with ExxonMobil instead. That transaction had also been blessed by Putin and Sechin (which did not help), and BP had offered Rosneft no less than 5 percent of its equity in exchange for 9.4 percent of Rosneft, implying much more profound integration.
BP has had more experience in Russia than any other oil major, having produced far more oil in Russia through its 50-50 joint venture with a group of Russian oligarchs in TNK-BP. Commercially, TNK-BP has been a great success, but these Russian oligarchs have sued BP so often that its work in the country has been hampered. Evidently, these same oligarchs persuaded Putin to change his mind about BP's deal with Rosneft, which excluded them.
The conclusion is that Putin's approval is a necessary but insufficient condition for the success of a big business deal in Russia. As if to clarify that the ExxonMobil deal did not signify any improvement of the national business climate, Russian bailiffs and special forces raided BP's Moscow offices the day after the deal was signed in connection with their legal dispute with their Russian partners.
A fundamental reason for Rosneft's choice of ExxonMobil is that the company has worked successfully as the operator of the difficult Sakhalin I project, of which ExxonMobil owns 30 percent and Rosneft 20 percent. The balance is held by Japanese and Indian companies. The contract was concluded in 1996, and production of oil started as planned in 2006. Interestingly, this is the only large oil and gas project with a foreign majority, suggesting that ExxonMobil certainly knows a thing or two about how to manage in Russia.
Sakhalin I compares favorably with Sakhalin II, where Royal Dutch Shell is the operator. Its partner Gazprom complained that costs ballooned as the project itself was delayed, and it used these complaints as an excuse to expropriate much of its foreign partners' equity.
Thus, considering their recent experiences, it is no surprise that the Russian leaders chose ExxonMobil over BP and Shell, the two other oil majors with the most experience in Russia. Furthermore, they can see how Kazakhstan suffers from years of delays in the launch of the giant Kashagan field in the Caspian Sea, where hapless Italian ENI is the operator. And Russians tend to have a preference for the biggest and strongest—that is, ExxonMobil.
The most surprising fact is that ExxonMobil was not chosen earlier. With little doubt, Moscow was reluctant to conclude big business deals with US companies for political reasons. Although Russia is the ninth biggest economy in the world, it is merely the thirty-seventh largest export market of the United States. The ExxonMobil deal with Russia became possible thanks to President Barack Obama's "reset" policy. It can be seen as a beginning of the normalization of US commercial relations with Russia.
Russian minority stakes in a few energy projects in the United States can hardly be perceived as a threat to national security. After all, Lukoil already has gas stations in Washington, DC, and Severstal and Evraz, each owning a number of steelworks in America, are among the biggest steel producers in the United States. The contrast to the controversy about Chinese investments in energy, hi-tech, or communications is striking.