By Daniel Gilbert
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 to tap this summer 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."
Write to Daniel Gilbert at daniel.gilbert@wsj.com
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