Published on October 11th, 2014 | by Sandy Dechert
Sanctions Trouble Russia-ExxonMobil Kara Sea Oil Well (Part 2)
(The story of the Kara Sea oil well, which went from being multinational to being solely operated by Russia, continued)
Let’s look at the pluses of the Kara Sea discovery first. ExxonMobil, the largest American petroleum company, and Rosneft, one of Russia’s huge state-owned oil companies, really hit it lucky, striking oil with their first well—drilled by the West Alpha, a semisubmersible owned by Norway-based North Atlantic Drilling and operated by ExxonMobil.
Well, maybe not just lucky—years ago surveys earmarked this chunk of the Arctic as 100% likely to contain oil and gas resources, as it does below the neighborhood immediately onshore (the West Siberian oil and gas province, which accounts for 60% of Russia’s current oil production). The Kara Sea oil well apparently has the potential to exceed the oil production of the Gulf of Mexico. China is the most likely buyer because of its location.
Igor Sechin, the head of Rosneft, characterized the discovery:
“Preliminary assessment of the resource base only for this first opening has trapped 338 million cubic meters of gas and 100 million tons of oil, and this is only one of the [geologic] structures in this field.”
The East Prinovozemelsky field drilled into by the over-2,000 m (6,500 ft) Universitetskaya-1 exploratory well sets a precedent for drilling 30-40 other wells nearby, the Russians say.
The first location could be producing oil in five or six years. Nice sweet, light crude oil, comparable to Siberian Light, unlike the nastier Urals blend. Why, the drillers even anticipate a price of $140-150 per barrel when the black gold starts coming up, based on ever-increasing oil price rise scenarios. And the supply may last the world all of another year, if enough of it is recoverable.
Super for President Putin. His country gets 2/3 of the spoils. ExxonMobil, which inked the deal in 2011 after BP’s bid was nullified, and before Shell’s spectacular failure to drill safely in US arctic waters and the resulting moratorium, has the lesser share. (ExxonMobil also has a pact to co-drill Russia’s Tuapse field in the Black Sea and has agreed to spin off some of its Gulf of Mexico subsea real estate to Russia—but those aren’t the topics at hand.)
So whose interests does ExxonMobil represent in the Kara Sea oil well?
You might well ask. I’d say, neither American nor Russian, but strictly ExxonMobil’s. The Irving, Texas-based company apparently persuaded the Russians that it had the know-how to drill the northernmost well Russia ever attempted in the Arctic Ocean. It also had welcome cash to pour into the venture, the lion’s share of $3.2 billion. And the US company won’t be able to recoup its expenses until production starts. What’s for Russia to lose?
But just in case, ExxonMobil spent $6.3 million lobbying the US government so far 2014 and listed Russian sanctions as one of its lobbying issues, Senate disclosures have revealed.
ExxonMobil has entered other joint ventures with Russia, too. The partners also agreed to create an “Arctic Research and Design Center for Offshore Developments” in St. Petersburg, Russia. Work on the center is already under way. Russian media describe it as the first institution capable of solving all the tasks the company will face when developing continental shelf deposits.
“It will gather global and Russian expertise, develop key competences needed to develop shelf deposits and create new underwater production technologies, including developing ice-class drilling platforms, ships and rigs and underwater systems for oil preparation and shipment.”
The co-venture has already restored the system of meteorological observations in the Kara Sea, which will provide drillers in the region with a full-fledged complex of meteorological monitoring. The group has also started monitoring marine mammal and bird habitat in the region, with special attention to polar bears.
Uh-oh, Russia does a “my bad”
Unfortunately, Putin chucked a spanner in the works by deciding to secure the Ukraine’s major port, hydrocarbons, and pipelines to Europe at about the same time. ExxonMobil has now had to bow out of the Kara Sea oil well deal because of the sanctions leveled against Russia for rummaging around in Europe’s heartland.
The American company has a few weeks longer than the agreed deadline, ostensibly to secure the well and platform for the safety of its Russian operators. Russian sources have said they will honor the agreement if the sanctions go away and the nominally US company can return soon, but they have also made it quite clear that they’re open to the idea of new partners.
And what else do you know? The Russians apparently believe they’ve learned about all Exxon has to teach them, because Rosneft Vice President Larisa Kalanda said at the International Investment Forum Sochi 2014 that they now have the know-how to go ahead on their own.
Just to sum things up, here’s how President Putin described the situation in a videoconference before the third round of sanctions was instituted:
“Today, commercial success is driven by efficient international cooperation. Businesses, including Russian and foreign companies, perfectly realize that… despite certain current political difficulties, pragmatism and common sense prevail, and we are pleased to hear that.”
To be continued…