Exxon Mobil’s ambitions in Russia appear to have been dashed, at least until the Ukraine crisis is resolved.
As part of the latest round of sanctions against Russia, the United States government took aim at Exxon’s project in the Arctic Ocean, ordering American companies to cut off exports to Russian oil exploration within 14 days.
The United States and Europe originally banned technology transfers that aided Russia’s deep water, Arctic offshore or onshore shale rock formation projects over the summer, but the language did not stop Exxon Mobil from starting drilling in the Kara Sea with a rig it had just moved. The new measures applied on Friday were meant to close those loopholes by also banning the export of goods and services.
Exxon said its lawyers were studying the sanctions. “We have to look at what was issued today” by the United States and the European Union “and determine how it affects us,” said Alan Jeffers, an Exxon spokesman.
American officials, who spoke on condition of anonymity to discuss the impact of sanctions on individual companies, said they recognized that Exxon Mobil lawyers might look for creative ways around the sanctions. But they said the government’s intention was to shut down the company’s operations in the Kara Sea.
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Exxon’s Stephen Greenlee, left; Igor Sechin, right, head of Rosneft; and Vladimir Putin, rear. Credit Sergei Karpukhin/Reuters
The sanctions won’t hurt Exxon’s profit for years. Exxon, which is working with the Russian energy giant Rosneft, just started exploratory drilling in the Arctic, and it could be a decade before the project started producing oil in meaningful quantities.
But the sanctions, particularly if they last for an extended period, could damage Exxon’s relationship with Russia, crimping the company’s growth strategy. The Kara Sea project in the Arctic Ocean is a central piece of Exxon’s effort to gain new reserves and replace production lost in aging fields and in countries like Venezuela that have grown unfriendly to Western oil companies.
Western governments have been gradually ramping up the pressure on President Vladimir V. Putin of Russia in an effort to halt his support of separatists in Ukraine. The prolonged crisis and the sanctions, against financial, defense and energy companies, as well as individuals, have weighed heavily on the Russian economy.
But the country’s cash-rich energy industry so far has shown few signs of a slowdown. Western energy giants, too, have been largely operating as normal.
The new measures threaten the status quo.
“It will infuriate the Kremlin, and Russia’s sanctions response will now be tougher than had been expected,” said Christopher J. Weafer, a partner at Macro-Advisory, a Moscow-based firm that advises businesses on Russia.
Exxon and other Western energy giants could feel the pinch, too. While the European Union exempted existing contracts from the sanctions, the United States did not.
The United States Treasury put a deadline on its order, saying that American companies engaged in such activities with five big Russian energy companies had until Sept. 26 to “wind down applicable transactions with these entities.” In addition to Rosneft, the American sanctions preclude transfers of technology, goods and services to the Russian energy companies Gazprom, Gazprom Neft, Lukoil and Surgutneftegas.
Exxon’s primary business in Russia is a partnership on Sakhalin Island with Rosneft, Japan’s Sodeco and O.N.G.C. of India. The project produces 140,000 barrels of oil a day, which translates to less than 50,000 barrels a day for Exxon. That represents a small fraction of the 2.1 million barrels Exxon produces worldwide every day.
But the sanctions are a potential blow to Exxon’s future growth.
Earlier this summer, Exxon, with its Russian partner Rosneft, started drilling in the Kara Sea, the body of water between the northern coast of European Russia and the Novaya Zemlya island chain. The project offers Exxon access to an area with great promise; the Arctic holds an estimated one-fifth of the world’s undiscovered, recoverable oil and natural gas, much of it concentrated in the ocean’s Russian sector.
The Arctic is part of a long-term strategy at Exxon to help bolster production, as many of its fields around the world start to decline. The company reported in the second quarter that its oil and gas output dropped 6 percent from the same period in 2013, largely because of the expiration of its rights to a field in Abu Dhabi.
Mr. Jeffers, the Exxon spokesman, wrote in an email on Friday that a rig brought this summer from Norway continued to drill the joint venture’s first Arctic well. But he added that, “we are assessing the sanctions. It is our policy to comply with all laws.”
The new sanctions will almost certainly lead to serious project delays. The sanctions will prohibit the export of many services for deepwater, shale and Arctic oil exploration and production, including drilling, well testing and advanced well completion techniques like hydraulic fracturing. While previously completed fields can continue to operate, expansions that tie in foreign companies will be far more difficult.
The wording of the United States and European sanctions are not entirely consistent. A Barclays report noted that each uses different clauses for describing deepwater, Arctic and shale projects “in such a way that adds uncertainty for companies involved in the production of both oil and gas in Russia.”
Barclays forecast that Russian oil production would decline by a mere 20,000 barrels a day in 2015 — a drip in a 90 million barrel a day world market. But it added that they would “throw a wrench” into plans to expand the Sakhalin fields.
Richard Mallinson, an analyst at Energy Aspects, a London-based research firm, said that the Exxon joint venture and similar projects would likely have to deal with significant disruptions until sanctions are lifted. Oil service companies like Halliburton and Baker Hughers, major suppliers to the Russian industry, may also face pressure.
The ban on technology transfers could cripple a sweeping plan by Russia to move from declining Siberian fields to ones offshore in the Arctic Ocean, newly accessible because of the thawing sea ice from global warming. In recent years, Russia has also developed ambitious plans to extract oil from its huge onshore shale rock formations, though little such oil has been produced so far.
Exxon, as well as Norway’s Statoil and Italy’s Eni, have Arctic ventures with Rosneft. A number of major companies, including Exxon, BP, Total and Royal Dutch Shell, are engaged in projects to test the potential of Russian shale.
In a presentation, Igor Sechin, the top executive at Rosneft and a close aide to Mr. Putin, said Arctic and so-called tight oil development that relies on Western technology would attract $300 billion to $500 billion in direct investment, and spur the economy with infrastructure work like building roads and railroads in the Arctic.
Without that investment, Russia’s energy future may be in jeopardy. If new offshore and shale oil fields are not developed, Russia’s current oil output of about 10 million barrels per day is expected to decline one million barrels by the end of the decade.
