- The Washington Times - Tuesday, September 30, 2014

The latest U.S. sanctions against Russia over Ukraine are starting to crimp not only the Russian economy but also major Western oil companies such as Exxon Mobil Corp., companies that have invested heavily in helping Russia tap into huge stores of oil buried offshore in remote Arctic waters and under the vast wilderness in eastern Siberia.

Under a joint venture with Rosneft, Russia’s sanctioned oil company, Exxon last month discovered what may be an oil field in the Kara Sea containing 750 million barrels.

The venture is a pet project of Russian President Vladimir Putin, who boasted about it and personally gave the go-ahead for the companies to start drilling this summer.

But under the gun from the U.S. Treasury, Exxon is closing the drilling site and is not allowed to participate in further exploration there unless the sanctions are lifted.

The partners spent $700 million developing the site in their first attempt to explore such remote and forbidding Arctic waters and planned to spend as much as $3.2 billion more.

Rosneft chief executive Igor Sechin, a close Putin ally who is looking for Chinese investors to finance further exploration, announced that he would name the well “Pobeda,” or “Victory,” and thanked Exxon, Schlumberger Ltd., Halliburton and other U.S. and Western companies for helping make the major oil find, which has yet to be confirmed.

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Rosneft has ambitions to start producing oil in the offshore Arctic in the next 15 years, although many analysts say it will not be able to realize the area’s potential without the help of Western firms like Exxon and the advanced technology and drilling platforms they are prohibited from selling to Russia under the sanctions.

“We expect to open a new oil province there, with reserves comparable to the developed reserves of Saudi Arabia,” Mr. Sechin recently boasted to the German magazine Der Spiegel.

The Kara Sea well was closed after a summer in which Exxon, BP PLC and other major Western oil firms joined Mr. Putin and Rosneft in declaring that the Russian oil industry was operating “business as usual” despite a series of escalating sanctions imposed by the U.S. and European Union in the standoff over Moscow’s annexation of Crimea from Ukraine.

Drillers managed to sidestep the sanctions through the spring and summer, citing the intent of U.S. and European leaders not to disturb Russia’s production activities, which provide indispensable flows of oil and natural gas to European nations for heating and transportation fuel.

But the round of sanctions announced by the Obama administration Sept. 12 were clearly aimed at shutting down exploratory activities such as the Kara Sea well. The U.S. Treasury in particular made a point of halting a venture that offered major bragging rights to Russian leaders during the clash with Mr. Obama and EU leaders.

“The well exposed a loophole in sanctions that both the EU and U.S. governments were eager to close,” said Anthony Ruben, an analyst at Inflection Point Consulting. “They have eliminated that loophole.”

The Obama administration, apparently irked at Exxon’s open flaunting of sanctions this year, originally gave drilling companies a deadline of Sept. 26 — Friday — to shut down their exploratory activities. But Exxon was able to negotiate with the Treasury an extension to wind down the Kara Sea operations more slowly to “protect the safety of the individuals involved in these operations as well as the risk to the environment,” the company said.

After questioning whether the sanctions applied to such ongoing projects, Exxon conceded that it would have to at least temporarily end its Kara Sea activities. The U.S. and EU have held out the possibility that if Russia complies with an agreement with Ukraine to end clashes and disengage from the conflict in eastern Ukraine, this latest, toughest round of sanctions could be lifted.

“For Exxon, already not popular with the Obama administration, it means a public black eye and a setback for investors,” said Mr. Ruben, noting that the company’s stock had dropped almost 10 percent since the sanctions were announced. Exxon was counting on its major Arctic and shale oil drilling projects in Russia to produce revenue.

But Exxon CEO Rex Tillerson is “a practitioner of ‘realpolitik’ and a long-term player in the Arctic,” and Exxon still may “come out ahead,” Mr. Ruben said. He expects the sanctions to be reduced or eliminated in less than a year, possibly once Europe starts to feel the pinch of declining oil and gas imports from Russia as winter approaches.

“With Europe still dependent on Russia for natural gas for heating, it is likely that by winter some progress — and face-saving compromise — will have been made that minimizes the impact of these sanctions,” he said, noting that the EU — unlike the U.S. — took pains to not provoke Mr. Putin and allowed drilling projects to continue.

Should Europe and the U.S. eventually back off the sanctions, Mr. Ruben said, that would vindicate Exxon and Mr. Tillerson, who has a close relationship with Mr. Putin that Forbes magazine has dubbed a “bromance.”

“Exxon will be viewed by Russia as a reliable ‘friend’ and long-term partner,” he said. “In the long run, being a trusted friend of Russia will probably be worth more to Exxon than being a short-term enemy of the Obama administration.”

Mr. Ruben also questioned whether the sanctions are doing as much as the West hopes to deter the wily Mr. Putin.

“The sanctions will certainly hurt. However, as Mr. Putin has likely been two or three moves ahead of the West during recent months, he has likely anticipated sanctions, and how they will be mitigated,” he said.

Also feeling heat from the sanctions along with Exxon is Bermuda-based SeaDrill, the company that provided the massive West Alpha drilling rig for exploratory wells in the Kara Sea. SeaDrill’s stock plummeted 19 percent after the Treasury announced its latest ban on new drilling operations. SeaDrill also has contracts with Rosneft for use of its West Navigator and West Rigel drilling rigs that are up in the air.

James Stafford, editor at OilPrice.com, said the Kara Sea venture was only the first to get caught in the crossfire of tit-for-tat sanctions between Russia and the West. He expects French energy giant Total SA will be next.

Because the sanctions prohibit Western banks from financing Russian oil and gas projects, the French company will be forced to seek non-dollar financing for its liquefied natural gas project on Russia’s Yamal Peninsula in the remote Arctic. The sanctions also threaten Total’s joint venture with Lukoil to explore shale oil in western Siberia, he said.

After getting off to a slow start, “the new sanctions are now taking a toll on massive oil and gas projects,” Mr. Stafford said.

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

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