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Apr 16, 2012 | 20:35 GMT

3 mins read

Russia: A Potentially Beneficial Energy Deal with ExxonMobil

ALEXEY DRUZHININ/AFP/Getty Images
Summary

Russian state oil giant Rosneft and U.S. ExxonMobil are signing a wide-ranging strategic partnership and expertise swap deal April 16 at Russian Prime Minister Vladimir Putin's residence. ExxonMobil CEO Rex Tillerson is meeting with Putin, industry chief and Deputy Prime Minister Igor Sechin and Rosneft chief Eduard Khudainatov.

The series of deals appears to satisfy many of Rosneft's wishes and is a major step forward in the technology and partnerships needed for the future of Russian energy. But ExxonMobil is not like other Western firms that have worked or are working in Russia, and ExxonMobil has shown in the past that it will not tolerate the Kremlin's political maneuverings in energy deals.

The deals grant Rosneft access to projects from which it can gain technology it has long desired as well as outright technology swaps. In order to draw in ExxonMobil, the Kremlin is introducing an offshore tax regime that makes it economically attractive for companies to handle the types of huge up-front costs associated with offshore exploration. Putin said April 11 that he would reform the tax regime even further to eliminate export duties and slash the Mineral Extraction Tax rates. The announcements of the past week facilitated the agreements with ExxonMobil.

The first part of the agreements will give Rosneft access to projects in North America. In the projects in North America, Rosneft's semi-independent subsidiary Neftegaz Holding America Ltd. will acquire 30 percent equity in projects in West Texas as well as a 30 percent stake in 20 blocks held by ExxonMobil in the Gulf of Mexico. Another Rosneft subsidiary, RN Cardium Oil Inc., will acquire 30 percent of ExxonMobil's stake in Harmattan in the West Canada Basin.

These projects in North America are critical for Rosneft because they will be a source for the development of technologies that could make use of unconventional and hard-to-develop energy reservoirs in Russia, particularly in Siberia. Unlike Russian state natural gas firm Gazprom, Rosneft does not do many large-scale energy projects abroad, and when it does, its projects are more geared toward learning new technologies than gaining strategic footholds around the world.

The other large part of the deals will see ExxonMobil and Rosneft form joint ventures to manage an exploration program in the Kara and Black seas. Development in the Kara Sea is a major focus for Russia because Rosneft estimates that the sea's East-Prinovozemelsky blocs contain more than 36 billion barrels of oil. But the Kara Sea will be very difficult to develop, because it demands deep arctic ice technology. ExxonMobil is one of only a few companies in the world that have the technology to even attempt such a project.

Over the past decade, the Kremlin has used political manipulation in its relationships with foreign energy firms active in Russia to maintain a level of control over the projects. For instance, Russia used lawsuits and financial restrictions to pressure Royal Dutch/Shell to sell a stake in the Sakhalin-II project to Gazprom.

But after an earlier deal between BP and Rosneft to develop the Kara Sea collapsed, the Kremlin decided that it was more important to find a firm that would move the technology reliably along than to create a larger deal with a political component. The Kremlin knows that the future of Russian energy and its firms depends on their gaining technology from the large foreign firms such as ExxonMobil. Russia's energy firms lack the capabilities to develop the country's remaining energy areas by themselves, but foreign firms have been wary of working in Russia after the consolidation of the country's energy sphere under the state firms during the past decade.

ExxonMobil has proved in the past that it will not allow the Russian government to bully it, particularly when large investments and critical technology are involved. In 2004, ExxonMobil was planning to purchase a stake in the now dissolved oil company Yukos but walked away when the Kremlin arrested Yukos' chief, Mikhail Khodorkovsky. Similarly, when the Kremlin attempted to pressure ExxonMobil's (then Exxon) consortium in the Sakhalin-I oil project, the firm threatened to shut the project down altogether.

As the world's largest energy firm, ExxonMobil will not accept the Kremlin's politicking as other foreign energy firms do. But as long as the Kremlin keeps the relationship's focus on business, Russia could benefit greatly from this strategic partnership.

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