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2014-05-03 20:00:00

EXXON & RUSSIA: DESPITE SANCTIONS

EXXON & RUSSIA: DESPITE SANCTIONS

Exxon Mobil Corp. is pushing ahead with its plans to drill in Russia's Arctic seas—its biggest opportunity to discover untapped deposits of oil and gas—even though deteriorating relations between Moscow and Washington have increased the risks. 

America's biggest energy producer is set this summer to tap what it calls the University Prospect in the Arctic's Kara Sea, a trove that could hold the equivalent of 9 billion barrels of oil—more than a third of Exxon's proven reserves.

That prize looks riskier as tensions increase between the West and Moscow over Russia's incursion in Ukraine. U.S. sanctions this week targeted Igor Sechin, a close associate of President Vladimir Putin and head of OAO Rosneft,  Exxon's Kremlin-controlled partner in the Arctic. The sanctions didn't extend to Rosneft itself.

"All of the activities that we had originally planned for this year are under way," David Rosenthal, Exxon's vice president of investor relations, said Thursday of Exxon's plans with Rosneft. Exxon will comply with all sanctions, he said.

Exxon has little choice but to stick with Russia, experts say. The company's first-quarter production fell 5.6% from a year earlier, the latest in a series of declines over the last decade. And it has to replace the fuels it pumps every year, an amount equivalent to the entire reserves of rival Hess Corp. 

By Rosneft's estimates, a quarter of the world's remaining oil-and-gas reserves lie buried beneath Russian-controlled soil. That makes the country hard to ignore, especially as governments of other oil-rich countries favor their state-controlled energy companies.

Exxon executives "take the long-term view that hopefully they can weather the near-term storm," said Charles Ebinger, director of the Energy Security Initiative at the Brookings Institution. Exxon and rivals such as BP  PLC and Royal Dutch Shell  PLC "don't have a lot of choice. They've been denied access to a lot of the promising acreage in the world," he said.

The Irving, Texas, company's most profitable barrels lie outside of the U.S., partly because Exxon hasn't fared well in the U.S. energy boom. It jumped into the U.S. shale frenzy with a $25 billion acquisition of XTO Energy Inc. in 2010, just before natural-gas prices tumbled.

Exxon Chief Executive Rex Tillerson has pledged to improve the company's profit margins. Last year, the company sold some of its stake in an Iraqi project, allowed a less-profitable concession in Abu Dhabi to lapse and continued to reduce spending on gas drilling in North America.

That pruning, combined with a focus on adding more crude from places such as Canada's oil sands, is beginning to pay off. Despite lower output, Exxon's profit from tapping oil and gas jumped 11% in the first quarter from a year earlier. The results were helped by higher natural-gas prices and a steep drop in capital spending to $8.4 billion, the lowest in three years.

The company's first-quarter profit fell 4.2% to $9.1 billion, hurt by weak refining margins.

Exxon's shares fell $1 to close at $101.41 Thursday. But from the first round of U.S. sanctions more than a month ago through Wednesday, Exxon's shares had climbed 8.6%, far outpacing the broader market and adding $34 billion to the company's value.

The rise partly reflects that Exxon faces little risk in the short-term. Russia accounted for about 1% of the company's output last year, and Exxon has yet to invest the years and billions of dollars it would take to unearth the Arctic's energy riches.

The areas of the Kara Sea where Exxon and Rosneft are exploring could hold billions of barrels of oil, the companies have said. It could be decades before the partners can coax meaningful amounts of crude from beneath the frozen sea, which is icebound for most of the year.

Exxon also has leverage with the Russian government, some analysts say, as the Kremlin tries to resuscitate its oil production. Only a few companies in the world—all of them Western—have experience operating in the harsh, Arctic conditions.

Drilling in the Arctic "is unquestionably one of our key projects," Rosneft said Wednesday. Last month the Russian company said it had begun a 55-day expedition with Exxon aboard a nuclear-powered icebreaker to study ice in the Kara Sea.

Exxon has agreed to foot most of the exploration costs, estimated to exceed $3.2 billion, as well an Arctic research center to be based in St. Petersburg, Russia. In return, the U.S. company gets a 33% stake in Kara Sea and Black Sea prospects, as well as a 49% interest in a pilot program to test the potential of rock buried beneath Siberia's tundra.

Rosneft acquired a 30% stake in some of Exxon's properties in the Gulf of Mexico's deep waters. The two companies are planning to build a plant to export natural gas from Russia's Far East.

"Exxon cannot afford to miss out," said Fadel Gheit, a senior energy analyst at Oppenheimer & Co. "If Obama and European leaders decide, 'We're going to close the door on Putin until he screams uncle,' things could get very bad."

wsj.com

Tags: EXXON, OIL, RUSSIA, ROSNEFT, GAS

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