Russia, Exxon relations thaw with $1 bn deal
ExxonMobil will invest in Russia for the first time in more than a decade as Moscow seeks to thaw its frosty investor climate and keep its oil flowing.
January 28, 2011 / 16:54 IST
ExxonMobil will invest in Russia for the first time in more than a decade as Moscow seeks to thaw its frosty investor climate and keep its oil flowing.
Russian state oil company Rosneft will develop over a billion tonnes of Black Sea oil using a USD 1 billion investment by US-based ExxonMobil, the world's biggest publicly traded oil company whose relationship with the top oil-producing country has been poor in the 21st century."This will be high-cost exploration and it's pretty much virgin territory," said Lysle Brinker, co-director of equity research at IHS. "It's another example where the Russians want to partner with the Western oil companies to gain expertise and perhaps set the stage for other ventures down the road."The deal was announced on Thursday in Davos and came just days after Rosneft unveiled an Arctic tie-up and share swap with Britain's BP Plc. In a reminder of the continuing complexities of investing in Russia, BP's new deal has drawn protests from its existing partners there, the co-owners of its eight-year-old joint venture, TNK-BP. The Alfa-Access-Renova (AAR) consortium is now suing over breaches of the shareholder agreement with BP.As Rosneft seeks to expand its global reach, it will have to take on many partners, Brinker said, adding the the Russian oil major is not likely to "put all of its eggs in one basket."Russia's deputy prime minister, Igor Sechin, who is also Rosneft's chairman, signed the deal with Rex Tillerson, chief executive of US No. 1 Exxon, at the World Economic Forum.Sechin said the deal was proof that the investment climate in Russia had improved."We have managed to convince even Exxon of that," he said.Rosneft officials said Exxon would invest USD 1 billion, and the deep-sea venture would be split 50/50 at the exploration stage, then 66/33 in favour of Rosneft at the development stage.ExxonMobil has in recent years clashed with Russian authorities over the budget for the Pacific Sakhalin-1 project. The 2011 budget was just approved on Thursday.Even before its Sakhalin battles, Exxon had a rough ride in Russia. Tillerson's predecessor, Lee Raymond, tried to buy in to now-bankrupt YUKOS, which was then Russia's largest oil producer.But Raymond failed to win the Kremlin's blessing and, instead of announcing a deal, Raymond rattled off a list of barriers to investment in Russia to a hotel ballroom full of reporters as YUKOS owner Mikhail Khodorkovsky listened silently.Checkered historyYUKOS owner Mikhail Khodorkovsky was later arrested for tax fraud. Rosneft acquired the main YUKOS production unit after a bankruptcy auction.Thursday's Exxon deal is the second tie-up with a major Western oil company this year.It follows a share swap and drilling deal in the Arctic between Rosneft and BP, another Western company with a rocky history of investment in Russia.BP Chairman Carl-Henric Sechin was also present at the signing of the Rosneft deal in Davos."We are being asked what has changed in Russia, why now all these deals are being signed," Sechin said."The regulations in the Russian oil and gas sector have changed considerably, offshore projects have been given preferences, in other words normal conditions have been created."Analysts hailed the BP deal as a sign Russia is moving away from "resource nationalism" as it faces rising investment requirements to stay the world's top oil producer, pumping at current record rates of more than 10 million barrels per day.Russia also approved on Thursday PepsiCo's purchase of the country's largest food processor, juice and dairy group Wimm Bill Dann.Entry ticket Russia wants reciprocity from the West. Russian companies are especially keen for downstream assets in Europe.Shares in top Mediterranean refiner Saras shot up 12% on Thursday after a report of interest from Russian state gas export monopoly Gazprom.BP and Rosneft already have a refinery joint venture in Germany, and have now agreed on three projects in the Kara Sea as well as a share swap that will make Russia a shareholder in BP.Sechin said he was aware of the AAR legal action but said he would meet the shareholders to smooth over the protest.Black sea blank?Exxon is the second US company to pledge USD 1 billion for a junior role on the Black Sea, where no major oil reserves have been found in the past 100 years.Chevron Corp pledged more than USD 1 billion to fund exploration and development of the Val Shatskogo project in the same region."It is the price of the entry ticket," said a Western banker in Davos.Exxon, which has extremely deep pockets and the expertise to drill deep offshore wells, also has exploration operations in the Turkish and Romanian sectors of the Black Sea. Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
