- The Washington Times - Monday, August 11, 2014

The West’s major oil companies have been seamlessly sidestepping sanctions imposed on Russia by the U.S. and European Union, for the most part pressing full speed ahead on joint ventures to drill for oil and gas with sanctioned Russian companies and executives.

Russia remains the world’s top energy producer, despite the sanctions and an economic spiral into recession this year. Because Russia it is such an important player and fossil fuels remain in heavy demand worldwide, much is at stake for Exxon Mobil Corp., BP PLC, and other Western oil giants. They have invested billions of dollars into Russia with hopes of developing some of the world’s biggest and most promising oil and gas fields in the nation’s vast Siberian and Arctic wilderness areas.

Until recently, the joint U.S.-EU sanctions did not appear to be aimed at crimping Russia’s vital energy activities, which benefit Europe and much of the rest of the world as much as they do Russia, although they do not directly affect the U.S. so much.

The careful crafting of the sanctions to avoid major damage to the energy industry had the effect of encouraging oil firms to continue openly associating with sanctioned firms such as OAO Rosneft Oil Co. and their sanctioned executives, prompting Rosneft’s chief executive to declare recently that it was “business as usual” for the energy sector.

Western energy firms even defied U.S. and European efforts to isolate Russian President Vladimir Putin, egging on his ambitions to embellish Russia’s status as an energy superpower and providing cover for him at an international economic forum he sponsored in St. Petersburg in June.

“We have responsibility to stand with our partners in difficult times,” Bob Dudley, chief executive of British oil giant BP, said after announcing a deal with Rosneft to jointly explore for shale oil in the Volga-Urals region of central Russia.

He added at the forum that he is “pleased to be part of the Russian energy complex,” Reuters reported.

BP has the strongest ties with Russia of any Western energy company, venturing into the federation early after the end of the Cold War and taking a 20 percent stake in Rosneft, Russia’s state-directed oil company.

But Exxon, the American oil firm with the biggest stakes in Russia, may be even closer to Mr. Putin’s heart. Exxon CEO Rex Tillerson has cultivated close ties with the Russian leader in what Forbes magazine has dubbed a Russian “bromance.”

On Monday, Mr. Putin hailed Exxon as his “old and reliable partner” as he gave his assent for Exxon in partnership with Rosneft to begin drilling Russia’s northernmost oil well in the Arctic Ocean.

“Despite current political difficulties, pragmatism and common sense prevail,” Mr. Putin said in a video from the Black Sea resort of Sochi. “Nowadays, commercial success is defined by an efficient international cooperation. Businesses, including the largest domestic and foreign companies, understand this perfectly.”

Mr. Dudley sought to explain Russia’s draw to reporters last week. “Russia is the largest oil- and gas-producing country on the planet, and the world is going to need 40 percent more energy between now and 2035. That’s why you can see many, many, many international companies working in Russia. Obviously, BP is among them.”

Mr. Dudley noted at the economic forum that Russia is one of the last frontiers for oil and gas exploration and is the only country with the potential to produce more shale oil than the U.S.

Sanctions nipping

BP pulled back some on its glowing outlook after the most recent round of sanctions were announced last week, with provisions aimed at stifling further investment in oil and gas exploration or sales of sophisticated Western drilling technology to Russia.

In its earnings outlook, the company warned that “any future erosion of our relationship with Rosneft, or the impact of further economic sanctions, could adversely impact our business and strategic objectives in Russia, the level of our income, production and reserves, our investment in Rosneft and our reputation.”

Russia’s gas production, which provides a vital pipeline to Europe during the winter heating season, was specifically exempted from last week’s sanctions, however, and existing drilling activities were given a pass, once again creating the impression that the sanctions were tailored to avoid any major disruption in energy supplies.

Oil and gas markets took the sanctions in stride as traders saw no immediate threat.

In contrast to BP, Exxon Mobil — the American company most heavily invested in Russia — last week deflected questions from worried investors about the possible impact of tightening sanctions on its vast operations in Siberia. Exxon regularly pitches its groundbreaking Sakhalin Island liquefied natural gas drilling project in Russia’s Far East as one of its greatest accomplishments.

In helping Russia tap into its remote Far Eastern offshore reserves under the harshest of Arctic conditions, Exxon has played a pivotal role in helping Russia exploit its potential as an energy giant.

Among other things, the infrastructure put into the Sakhalin project laid the groundwork for funneling more of Russia’s oil and gas to China, Japan and other lucrative Asian markets, making Russia less dependent on Europe as a market for its fuel.

Cutting-edge technology

Mr. Tillerson, at a meeting of the World Petroleum Congress in Moscow in June, underscored his commitment to doing business in Russia, Bloomberg News reported. His close ties to Mr. Putin reflect the importance oil firms place on cultivating the world leader, who exerts personal control over major drilling projects and awards top executive slots to friends and allies at Rosneft, Gazprom and other state-directed enterprises.

“We look forward to taking advances achieved in the cutting-edge success in the Far East of Russia and building on them to unlock new supplies of oil and gas,” Mr. Tillerson said.

Exxon’s Russian partners are effusive as well about the mutual benefits of doing business with the world’s largest oil company. Rosneft portrays its relationship with Exxon as indispensable and has even joined Exxon in a Texas venture.

“All major projects this year are related to our joint work with Exxon,” Rosneft’s top executive, Igor Sechin, told the congress in Moscow.

Mr. Sechin, a close ally of Mr. Putin, said Rosneft’s operations with Exxon were unaffected by the sanctions and it was “business as usual,” only days after the U.S. banned him from traveling to the U.S. as punishment for Russia’s takeover of the Crimean Peninsula from Ukraine.

The latest round of sanctions, aimed at cutting off future drilling projects, came at a bad time for Exxon. The Texas oil giant has increasingly looked to its major stakes in Russia to supply the growth in revenue and earnings sought by investors, having announced plans to explore for oil and gas in the Kara Sea and large swaths of the Arctic Ocean. Exxon also hopes to help Russia tap into its huge unexplored fields of shale oil and gas in Siberia.

Exxon and Rosneft just erected the world’s largest drilling platform, Berkut, in the Okhutsk Sea as part of their Sakhalin project, which Mr. Putin views as a vital link in his plans to develop the Russian Far East. The platform weighs 200,000 tons, stands nearly 50 stories above the ocean surface and is made to withstand cataclysmic earthquakes, among other firsts.

Russia for the most part relies on Exxon and other Western firms for the cutting-edge technologies needed to exploit reserves in its remote offshore waters.

Going further into forbidding unexplored territory, Exxon and Rosneft just started exploring in the Kara Sea this summer, tapping into a promising formation that might hold more than 8 billion barrels of oil. The Arctic drilling site is so remote that it takes four days to reach by sea from the nearest port through iceberg-laden water, making it one of the most difficult and expensive projects ever pursued by Exxon, with an estimated startup cost of $600 million.

The sanctions just imposed by the U.S. and EU appear to be aimed at putting the brakes on many of Exxon’s and BP’s projects. An EU Council statement said export licenses will be denied if products are destined for deep-water oil exploration and production, Arctic oil exploration or production of Russian shale oil.

But Andrei Polischuk, an oil and gas analyst at Raiffeisen Bank, said he expects Russian and Western oil companies will find ways to circumvent the restrictions. One way would be to insist that they are searching for gas, not oil, although he pointed out that to the industry, the distinction is meaningless.

“What is the difference between drilling for oil or gas? Exploration is usually done for both,” he said.

Moreover, “what would keep Rosneft, for example, from asking its partner CNPC [China’s state-owned petroleum corporation] to buy some Western-made equipment and then ship it to Russia” to get around the sanctions, he asked.

Executives eager to please

Despite the harsh weather conditions in Russia and growing sanctions, nearly every major Western oil company remains eager to keep drilling there, said Russian Energy Minister Alexander Novak.

“Our contacts have indicated that the companies are interested in continuing investing in Russia and continuing to work with Russian companies, both in Russia and abroad,” he told the St. Petersburg forum. “I even know that some companies are calling for their governments to stop talking about sanctions.”

He said that “economical interest must prevail, and from our side we are ready to establish conditions for companies to continue to work, invest and cooperate with our companies.”

Executives who hope to stay in business in Russia also know they must kowtow to Mr. Putin, who views Russia’s vast energy resources as a national treasure that must be controlled by the Kremlin.

Oil and gas sales account for more than two-thirds of Russia’s export revenue and about half of its government revenue, and thus are indispensable sources of growth for Russia’s economy.

In light of energy’s high priority in the Kremlin, Mr. Dudley and other Western oil executives in St. Petersburg made a show of support by meeting privately with Mr. Putin. Western banks, which were targeted more directly by the sanctions, were not represented at the forum, Reuters reported.

Other global energy executives at the forum included Royal Dutch Shell PLC’s Ben van Beurden, Total SA’s Christophe de Margerie, Eni S.p.A.’s Claudio Descalzi and ExxonMobil Development Co.’s Neil Duffin. Most of them kept low profiles while reassuring Mr. Putin that they intended to continue operating in Russia, Bloomberg said.

“My message to Russia is simple: business as usual,” said Mr. de Margerie, who signed a deal with Russia’s Lukoil Oil Co. during the forum to explore for unconventional oil.

• Patrice Hill can be reached at phill@washingtontimes.com.

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