Paul Boughton
US supermajor ExxonMobil and state-run Russian oil firm Rosneft have announced a major new strategic alliance. Energy analyst Andrew Neff reports.
In a deal that is perhaps as politically significant as it is important for its business implications, yesterday Rosneft and ExxonMobil signed a strategic co-operation agreement that will see the two companies work together in exploration projects in the Russian Arctic and Black Sea. The agreement, signed in the Russian Black Sea resort city of Sochi in the presence of Russian prime minister Vladimir Putin and ExxonMobil CEO Rex Tillerson, will also give Rosneft its first access to the United States, with the two companies agreeing that the state-run Russian oil firm will receive the right to secure stakes in ExxonMobil projects in the US Gulf of Mexico and the state of Texas. The agreement also calls for the two companies to look to co-operate for joint projects in third countries, as well as establish a new joint Arctic Research and Design Center for Offshore Development in St Petersburg.
Under the terms of the agreement, ExxonMobil and Rosneft agreed to invest USD3.2 billion to explore for oil and gas in the East Prinovozemelsky (EPS) Blocks 1, 2, and 3 in the Arctic Kara Sea, as well as in the Tuapse block in the Russian sector of the Black Sea. Rosneft will take a 66.7 per cent stake in the blocks, while ExxonMobil—which will finance the majority of exploration costs at the blocks—will have the remaining 33.3 per cent. The agreement calls for at least USD1 billion to be invested in the Tuapse block, for which ExxonMobil and Rosneft reached a preliminary agreement back in January, and a further USD2.2 billion to be spent on exploration in the EPS 1, 2, and 3 blocks, which ExxonMobil said were "among the most promising and least explored offshore areas globally, with high potential for liquids and gas."
If the Kara Sea exploration blocks sound familiar, that is because they cover the same acreage (of about 125,000 sq. km in total) that was originally set to be included in the USD16-billion Arctic exploration alliance and share-swap deal between BP and Rosneft. That much-ballyhooed deal, announced in January, fell apart in May as a result of opposition to the agreement by BP's Russian partners in their TNK-BP joint venture. Yet even with little prospect of BP being able to rescue the agreement with Rosneft, until yesterday the UK firm still had a glimmer of hope that it could find a way to salvage some aspect of the deal. Now, however, BP will be left to ponder 'what if', watching with envy as ExxonMobil has swooped in to take advantage of BP's troubles by clinching its own deal with Rosneft. Meanwhile, the UK oil firm is left to sort out the mess of its tangled relationship with Alfa-Access-Renova (AAR), all the while working not to jeopardise their lucrative TNK-BP venture.[Page Break]
Rosneft coming to US for first time
Although much of the focus from yesterday's deal is on ExxonMobil obtaining access to new acreage in Russia's Arctic—and the fallout for BP from its own failed deal with Rosneft—the co-operation agreement between the Russian oil giant and the US supermajor also holds the promise of important benefits for Rosneft outside its home turf. Indeed, while ExxonMobil will help Rosneft in bringing its deepwater and offshore technological expertise to projects in the Kara and Black Seas, the co-operation agreement also provides the Russian state oil firm with the opportunity to gain equity access to ExxonMobil oil and gas projects in the US. Although no projects were specified in the announcement of the deal yesterday, the companies mentioned that potential options include stakes in offshore fields in the US Gulf of Mexico, tight oilfields in the heartland of the US oil industry in the state of Texas, and possibly projects in Canada and other countries.
In that sense, the ExxonMobil co-operation agreement offers benefits to Rosneft that the failed BP deal did not. Indeed, Russian deputy prime minister Igor Sechin—formerly Rosneft's chairman of the board and a chief architect of the BP-Rosneft strategic alliance—said yesterday that the ExxonMobil deal offered Rosneft "better" terms, even though the new deal does not include the same share-swap plan as the earlier BP agreement. Rosneft president Eduard Khudainatov said that the ExxonMobil agreement would help Rosneft pursue its strategic vision of building world-class expertise in offshore operations and enhancing oil recovery. "The partnership between Rosneft with its unique resource base, and the largest and most highly capitalized company in the world reflects our commitment to increasing capitalization of our business through application of best-in-class technology, innovative approach to business management, and enhancement of our human resource potential," Khudainatov said in a press release.[Page Break]
Outlook and Implications
The ExxonMobil-Rosneft strategic co-operation agreement is all about potential. For BP, the deal is simply about lost potential—the company's missed opportunity to capitalise on its leading position in Russia (among the supermajors) to craft a deal with Rosneft that would cement BP's position for the next generation. The UK oil firm will surely be lamenting its inability to finalise the earlier deal with Rosneft for years to come, particularly if the BP-AAR relationship sours further and TNK-BP feels the operational effects of that relationship deterioration. BP will also be kicking itself for missing out on the Arctic exploration deal if Rosneft and ExxonMobil are able to realise some of the tremendous hydrocarbon production potential of the EPS blocks, which Rosneft estimates contain an aggregate 36 billion barrels of recoverable oil reserves.
By comparison, the Tuapse block in the Black Sea is estimated to hold "only" 9 billion barrels of oil reserves, but again, the agreement with Rosneft on hashing out the details of investment in exploration in the block is all about potential. For ExxonMobil, simply having potential for growth in Russia is a step forward, considering that the US firm has suffered a series of its own setbacks in Russia over the past decade, from being stripped of the right to develop the Sakhalin-3 block in 2004 (after a decade and millions of dollars spent on exploration) to losing out on a potential deal to acquire part of YukosSibneft before that Russian company merger was reversed and Yukos itself was dismantled, bankrupted, and subsequently liquidated. ExxonMobil has continued to work successfully in Russia as the operator (with a 30% equity stake) in the multi-billion-dollar Sakhalin-1 project in the Far East, but even there the US oil company has had problems in getting its annual investment budget approved. ExxonMobil as yet has also been unable to agree to a deal with Gazprom for marketing of the gas output from the Sakhalin-1 project.
As such, sceptics may suggest that ExxonMobil could face similar problems with its new deal, but optimists will point to the fact that things are different this time around. Not only is the US supermajor partnering with state-run Rosneft, but the agreement comes with the blessing of Prime Minister Putin, which—in theory—would seem to help ExxonMobil avoid any potential political hiccups. (For its part, BP also assumed that it had smoothed over any potential political problems in its own deal with Rosneft, having brought both Sechin and Putin on board, but in the end, it was BP's own Russian partners at AAR that prevented the deal from being completed). Furthermore, with both the US and Russian governments eager to pursue a "reset" in political relations, a strategic co-operation agreement between ExxonMobil and Rosneft has the potential to generate important political benefits as an economic representation of this reset.
Again, however, this is the potential of the deal, as the reality could yet turn out differently, particularly if US lawmakers balk at the notion of a Russian state oil company taking equity stakes in oil and gas projects in the US Gulf of Mexico and/or Texas. It is unclear if any investments by Rosneft in ExxonMobil projects in the US would require approval from the Committee on Foreign Investment in the United States, but this is clearly an issue that will have to be addressed in order for the Russian oil firm to realise the full potential from the ExxonMobil strategic agreement. The reciprocity envisioned in the ExxonMobil-Rosneft agreement holds much potential to generate mutual benefits for the two companies and the two host governments, but realising this potential will require further co-operation, both between the oil companies and between the US and Russia.
For more information, visit www.ihs.com
In a deal that is perhaps as politically significant as it is important for its business implications, yesterday Rosneft and ExxonMobil signed a strategic co-operation agreement that will see the two companies work together in exploration projects in the Russian Arctic and Black Sea. The agreement, signed in the Russian Black Sea resort city of Sochi in the presence of Russian prime minister Vladimir Putin and ExxonMobil CEO Rex Tillerson, will also give Rosneft its first access to the United States, with the two companies agreeing that the state-run Russian oil firm will receive the right to secure stakes in ExxonMobil projects in the US Gulf of Mexico and the state of Texas. The agreement also calls for the two companies to look to co-operate for joint projects in third countries, as well as establish a new joint Arctic Research and Design Center for Offshore Development in St Petersburg.
Under the terms of the agreement, ExxonMobil and Rosneft agreed to invest USD3.2 billion to explore for oil and gas in the East Prinovozemelsky (EPS) Blocks 1, 2, and 3 in the Arctic Kara Sea, as well as in the Tuapse block in the Russian sector of the Black Sea. Rosneft will take a 66.7 per cent stake in the blocks, while ExxonMobil—which will finance the majority of exploration costs at the blocks—will have the remaining 33.3 per cent. The agreement calls for at least USD1 billion to be invested in the Tuapse block, for which ExxonMobil and Rosneft reached a preliminary agreement back in January, and a further USD2.2 billion to be spent on exploration in the EPS 1, 2, and 3 blocks, which ExxonMobil said were "among the most promising and least explored offshore areas globally, with high potential for liquids and gas."
If the Kara Sea exploration blocks sound familiar, that is because they cover the same acreage (of about 125,000 sq. km in total) that was originally set to be included in the USD16-billion Arctic exploration alliance and share-swap deal between BP and Rosneft. That much-ballyhooed deal, announced in January, fell apart in May as a result of opposition to the agreement by BP's Russian partners in their TNK-BP joint venture. Yet even with little prospect of BP being able to rescue the agreement with Rosneft, until yesterday the UK firm still had a glimmer of hope that it could find a way to salvage some aspect of the deal. Now, however, BP will be left to ponder 'what if', watching with envy as ExxonMobil has swooped in to take advantage of BP's troubles by clinching its own deal with Rosneft. Meanwhile, the UK oil firm is left to sort out the mess of its tangled relationship with Alfa-Access-Renova (AAR), all the while working not to jeopardise their lucrative TNK-BP venture.[Page Break]
Rosneft coming to US for first time
Although much of the focus from yesterday's deal is on ExxonMobil obtaining access to new acreage in Russia's Arctic—and the fallout for BP from its own failed deal with Rosneft—the co-operation agreement between the Russian oil giant and the US supermajor also holds the promise of important benefits for Rosneft outside its home turf. Indeed, while ExxonMobil will help Rosneft in bringing its deepwater and offshore technological expertise to projects in the Kara and Black Seas, the co-operation agreement also provides the Russian state oil firm with the opportunity to gain equity access to ExxonMobil oil and gas projects in the US. Although no projects were specified in the announcement of the deal yesterday, the companies mentioned that potential options include stakes in offshore fields in the US Gulf of Mexico, tight oilfields in the heartland of the US oil industry in the state of Texas, and possibly projects in Canada and other countries.
In that sense, the ExxonMobil co-operation agreement offers benefits to Rosneft that the failed BP deal did not. Indeed, Russian deputy prime minister Igor Sechin—formerly Rosneft's chairman of the board and a chief architect of the BP-Rosneft strategic alliance—said yesterday that the ExxonMobil deal offered Rosneft "better" terms, even though the new deal does not include the same share-swap plan as the earlier BP agreement. Rosneft president Eduard Khudainatov said that the ExxonMobil agreement would help Rosneft pursue its strategic vision of building world-class expertise in offshore operations and enhancing oil recovery. "The partnership between Rosneft with its unique resource base, and the largest and most highly capitalized company in the world reflects our commitment to increasing capitalization of our business through application of best-in-class technology, innovative approach to business management, and enhancement of our human resource potential," Khudainatov said in a press release.[Page Break]
Outlook and Implications
The ExxonMobil-Rosneft strategic co-operation agreement is all about potential. For BP, the deal is simply about lost potential—the company's missed opportunity to capitalise on its leading position in Russia (among the supermajors) to craft a deal with Rosneft that would cement BP's position for the next generation. The UK oil firm will surely be lamenting its inability to finalise the earlier deal with Rosneft for years to come, particularly if the BP-AAR relationship sours further and TNK-BP feels the operational effects of that relationship deterioration. BP will also be kicking itself for missing out on the Arctic exploration deal if Rosneft and ExxonMobil are able to realise some of the tremendous hydrocarbon production potential of the EPS blocks, which Rosneft estimates contain an aggregate 36 billion barrels of recoverable oil reserves.
By comparison, the Tuapse block in the Black Sea is estimated to hold "only" 9 billion barrels of oil reserves, but again, the agreement with Rosneft on hashing out the details of investment in exploration in the block is all about potential. For ExxonMobil, simply having potential for growth in Russia is a step forward, considering that the US firm has suffered a series of its own setbacks in Russia over the past decade, from being stripped of the right to develop the Sakhalin-3 block in 2004 (after a decade and millions of dollars spent on exploration) to losing out on a potential deal to acquire part of YukosSibneft before that Russian company merger was reversed and Yukos itself was dismantled, bankrupted, and subsequently liquidated. ExxonMobil has continued to work successfully in Russia as the operator (with a 30% equity stake) in the multi-billion-dollar Sakhalin-1 project in the Far East, but even there the US oil company has had problems in getting its annual investment budget approved. ExxonMobil as yet has also been unable to agree to a deal with Gazprom for marketing of the gas output from the Sakhalin-1 project.
As such, sceptics may suggest that ExxonMobil could face similar problems with its new deal, but optimists will point to the fact that things are different this time around. Not only is the US supermajor partnering with state-run Rosneft, but the agreement comes with the blessing of Prime Minister Putin, which—in theory—would seem to help ExxonMobil avoid any potential political hiccups. (For its part, BP also assumed that it had smoothed over any potential political problems in its own deal with Rosneft, having brought both Sechin and Putin on board, but in the end, it was BP's own Russian partners at AAR that prevented the deal from being completed). Furthermore, with both the US and Russian governments eager to pursue a "reset" in political relations, a strategic co-operation agreement between ExxonMobil and Rosneft has the potential to generate important political benefits as an economic representation of this reset.
Again, however, this is the potential of the deal, as the reality could yet turn out differently, particularly if US lawmakers balk at the notion of a Russian state oil company taking equity stakes in oil and gas projects in the US Gulf of Mexico and/or Texas. It is unclear if any investments by Rosneft in ExxonMobil projects in the US would require approval from the Committee on Foreign Investment in the United States, but this is clearly an issue that will have to be addressed in order for the Russian oil firm to realise the full potential from the ExxonMobil strategic agreement. The reciprocity envisioned in the ExxonMobil-Rosneft agreement holds much potential to generate mutual benefits for the two companies and the two host governments, but realising this potential will require further co-operation, both between the oil companies and between the US and Russia.
For more information, visit www.ihs.com
