Exxon, Shell back out of Russian oil projects

Prirazlomnaya offshore ice-resistant stationary platform set in Pechora Sea. Source: TASS

Prirazlomnaya offshore ice-resistant stationary platform set in Pechora Sea. Source: TASS

The oil majors backed out of many projects because of sanctions. According to analysts, this potentially threatens 25 percent of the Russian oil market, although it will also push the country to develop indigenous technology.

American oil giant ExxonMobil has terminated nine of its 10 oil production projects in the Russian Arctic, Western Siberia, and on the Black Sea shelf due to the sanctions imposed on Russia by the United States.

ExxonMobil’s partner in the joint venture is Russian state-owned behemoth Rosneft. The only project left unaffected is exploratory drilling at the Universitetskaya-1 well, which the partners initiated on August 9, 2014.

ExxonMobil spokesman Alan Jeffers told Russian news agency ITAR-TASS that the U.S. State Department had taken into account the complexity of the work at the well and has given the company extra time to close up the project.

Shell followed ExxonMobil’s example, also ceasing its operations in Russia in response to the sanctions. According to Russian analysts, the withdrawal of foreign partners potentially poses a threat to about a quarter of the Russian oil market.  

Foreigners heading for the exits

“According to estimates, up to 25 percent of Russia’s currently recoverable oil is extracted through hydrodynamic impact on formations, primarily hydrofracking (hydraulic fracturing). However, hydrofracking equipment is produced predominantly in the U.S.,” said Olga Malikova, a professor at the Institute for Government Service and Management at the Russian Academy of National Economy and Public Administration.

The withdrawal of Shell and ExxonMobil from tight oil production in Russia is therefore quite an unwelcome event for the domestic oil extraction industry, she said. Russia has seen stable oil output growth in recent years, due to a substantial degree to modern enhanced oil recovery technology, as well as to more work at complex fields, Malikova added.

On September 30, Shell’s press service published a statement saying that the sanctions had influenced its plans to develop oilfields in the Khanty-Mansiysk Autonomous Area in Western Siberia.

“At the moment, we are conducting a dialogue with European state entities and our partners regarding the degree of influence of these sanctions,” the statement read. According to the Financial Times, ExxonMobil is calling on the U.S. government to ease the sanctions against Russia so that it can resume its Arctic drilling project in the summer of 2015.

The company’s CEO Rex Tillerson spoke out against the U.S. sanctions at an ExxonMobil shareholder meeting in May 2014.

“We do not support sanctions, generally, because we don’t find them to be effective unless they are very well implemented,” he said.

In April 2014, Shell chief Ben Van Beurden said the company had no plans to change its work with its Russian partners, despite the situation in Ukraine.

Influence on the market

While Russian commentators see the exit of Russia’s foreign partners as immediately problematic, they also believe it could push the country to develop its own technology.

“The strategy of purchasing high-tech foreign equipment is posing serious problems to the development of the industry,” Olga Malikova said.

According to her, Russian companies will need to either search carefully for potential partners regarding supplies of the technology they need, or work at enhancing the efficiency of the equipment they already have.

Otherwise, these companies will have to face the highly inconvenient fact of reduced oil production on a whole host of fields and a complicated situation in the industry, she warned.

Dmitry Baranov, a leading expert at investment holding Finam Management, is more optimistic: “Production of that oil will begin a little later, which is not terrible at all for the economy in general and for the industry in particular. Russia will start to produce that oil later so that there will be more oil for future Russians,” he said.

Baranov believes that “the country will get the time and resources to develop its own technology to produce and refine viscous and superviscous oil; that is, in any case, Russian R&D and industry and trade will develop.”

According to Alexei Kozlov, chief analyst at UFS IC, “the withdrawal of foreign oil companies may delay the start of large-scale tight oil production, but Russian oil companies are up to the task.”

Rosneft’s other partners in offshore oil production – Italy’s ENI and Norway’s Statoil – have yet to voice their position on continued cooperation.

However, Rosneft President Igor Sechin previously made clear in an interview with Bloomberg that the door would remain open even in the event that partners chose to withdraw from cooperation.

“If anyone is unable to continue work or is forced to leave, they will have the option of coming back,” said Sechin.

All rights reserved by Rossiyskaya Gazeta.

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