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Exxon Mobil Scores a Coupe by Gaining Access to Russian Arctic Oil Reserves

Companies / Oil Companies Sep 01, 2011 - 03:03 PM GMT

By: Money_Morning

Companies

Best Financial Markets Analysis ArticleDavid Zeiler writes: With fresh sources of oil becoming increasingly scarce, Exxon Mobil Corp. (NYSE: XOM) scored a major coup on Tuesday by making a deal for access to the vast reserves of Russian Arctic oil.

Many companies were in the hunt for the Russian Arctic oil, including BP PLC (NYSE ADR: BP), Royal Dutch Shell PLC (NYSE ADR: RDS.A), Chevron Corp. (NYSE: CVX), Total SA (NYSE ADR: TOT) and Statoil ASA (NYSE ADR: STO), but it was Exxon that walked away with the prize.


The arrangement with state-controlled Rosneft (PINK: RNFTF) gives Exxon a significant advantage over its major rivals -- all of which have struggled in recent years to replace the oil they're extracting with new sources.

Rosneft, in which the Russian government has a 75% stake, estimates the three Kara Sea blocks where Exxon will be exploring contain about 36 billion barrels of recoverable oil.

"If that figure is correct and Exxon is able to produce the fields, we are talking about one of the world's largest oil discoveries in the last 50 years," Fadel Gheit, an energy analyst at Oppenheimer & Co., told MarketWatch. "But it remains to be seen how much of that oil is economically recoverable."

Rosneft estimates total reserves in the area at about 110 billion barrels of oil equivalent - an amount four times the size of Exxon's proven global reserves.

Quid Pro Quo
Having access to reserves of that size will help Exxon rectify its replacement ratio for oil. Earlier this year Exxon reported that for every 100 barrels of oil it produced, it found just 95 barrels of new oil.

Exxon has been more successful in replacing natural gas resources - it finds 158 cubic feet of gas for every 100 it extracts. But with natural gas prices slumping, the company would much rather find more oil.

Terms of the deal are generous for Rosneft; the Russian company will receive some deepwater Exxon assets in the Gulf of Mexico as well as some land-based fields in Texas.

Exxon has agreed to spend $2.2 billion to explore for oil and gas in the icy Kara Sea, and an additional $1 billion to prospect in the Black Sea. It will own one-third of the joint venture, with Rosneft controlling the other two-thirds.

Apart from the money, the Russians need Exxon's expertise at offshore oil exploration and drilling in Arctic environments, such as the Hibernia project in Canada.

"Russia needs capital investment -- these are very expensive projects -- and the latest technology," said Money Morning Global Energy Strategist Dr. Kent Moors. "That is where the Western majors have an in. Exxon now has a foot in the door early."

Political Pitfalls
Some analysts are concerned about Russian political landmines that have sabotaged other deals with Western oil majors.

Back in May BP was on track to make a similar deal with Rosneft for access to the Russian Arctic oil when two Russian billionaires blocked it because it threatened to compete with their own joint venture with BP.

Another deal that had Chevron investing $1 billion in a Rosneft Black Sea project also collapsed earlier this year. And in 2006, Shell was forced to sell 50% of a venture in Sakhalin to state-owned Gazprom OAO (PINK ADR: OGZPY) after investing more than $20 billion in the project.

Exxon itself had a deal to buy a stake in OAO Yukos fall through in 2003 when the company's founder was jailed for tax evasion and fraud.

Yet that hasn't stopped the Western oil companies from coming back - there's just too much opportunity in Russia, which is now the world's No. 1 producer of oil. Most of the oil majors have a presence somewhere in Russia despite its history.

Dr. Moors said the Rosneft deal looks relatively safe for Exxon.

"Matters are much better now," said Dr. Moors. "Rosneft will operate the fields, which means the government calls the shots."

Other analysts agreed.

"Which is more risky today:Iran, Libya or Russia?" Karen Kostanian, energy analyst at Bank of America-Merrill Lynch in Moscow, told Reuters. "As long as Russia needs technology and Exxon needs access to reserves, these people are safe for several years to come."

Risky Business
In fact, some analysts say the threat of Russian political hijinks is just one risk among many in a high-risk business. The remote location, hostile climate and lack of detailed information on the reserves themselves all will add to the cost - and risk - of the Rosneft venture.

And because little exploration has been done for the Russian Arctic oil so far, no one expects the drilling of even prospecting wells until at least 2015.

But it does give Exxon something of an insurance policy against the dwindling number of potential sources of new oil.

"I see this mainly as an acquisition of option value for Exxon Mobil," Cliff Kupchan, director of Eurasian Practice at Eurasian Group, told Reuters. "They have very lucrative options, should things go well, to work in the next energy frontier -- the Arctic. It doesn't mean that all this is going to happen, but from Exxon's point of view, that's the real appeal -- to open new future avenues of production."

Source :http://moneymorning.com/2011/09/01/55426russian-arctic-oil-to-give-exxon-mobil-leg-up-on-rivals/

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