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.

National Journal
Aug. 1, 2014, 8:52 a.m.

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 re­set—long 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.

“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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