RUSSIA SANCTIONS: NO BAR
The most powerful man in Russia's oil industry says U.S. sanctions won't prevent the development of discoveries in the Arctic Ocean.
Igor Sechin, chief executive officer of state oil producer OAO Rosneft (ROSN) and a long-time ally of President Vladimir Putin, spent two days traveling by plane, ship and helicopter last week to announce a billion-barrel crude strike in the iceberg-prone Kara Sea region of Russia's Arctic Ocean.
"We will continue working no matter what," Sechin said in an interview on board a polar research vessel as he prepared to unveil the find he named Victory. "We will plan the work for next season. As I said, now we've drilled only the first structure -- at Universitetskaya. There are more than 30."
But Sechin has a problem. The first well, the costliest yet drilled in Russia, relied on money and expertise from Exxon Mobil Corp. (XOM), Rosneft's partner in the Arctic and America's largest oil company. Under U.S. sanctions, imposed to punish Putin's actions in Ukraine, Exxon must stop working in Russia's offshore after the well is safely sealed.
Sanctions may also be the reason that Exxon has been far more circumspect in offering an assessment of the well than Rosneft, declining to give any estimate of the size of the find.
"We have encountered hydrocarbons, but it is premature to speculate on any potential outcome," said Exxon spokesman Richard Keil. "Our current focus is on completing the well and safely winding down operations consistent with our license with the U.S. government."
Appraising the first discovery and looking for more will cost billions of dollars, cash Exxon had promised to stump up and Rosneft, heavily indebted and barred from western capital markets, will find hard to replace. The company also has little experience of drilling in Arctic seas, more technically demanding than the onshore fields in Rosneft's Siberian heartland.
It will take a lot of time and investment before Rosneft can realize and financial gain from the discovery, VTB Capital said in a research note today.
"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," according to the note.
The development of Arctic oil reserves is one of President Putin's grandest ambitions. As Russia's existing fields in Siberia run dry, the country needs to find new reserves as it vies with the U.S. to be the world's largest oil and gas producer.
Sechin said the opportunity offered by today's oil discovery meant Rosneft would have no problem attracting investors and technology providers. Something he said was possible while respecting the company's existing agreement with Irving, Texas-based Exxon.
Rosneft shares dropped 1.5 percent to 229 rubles in Moscow at in Moscow today.
If Exxon is forced to leave the project, "of course we'll do it on our own and attract the necessary technologies and different partners who don't have limitations on cooperation," said Sechin, who featured in Bloomberg Markets 50 Most Influential list this year.
"The project's operator is our joint venture with Exxon and we're not planning on changing the venture's ownership structure," he said. "They will always have the possibility of returning to the project, as soon as the regulatory bodies allow."
The size of the potential discovery meant there would be no shortage of interest, said Sechin, who hinted that investment could come from outside the U.S. or Europe. In the last two years, Rosneft has signed deals with China's largest oil companies that swap up-front cash for long-term oil supplies.
"We're going to take into consideration all aspects of the law, but the market will be our guide," Sechin said. "Market relations are more multi-polar and provide us with more opportunities. Any oil and gas company would be interested in the resources that we confirmed today."
On finance, Sechin said the company had the resources to survive without borrowing from U.S. or European capital markets. Government support may be one way of keeping new projects on track at Rosneft, 69.5 percent owned by the state, he said.
"The support will be determined by the resources of the budget and the plans of the government," said Sechin, who was Russia's deputy prime minister before taking the helm at Rosneft. "If that comes about, that means we will continue developing all our projects."
A rising oil price will also help Rosneft finance the development of Arctic resources, he said, adding that he expected to add the Victory discovery to Rosneft's reserves within several months.
"The mature fields in use around the world are declining and this oil is high quality so the market should definitely give us the kind of price that justifies our investments," he said. In five to seven years, Rosneft may be able to get $140 to $150 a barrel, he said
The well drilled in the Kara Sea found about 1 billion barrels of oil, Rosneft said. The crude is "super-light," the company said, meaning when it's refined it will produce a high proportion of gasoline and diesel. That's likely to make it more valuable than Russia's existing export grade, Urals.
The discovery showed the Kara Sea has the potential to become one of the world's most important crude producing regions with more oil than that Gulf of Mexico, according to Rosneft. The mid-range forecast for when he expects production to start is seven years, Sechin said.
The well was drilled before the Oct. 10 deadline Exxon was granted by the U.S. government under sanctions barring American companies from working in Russia's Arctic offshore.
"We'll continue drilling here next year and the years after that," Sechin said. This discovery is of "exceptional significance in showing the presence of hydrocarbons in the Arctic."
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REUTERS - Brent crude futures LCOc1 were down 72 cents at $61.49 per barrel at 1020 GMT, having fallen by 1.5 percent on Tuesday, its largest one-day drop in a month. U.S. West Texas Intermediate (WTI) crude CLc1 was at $55.12 per barrel, down 58 cents.
BLOOMBERG - Prices dropped during the session as the International Energy Agency said the recent recovery in oil prices, coupled with milder-than-normal winter weather, is slowing demand growth. The worsening outlook for consumption dampened some of the enthusiasm that OPEC and its allies will extend supply curbs.
Global energy needs rise more slowly than in the past but still expand by 30% between today and 2040. This is the equivalent of adding another China and India to today’s global demand.
Product exports have grown significantly over the past several years and are expected to continue to grow as Russian refineries add capacity to produce more high-quality products.