Exxon's Arctic oil drilling plans threatened by US sanctions on Russia

PUBLISHED : Wednesday, 30 April, 2014, 1:31am
UPDATED : Wednesday, 30 April, 2014, 1:31am

ExxonMobil's dream of drilling in the Russian Arctic may risk running aground on the politics of Ukraine.

The company plans to start drilling in August in the Arctic's remote Kara Sea in August - the centrepiece of Exxon's global alliance with Russian state-controlled Rosneft. The partnership, which includes shale exploration in Siberia and joint venture fields in Texas, will come under greater scrutiny after the US placed sanctions on Rosneft's chief executive Igor Sechin.

"With Sechin being sanctioned it may complicate relations for Rosneft with Western companies," said Mattias Westman, who oversees about US$3.3 billion in Russia assets as chief executive of Prosperity Capital. "Maybe some transactions will be threatened as a result and perhaps Russia will counter and they will be less keen for American companies to work on Arctic projects."

A spokesman for Exxon's exploration arm said on April 25 the company's Kara Sea project was on schedule. He declined to make any additional comment after the United States extended the reach of sanctions yesterday.

Rosneft assures its "shareholders and partners, including those in America," that co-operation will not be hurt by sanctions, Sechin said in a statement yesterday. "Our co-operation won't suffer."

A US Treasury official said yesterday that US companies can still do business with Rosneft.

That said, the sanctions leave Exxon in business with a group headed by a man who is not allowed into the US. The exploration with Exxon is the most high-profile of several drilling ventures Rosneft plans with international oil companies including Norway's Statoil and Eni of Italy.

The Arctic well will be among the most expensive Exxon has ever drilled, costing at least US$600 million. The spending is justified by the potential prize. Universitetskaya, the geological structure being drilled, is the size of the city of Moscow and large enough to contain more than nine billion barrels of oil, a trove worth more than US$900 billion at today's prices.

The only way to reach the prospect is a four-day voyage from Murmansk, the largest city north of the Arctic circle. Everything will have to be shipped in - workers, supplies, equipment - for a few months of drilling, then evacuated before winter renders the sea icebound. Even in the short Arctic summer, a flotilla is needed to keep drifting ice from the rig.

All this means that drilling the prospect will cost more than US$600 million, more than triple typical offshore exploration wells in other parts of the world, according to people in the industry familiar with the plans.