Surprise! Exxon Mobile Strikes Deal with Russia for Arctic Energy

Yesterday’s announced deal between Exxon Mobile and Russia’s
state-owned Rosneft came as a bit of a surprise. My initial reaction, to borrow
Homer Simpson’s catchphrase: “D’oh!” For one, it seems like a rather
off-balance arrangement, at least according to initial reports, that puts
Russia on track to reap huge benefits while putting Exxon Mobile on risky
footing. As The New York Times aptly
put it, “the
deal means wading deeper into Russia’s risky business environment.” Indeed,
if past events are any indicator, Exxon Mobile will need to be very cautious if
the deal moves forward. According to The
New York Times report:

Russia
has reneged on deals with Western oil companies before. In 2006, for
example, it compelled Royal Dutch Shell to sell 50 percent of a Sakhalin
offshore development to Gazprom, a state company — after Shell spent a decade
and more than $20 billion of its own money and that of other investors to build
the project’s infrastructure.

Some analysts are optimistic, however. “The
deal also signals a thaw in U.S-Russian relations,” The Washington Post reported. “Cliff Kupchan, director of the
Eurasia Group, noted that just three years ago, U.S. energy firms were shut out
of deals in Russia. ‘Since then,’ he said, ‘we’ve had a reset in the
relationship under President Obama, from cooperation on Iran to the START treaty,
and we’re seeing that improved relationship seeping into energy.’”

But for me, it is the potential longer-term geopolitical
implications of the deal that are most striking. Indeed, in reading the terms
of the deal (again, just based on the initial reports), it is not too difficult
to see Russia gaining some leverage from its deal with Exxon Mobile – not least
because the Kremlin would be setting policies that could have major
implications for Exxon, America’s largest oil company, and the tens of billions
of dollars (and perhaps more) it is likely to invest in the Russian Arctic.

What the deal seems to do is set Russia up to advance its
oil industry. “Under
the new agreement, the state-owned Rosneft could become a part-owner of
drilling operations in the United States,” The New York Times reported. “Those operations could include two of
the industry’s most contentious oil extraction methods — drilling for oil in
the deep waters of the Gulf of Mexico and using the so-called hydraulic
fracturing, or fracking, technique on land. The
Russians want to learn about both types of drilling for use at home.”
(Emphasis added)

Indeed, given Russia’s Arctic ambitions and claims to large
swaths of territory, it makes sense that Russia would want to partner with an
American oil company, since the United States has the most
technologically-advanced oil drilling equipment. Learning about U.S. drilling
techniques would enable Russia to advance its domestic oil exploration
operations, which could help it to secure and exploit Arctic energy resources
on its own, including those that are not as easily recoverable with its current
techniques due to the harsh environment in the region. (“Exxon
has expertise in building oil infrastructure in these forbidding waters,” The Wall Street Journal reported. “Its
Hibernia platform off of Canada's eastern coast was built to withstand the
impact of giant icebergs that detach from Greenland and float southward.”)

The United States, Russia and other Arctic nations may already be heading for competition in the Arctic. Earlier this month, The Christian Science Monitor reported
that “Within
the next year, the Kremlin is expected to make its claim to the United Nations
in a bold move to annex about 380,000 square miles of the internationally owned
Arctic to Russian control.”  So
perhaps then the Exxon-Rosneft deal is
a calculated moved by Russia to bolster its ability to lay claim to and exploit
Arctic energy resources. Of course this is all just conjecture. And I hope I’m
wrong. For now, though, I'd recommend caution over outright optimism. The deal is “almost certain to
require a review in Washington,” according to The New York Times. Let’s hope lawmakers look at the deal from
every possible angle.