Market News

 September 22, 2014
Exxon Halts Oil Drilling in Waters of Russia

 Exxon Mobil announced on Friday that it was winding down its $700 million exploration in Russia's Kara Sea, the first major sign that Western sanctions are biting into the company's ambitious plans to explore for oil and gas in the Arctic Ocean.

The drilling suspension came a few days after the latest round of sanctions by Washington and the European Union that ordered companies to cut off help to Russian oil exploration in the Arctic, as well as in deep water and shale fields, all of which require advanced technology. The escalating sanctions are intended to punish Moscow for its involvement in the turmoil embroiling Ukraine.

The drilling suspension will not immediately affect oil production for Exxon Mobil or its Russian partner, Rosneft, since the project is aimed at exploring for the presence of oil in the Arctic field and deciding if future production will be economically feasible. But the drilling suspension, should it be lasting, would potentially hurt Russian production in the next decade.

The Treasury Department put a deadline of next Friday for companies like Exxon Mobil to "wind down applicable transactions" with five big Russian energy companies: Gazprom, Gazprom Neft, Lukoil, Surgutneftegas and Rosneft. An Exxon Mobil spokesman, Richard Keil, said the company had asked the Treasury Department to give it some time to safely remove equipment from the drill site and wind down operations. The department, he said, gave its approval.

"The license recognizes the need to protect the safety of the individuals involved in these operations as well as the risk to the environment," Mr. Keil said. "All activities related to the winding down will proceed as safely and expeditiously as possible."

Rosneft declined to comment. But officials involved in the exploration said drilling operations would have had to be suspended in a few weeks anyway as the Arctic freezes up and winter weather impedes safe operations.

Exxon currently has small oil production operations in Russia. Its primary business is a partnership on Sakhalin Island with Rosneft, Sodeco of Japan and O.N.G.C. of India, and that operation should continue unimpeded by the sanctions. Exxon's portion of production there is a mere 50,000 barrels a day, a small fraction of its 2.1 million barrels the company produces worldwide.

But the American company has ambitious goals in Russia, particularly in the Arctic, where it hopes to produce meaningful amounts of oil and gas by 2025. Exxon had moved a rig there this summer, and the exploratory drilling efforts had just gotten underway.

The Eurasia Group, the New York-based political risk consultancy, recently issued a report predicting that the sanctions would force foreign oil and oil service companies "to scale back operations and reassess their commitments to the Russian market" and that "Russian companies increasingly will have to turn to domestic and Asian sources of financing and alternative technologies to keep up production."

China, South Korea and Singapore have modern oil industries with various capabilities for drilling in shale and offshore, much of it gained from working with Western companies. Some of their companies will probably work with Russia. But energy experts say they do not have the full range of capabilities to replace companies like Exxon when it comes to the most challenging oil and gas fields.