Why Forcing ExxonMobil Out Of Russia Isn`t Going To Help Anything

Putin’s relationship with Exxon’s Rex Tillerson is very likely the most constructive and meaningful one he has with any American. Wouldn’t it be better to forge more high-tech, high-level alliances with Russia rather than break up the few we have?

Those new sanctions imposed on Russia by the U.S. and Europe on Friday will, among other things, force Exxon Mobil XOM -0.83%, Royal Dutch Shell , Total and other big oil companies to wind up their joint ventures with Kremlin-controlled Rosneft and Gazprom .

Yes, Rex Tillerson and Vladimir Putin will have to put their famous "Bromance” on hold. That means a timeout on their pet project: drilling a wildcat exploration well in Russia’s arctic Kara Sea. So what? Do the sanctions-imposers really expect this to give Rex and Vlad agita? I don’t think so.

Earlier rounds of sanctions did nothing to cool Exxon and Rosneft’s ardor. Tillerson has appeared with CEOIgor Sechin at an energy conference. A month ago officials from Exxon and Rosneft met on Seadrill's West Alpha drilling rig about to start drilling the first Kara Sea prospect. Tuning in by video link, Putin declared, "Exxon Mobil is our old, reliable partner, and we greatly value our relationship.”

It’s not a relationship that will crumble in the face of sanctions. Nor is the Kara Sea drilling expedition one that Putin will just permanently abandon. The partners hope the Universitetskaya prospect contains upwards of 9 billion barrels of oil.

The cost to complete the first well is expected to be on the order of $700 million. If Exxon and Rosneft find oil worth getting out of the ground it will be another several billion dollars to drill more wells and construct the pipelines and processors to get it to market. Even under the best circumstances (including a paucity of icebergs and no U.S. sanctions) it would probably take five years to get the first oil out. And then a few years more before Exxon and Rosneft would have sold enough of that oil to pay back all the development costs.

No wonder Exxon and Rosneft’s Kara Sea agreement includes an exploration period through 2020, a planning period of 8 years after a discovery, and development to be completed within five years of plan approval.

So if the sanctions stop them from doing it for a few months — it is really no big deal. And if Putin and the West start Cold War, Part Deux and Exxon is forced to abandon its JV altogether, that won’t be a travesty either: as part of their JV, Rosneft took sizable equity stakes in a portfolio of Exxon prospects in the U.S. and Canada. Amid a diplomatic deep freeze, western assets would revert to Exxon, while Russian assets would go to  Rosneft.

Sure it’s an inconvenience for the executives involved in this joint venture to have to stop sharing trade secrets and technical know how while the sanctions are in place. But you can’t believe for a minute that either Exxon or Putin is going to get outraged over it. Exxon shareholders couldn’t possibly mind; if Exxon isn’t sinking their capital into the Kara Sea then that’s more dollars left over for dividends and share buybacks. (Exxon paid out $16 billion in dividends and did $11 billion in buybacks last year.)

Exxon shareholders should even welcome the pause in the exceedingly expensive and high-risk Arctic. Consider for a second the $5 billion misadventure that Royal Dutch Shell has had in Alaska. Here’s a quick recap: In 2008 Shell acquired the rights to exploration blocks in the Beaufort Sea north of the North Slope. Shell, in 2012 (after years of studying whales and seals, negotiating with the native peoples, and satisfying draconian EPA rules governing diesel emissions in the middle of freaking nowhere) finally floated its Kulluk drillship into the Beaufort, where it only got to drill for a few weeks before having to be towed back to port lest icebergs crush it. On the way out it got grounded on the rocks of Kodiak Island. Shell decided to press pause on its Alaska project, and Shell shareholders can only wish that they had never heard of Alaska.

No doubt Exxon has been facing far less onerous environmental and regulatory scrutiny in Russia than Shell did in Alaska. Maybe that alone makes the Kara Sea exploration more economically feasible.

The more attractive part of Exxon’s JV with Rosneft, in my opinion, is their plan to develop the Bazhenov shale of western Siberia. The Bazhenov could prove to be many times bigger than the Bakken shale of North Dakota, which is currently producing 1 million barrels per day. And as it is an onshore play in an area already criss-crossed with pipelines and infrastructure, the economics of drilling there are likely to surpass the Kara Sea.

Rosneft will be challenged to develop the Bazhenov without the help of western companies. It’s not just Exxon that has the know-how, but the service providers like Schlumberger and Baker Hughes. Those companies were already restricted by earlier sets of sanctions from providing gear to Russia.

No one should be convinced that Rosneft can’t develop the Bazhenov without these partners. Rosneft, after the $55 billion acquisition of TNK-BP in 2012, produces more oil than any other publicly traded company — about $4.1 billion a day. Rosneft has been partnered for two years now with Exxon — plenty of time for the sharing of ample materials and know-how to drill shale wells. An average well in the Bakken or Eagle Ford costs less than $10 million to drill and complete. The techniques to drill horizontally into shale layers like the Bazhenov are being continuously perfected, but the basic technology is now a decade old. Hard to believe that Rosneft couldn’t find service companies not covered by sanctions to do the work.

Where might Putin find such partners not covered by European and U.S. sanctions? China of course.

In May Gazprom cut its biggest ever deal to supply China National Petroleum Corp. with $400 billion of natural gas over 20 years.

Two weeks ago, when Putin and Chinese Vice Premier Zhang Gaoli presided over the groundbreaking on the pipeline that will carry Russian gas to China, Putin suggested it was likely that Rosneft would agree to partner with China on developing the giant Siberian oil and gas field known as Vankor.

"In general we are very careful about letting in our foreign partners,” Putin said at the event. "But of course for our Chinese friends there are no restrictions.”

Vankor’s output could hit 1 million bpd in less than a decade.

The Russo-Sino connection goes back a ways: in 2006 Sinopec bought a stake in Russia’s Udmurtneft. In 2009 China advanced Rosneft $25 billion in prepayments for oil to finance a pipeline to China. Last year CNPC acquired a fifth of Novatek’s $27 billion LNG project on the Yamal Peninsula.

And if Rosneft gets stymied on what to do with the Bazhenov, it can look to China’s Cnooc or Sinopec. Together they’ve gathered ample experience in U.S. shales. In 2010 Cnooc bought a 33% in Chesapeake Energy’s Eagle Ford shale position for $1.1 billion. In 2011 it paid $1.3 billion for a third stake in Chesapeake’s Niobrara acreage. In 2011 Sinopec paid Devon Energy $2.5 billion for stakes in five shale plays, while last year it paid Chesapeake $1 billion for 50% of its Mississippi Lime acreage.

Russia is so chummy with China now that Beijing even made excuses for the shooting down of Malaysia Airlines flight 17 over Ukraine.

Is that really what the West wants to see happen as a result of these sanctions — sending Moscow into the ready arms of Beijing?

Over the long run wouldn’t it be better for the United States and Europe for Exxon and other western oil giants to work with Rosneft? Wouldn’t it be better  to forge more high-tech, high-level alliances with Russia, not fewer?

Putin’s relationship with Exxon’s Rex Tillerson is very likely the most constructive and meaningful one he has with any American. Do we really want to break up the Bromance?

Tillerson orchestrated the development of Sakhalin 1, which came online in 2005 and is now producing some 140,000 barrels per day. Sakhalin 1 was in great contrast with Shell-operated Sakhalin-2; in 2006 an irate Putin cut Shell’s stake in the Sakhalin-2 in half and handed control to Gazprom after costs doubled to $22 billion.

A year ago Putin awarded Tillerson Russia’s Order of Friendship.

The world should want Exxon, Total, Statoil and its other international partners to rub off on Rosneft. Recall that in the 1940s Saudi Aramco, then known as the Arabian-American Oil Company, was owned by what’s now Chevron and Exxon. Though Aramco is now owned entirely by the kingdom, it is arguably the most valuable company in the world — thanks in large part to the culture and processes put in place by the likes of Exxon. Aramco’s operational excellence enables it to maintain the world’s only cushion of untapped oil production capacity and thus enables Saudi Arabia to play its key role in stabilizing oil markets. Maybe some day Rosneft’s JVs with the likes of Exxon will help Russia become such a stable and reliable supplier.

Until then, if the U.S. and Europe are truly serious about hurting Russia’s energy industry (and Putin’s pocketbook) they ought to try the same approach they took with Iran in 2012 and start banning imports of Russian oil.

forbes.com