EXXON FINDING IN RUSSIA

At another time or in a different place, the oil and gas field ExxonMobil has discovered in the Russian Arctic would have been a cause for jubilation at its Texas headquarters.

As it is, the Pobeda field in the Kara Sea, announced by Exxon's Russian partner Rosneft over the weekend, must for now remain a tantalising prospect. Exxon will not be able to play any further role in developing the field, until the sanctions imposed by the US and European Union on exports of technology and services for Arctic developments are lifted.

Exxon secured the best strategic position of any western oil company in Russia, which has some of the largest oil and gas reserves in the world. But with Exxon's Russian ambitions on ice because of sanctions related to the Ukraine crisis, questions are coming to the fore about the US energy group's sluggish growth and weak share price performance relative to some leading rivals such as Chevron.

"Exxon was in a superb position in Russia, because it had been designated Rosneft's partner of choice," says Paul Sankey, an analyst at Wolfe Research.

"Russia was going to be Exxon's next mega-area. And the list of mega-areas in the world is very short."

Between 2011 and 2013, Exxon pulled off a coup by signing co-operation agreements for 10 joint ventures with state-controlled Rosneft, including exploration in the Black Sea, development in the Bazhenov shale of western Siberia, and a joint Arctic research centre.

Now nine of those ventures have been suspended. Exxon is still working on the other venture in the Pobeda field, but only for a few days so it can seal the Universitetskaya-1 well safely.

The field appears to hold more gas than oil, and Rosneft was vague about how many of its estimated 730m or so barrels of crude could be extracted.

Still, finding such a rich deposit with its very first well in what it hopes will be an important oil-producing region was a significant success for Exxon, and a deeply frustrating one.

Igor Sechin, Rosneft's powerful chief executive and a long-time admirer of Exxon, told reporters on the rig in the Kara Sea that he was not looking for a new partner.

"The project's operator is our joint venture with Exxon, and we're not planning on changing the ownership structure," he said, adding Rosneft was prepared to go-ahead without Exxon if need be.

Many Russian oil executives believe it will not come to that, because they expect western sanctions to be relatively shortlived.

One executive from a large Russian energy company says: "We hope to continue to work with [western oil groups] when the situation changes. We hope it's going to change very soon."

People familiar with Exxon's strategy in Russia say the company is already urging the US government to water down sanctions to allow it to drill again in the Arctic next summer.

Rex Tillerson, Exxon's chief executive who ran the company's operations in Russia in the late 1990s, has argued for restraint in imposing sanctions.

"We do not support sanctions, generally, because we don't find them to be effective unless they are very well implemented," he told shareholders at Exxon's annual meeting in May. He told reporters later that Exxon's views were being heard "at the highest levels".

However, President Barack Obama will not be inclined to do Exxon any special favours. Mr Tillerson spoke at a fundraiser for Mitt Romney, his Republican opponent in the presidential election of 2012.

Republicans in Congress are more likely to be well-disposed towards the oil industry but are also typically hawkish on Russia. The proposed Ukraine Freedom Support Act, which would further widen sanctions related to Russia, passed through the US Senate foreign affairs committee this month with bipartisan support and an 18-0 vote in favour.

Edward Chow, a senior fellow at the Center for Strategic and International Studies in Washington, suggests Russian executives may overestimate the US administration's willingness to sacrifice foreign policy goals to help American businesses.

"A lot depends on what happens in Ukraine," Mr Chow says. "Unless US objectives are achieved, it's very difficult to roll back sanctions."

If he is right, that puts Exxon's future in Russia firmly in the hands of President Vladimir Putin.

One person with knowledge of the company's thinking in Russia suggests it is playing the long game. "On a 20 [to] 30-year view, Exxon hopes that these issues will disappear," he adds.

It is true that the Kara Sea was always a long-term prospect. Even if it was able to go full steam ahead, Exxon would probably not have been producing any oil there until well into the next decade.

A look at some of the company's other projects for long-term growth, however, suggests none is as attractive as Russia. They include such challenging prospects as growth at the West Qurna field in Iraq, more development in the Canadian oil sands and expansion at Kashagan, the troubled mega-project in Kazakhstan.

The difficulties are a reflection of the pressure Exxon faces because of its sheer size. The usual decline in the output from its wells means the company has to start the equivalent of two large new projects every year just to stay where it is. Achieving any actual growth is even harder.

If the road in Russia remains blocked, one of Exxon's best bets may be to invest more in the US oil and gas boom. It was late to the shale party but has been building up its position, and tight oil production is growing fast.

The more ambitious move would be to use the company's financial strength to do a deal that would power the company the way buying Mobil did for Exxon in the decade after they agreed their merger in 1998.

Rumours have swirled in the industry about an Exxon bid for Anadarko Petroleum, BG Group or even BP. Especially if weak oil prices put pressure on company valuations, they could be attractive deals. The best way for Exxon to get over its disappointment in Russia might be to go and do something entirely different.

Rosneft relishes opportunity to thrive amid sanctions

When Igor Sechin stood aboard the West Alpha rig in the Russian Arctic and announced on Saturday that Rosneft had struck oil, the company's chief executive clearly relished the opportunity to show off its success in the face of western sanctions.

"This is our united victory, it was achieved thanks to our friends and partners," he said, and went on to name eight western companies involved in the Pobeda field in the Kara Sea, including ExxonMobil.

The oil find at the Universitetskaya-1 well was a useful public relations victory for Mr Sechin at a time when Russian executives are attempting to strike a balance between claiming they are unaffected by western sanctions and putting in requests for government aid.

Mr Sechin himself has asked for a $42bn loan from Russia's national welfare fund, which supports the country's public pensions – a request that ministers have said is likely to be granted, at least in part.

Few in the oil industry believe that Russia's offshore Arctic resources will be developed while the sanctions remain in place.

"The offshore Arctic is closed for the near future," says Duncan Milligan, analyst at consultancy Wood Mackenzie. "We see it as quite unlikely that any international oil company will drill an offshore Arctic well until there is an improvement in the political situation."

Mr Sechin has said Rosneft's investment in the region could reach $400bn over 20 years – the Universitetskaya-1 well alone may cost some $700m.

Analysts at VTB Capital, the investment bank division of one of Russia's top state lenders, expressed caution over the "risks and uncertainties" of Rosneft's Arctic ambitions.

"We believe that to proceed with Arctic development, the company would need to drill more exploratory wells, as the stated resources are not enough, in our view, to economically justify such complicated production."

ft.com