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What Do U.S. Sanctions Mean for Exxon's Close Friendship With Russia in the Arctic? What Do U.S. Sanctions Mean for Exxon's Close Friendship With Russia i...

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What Do U.S. Sanctions Mean for Exxon's Close Friendship With Russia in the Arctic?

A new policy aimed at hitting Russia's energy strategy may hurt the U.S. oil company too.

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The latest round of sanctions against Russia have the opportunity to hurt Russia's oil industry, its crown jewel. But for that to work, they may have to hurt one of the most valuable companies in the U.S.

Sanctions from the Commerce Department's Bureau of Industry and Security will require U.S. companies to obtain licenses in order to export technology to Russian oil production in the Arctic and elsewhere. The measures "are designed not to impact Russian current production, but to impact their ability to produce in more technologically challenging future projects," a senior administration official said Tuesday.

 

One of these future projects, however, involves America's biggest oil company: Exxon Mobil.

In 2011, Exxon and Russia's state-run oil giant, OAO Rosneft, formed a $500 billion partnership to explore Russian seas for oil. It was a happy marriage at the time: Exxon needed Russia's untapped reserves to nurse its steadily dropping output, and Russia needed Exxon's technological expertise and market know-how to maintain its status as the world's largest oil producer. But the venture was signed in the days of President Obama's Russian resetlong before Syria, Snowden and, most recently, separatists in eastern Ukraine made U.S.-Russia relations the shakiest since the Cold War.

Exxon and Rosneft have plans to drill their first exploration well in the Arctic this year, targeting a deposit that may hold more oil than the petroleum-rich North Sea, which made Norway rich. As many as 40 other wells would follow in the next few years, with one in the Black Sea. The companies also planned to frack shale fields in Siberia.

 

Exxon Mobil spokesman Alan Jeffers said Wednesday night that the corporation is assessing the impact of the sanctions. He could not say how long such an assessment may take.

The new sanctions put U.S. oil companies working with Russia in an uncomfortable spot. If the Exxon deal moves forward, America's most profitable energy company will be investing billions in Russia's long-term energy strategy at a time when all Washington wants to do is isolate Moscow. If the partnership is put on ice, the Obama administration would have hurt Russia at the expense of U.S. oil production.

The bond between Rosneft and Exxon is a strong one. Last summer, Russian President Vladimir Putin awarded Exxon CEO Rex Tillerson the Order of Friendship, which is meant to reward foreign nationals whose work improves the Russian nation and its people. "Most big U.S. companies, especially those making long-term strategic decisions, dismiss Russia-U.S. politics as something of a soap opera with frequent script changes," Chris Weafer, managing director of Macro Advisory, a Moscow-based consulting firm for investment opportunities in Russia, told Bloomberg's Stephen Bierman in January.

In April, when the U.S. Treasury Department blacklisted Rosneft CEO Igor Sechin, who is thought to be behind Russia's energy strategy, Rosneft shares hit a 10-month low. But neither Rosneft nor Exxon blinked when it came to their lucrative oil-exploration deal.

 

At least one member of Congress has expressed concern about the partnership. After meeting with Ukrainian leaders in May, Sen. Ted Cruz, R-Texas, said that the U.S. "should look very closely" at the deal.

While the latest sanctions certainly carry more weight than blacklisting a CEO, Exxon and Rosneft's partnership is not expected to buckle. Globalization—and the profit that comes with it—is top priority for both companies. For Exxon, "their fidelity is to their shareholders, not necessarily their government," wrote Matthew Philips for Bloomberg Businessweek in March.

U.S-Russian relations are already tense in the Arctic. Russia has been vying for years for more control of the region, which includes the North Pole and is home to 15 percent of the world's oil. The U.S. has not yet ratified a United Nations convention that would allow it to request more territory, through Alaska, but lawmakers are worried that the U.S. isn't doing enough there anyway.

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"Our country has more work to do to catch up with other Arctic nations," Rep. Rick Larsen, D-Wash., said earlier this month when Adm. Robert J. Papp Jr. was appointed the State Department's special representative to the Arctic. On Tuesday, the day Obama announced the latest sanctions, Papp lamented, "How do you get the general American public to understand that we're an Arctic nation?"

The American public may not see it that way, but Exxon Mobil certainly does.

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