On Friday, the United States and the European Union imposed a new round of sanctions on Russia in response to Moscow’s intervention in eastern Ukraine and following its annexation of the Crimean peninsula in March. The goal is to clamp down further on the Russian economy but it will significantly affect the drilling plans of western oil giants ExxonMobil and BP.
In fact, this closes a loophole that allowed Exxon to begin drilling Russia’s first exploratory well in the Arctic Kara Sea last month — a well that could have to shut down in less than two weeks. Exxon’s lawyers were reportedly reviewing the sanctions to determine if they would have to alter operations in the Kara Sea and in another consortium-led oil and gas operation on Sakhalin Island.
Prior rounds of sanctions have primarily targeted the Russian banking and defense sectors, but in late July, the U.S. and E.U. agreed to crack down on Russia’s access to Western fossil fuel technology for future development of deepwater, Arctic offshore, and shale oil and gas deposits. Russia has the largest combined oil and gas reserves in the world but lacks the oil and gas technology needed to access complex and dangerous deposits like those deep under the waters under Russia’s Arctic coast. So it enters into deals with the Western oil giants — most prominently Exxon — to exploit those resources. Exxon and Russia agreed to a $3.2 billion deal that gives the company access to a Texas-sized chunk of the Arctic.
To kick off the Exxon offshore well in August, President Vladimir Putin got on a videoconference call with the CEO of Rosneft — Russian state-owned oil giant — and Glenn Waller, Exxon’s top man in Russia, to laud the promise of international cooperation on display. “I am convinced that the joint projects between Rosneft, Exxon Mobil and other companies will benefit our national economies, will contribute to strengthening the global energy situation,” Putin said.
Waller responded that “our cooperation is a long-term one,” and that Exxon was excited to keep working in Russia because “we see big benefits here and are ready to work here with your agreement.”
That agreement is in jeopardy because Friday’s sanctions specifically prohibit:
the provision, exportation, or reexportation, directly or indirectly, of goods, services (except for financial services), or technology in support of exploration or production for deepwater, Arctic offshore, or shale projects that have the potential to produce oil in the Russian Federation, or in maritime area claimed by the Russian Federation and extending from its territory…
This goes beyond the prior sanctions on future activity, targeting ongoing projects; the U.S. Treasury Department gave firms two weeks to wind down current operations.
Exxon spokesperson Alan Jeffers told the New York Times that “we have to look at what was issued today … and determine how it affects us.” In May, Exxon CEO Rex Tillerson told shareholders that “we don’t find [the sanctions] to be effective unless they are very well-implemented,” and that the questions people should really be asking is “who are they really harming?”
Putin has said that the sanctions will somehow benefit Russian democracy, while also expressing confusion at the sanctions’ timing — Ukraine and Russian-backed separatists are in the middle of a ceasefire.
BP owns nearly 20 percent of Rosneft, and ExxonMobil has a joint venture with the Russian oil giant. Sanctions that last for a significant period of time could complicate both relationships in the long term. In May, BP signed an agreement with Rosneft to explore for shale oil in Russia.
U.S. Treasury Secretary Jack Lew said in a statement Friday that “we have designed the actions announced today to deliver significant pressure on the targets of our sanctions while safeguarding, to the extent possible, global financial markets and the global economy.”
In the near term, Exxon’s revenues should not drop by very much at all since it has operations across so much of the globe, with the Russian projects representing so little of that total. Yet because an oil company’s profits depend on maintaining or growing reserves, and Exxon’s have been flat for the last few years, anything that cuts off access to existing or potential reserves would hit them on Wall Street at the very least.
ExxonMobil stocks dropped 1.3 percent on Friday. The oil giant has been looking to maintain its massive reserves as old fields dry up and access to promising fields gets curtailed by geopolitical turmoil and expiring contracts. Arctic offshore drilling presents a risky target for even Exxon’s technological expertise — the company decided not to bid for a new round of licensing off the coast of Greenland last December.
One of the main reasons Russia is able to begin to develop such risky Arctic oil and gas deposits is because Arctic sea ice is thawing due to a warming climate.
The sanctions do not just target deepwater Arctic offshore drilling — they also cover deepwater and shale oil exploitation. Many western companies, including Exxon and BP, are just as eager as Russia is to see how promising Russian shale deposits are. Exporting technology, goods, and services to develop those potential resources just got a lot more complicated.