Is US Oil Giant ExxonMobil Trying to Evade US Sanctions on Russia?
In the run-up to 2014 sanctions, US oil giant ExxonMobil led by its then CEO Mr Rex Tillerson, and Russia’s oil giant Rosneft invested $3.2 billion in a project for drilling for oil in the Kara Sea in the Russian sector of the Arctic — a region that Rosneft estimated it could have more oil than the entire Gulf of Mexico. But the sanctions forced Exxon Mobil to halt drilling.
Russia is reported to have more than $8 trillion worth of untapped oil and gas in its sector of the Arctic, but it needs sophisticated Western technology and services to actually extract it. Exxon Mobil’s involvement in the Russian Arctic could have a very significant impact on the global oil market and prices in that it could, in a few years, add more than 1.5 million barrels of oil a day (mbd) to Russia’s current oil production of 11.2 mbd thus consolidating Russia’s position as the top oil producer in the world.
It was suggested that the appointment of Mr Tillerson for the post of US foreign Secretary could be a clear sign of intent that US President Donald Trump may be considering easing or lifting the sanctions on Russia. However, the US missile strike against Russia’s close ally, Syria, may have changed the political equation for the time being.
Although Mr Tillerson has recused himself from anything that has to do with Exxon and Russia for the next two years, the news has sparked a lot of interest.
ExxonMobil applied for a waiver from US sanctions permitting it to resume drilling for oil in Russia and particularly in the Black Sea. ExxonMobil has had high hopes that it will be able to tap the Russian oilfields this year but the US Treasury Department denied the request saying that no US companies would be exempt from rules governing US sanctions on Russia.
This is actually the second application for a waiver from ExxonMobil. The last one was submitted to the US Department of Treasury in 2015, but was rejected by the Obama administration. Now, some believe the second application came at a very awkward moment with the US election hacking scandal still hot and the FBI investigating Russian involvement in the US elections, not to mention the fact that the State Department under the leadership of Mr Tillerson is one of the agencies that will oversee the application waiver.
Of course, ExxonMobil could argue that it has nothing to do with the hacking scandal. It has a partnership agreement with Rosneft sealed back in 2011 for drilling in the Russian Arctic and also developing the Tuapse offshore oil and gas block in the Russia Black Sea shelf.
This begs the question as to why ExxonMobil is so eager to get a waiver for Back Sea drilling? Exxon has already lost over $1 bn from the sanctions and it is very likely that the company’s management has decided to stop the financial bleeding. What’s more, the company recently had to write off a substantial part of its proven oil reserves amounting to 3.3 billion barrels (bb), or 19% of its total.
The Tuapse field in the Black Sea has reserves estimated between 2.2 bb and 7.2 bb and ExxonMobil has a 33.3% share in it. There are also reports that Exxon is worried that Italy’s oil giant Eni may replace it in Black Sea exploration in Russia.
For Italian companies, it’s business as usual in Russia despite EU sanctions, thanks to waivers granted by the government. Eni is one of them, and like ExxonMobil, it is a valuable major partner of Rosneft. So ExxonMobil’s worry seems legitimate. It stands to make substantial gains if it rejoins Rosneft in the Black Sea continental shelf and elsewhere as well. What remains to be seen is whether the US Treasury Department will agree to the waiver.
It has now emerged that low oil prices and sanctions won’t deter Russia from Arctic drilling. Rosneft is getting its drilling activities underway in the Laptev Sea despite Russia’s Energy Minister Alexander Novak declaring that Russian producers in the Arctic need a crude price of at least $70/barrel to be profitable. But how much of this is mere political posturing and how much it is a genuine change for the better in the Arctic’s oil business environment?
Rosneft, Russia’s primary oil operator in the Arctic, resumed its activities by drilling the Central-Olginskaya offshore well in the Laptev Sea on orders from Russian President Putin. Rosneft also stated that it intends to resume drilling in the Barents Sea next year and in the Kara Sea within two years, thus emphasizing its pre-eminent role in developing the Arctic resources. By doing this, Russia and President Putin are demonstrating that sanctions did not succeed in putting a crimp in Russia’s oil sector.
And whilst ExxonMobil’s application for a waiver may have been prompted by financial considerations, it is possible that the application could also have been a trial balloon on behalf of the Trump administration to test the political reaction in Congress and US public opinion to easing if not lifting sanctions on Russia.
If the Trump administration weakens sanctions against Russia, the European Union (EU) could move to follow suit. And whilst the United States and Russia are not large trade partners, the EU does an enormous amount of trade with Russia. More than 50% of Russian exports of goods went to the EU countries in 2014, according to Congressional Research Service.
*Dr Mamdouh G. Salameh is an international oil economist. He is one of the world’s leading experts on oil. He is also a visiting professor of energy economics at the ESCP Europe Business School in London.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the position of ESCP Europe Business School.