Tuesday, April 17, 2012

Rosneft-Exxon deal: the gains and challenges to develop Arctic reserves....

Rosneft-Exxon deal: the gains and challenges; to develop Arctic reserves and beyond....
Russian oil giant to gain stakes in North American projects as part of the deal.....

After the landmark deal, already dubbed by many “the deal of the century”, energy experts are unanimous in their estimates of potentially huge reserves the companies are getting access to, warning however that “the money is not yet on the table”.

Rosneft and Exxon will provide details of their strategic deal in New-York on Wednesday, with Exxon CEO Rex Tillerson, Rosneft president Eduard Khudainatiov and Deputy Prime Minister Igor Sechin, the man in charge of energy sector, speaking to investment analysts.

By tapping new deposits in the Arctic and East Siberia, Russia is going to sustain overall output to maintain its title as the world's top crude producer. Moreover the Arctic has significant potential as the main source of oil and gas in the future and Russia needs to open up this area in order to secure new sources of oil and gas as existing production base is going to decline over the next decade. Its traditional Western Siberia fields bring the bulk of Russia’s output, holding nearly 3/4 of Russia’s reserves.

Keeping production levels at 10 million barrels of oil per day until 2020 is a key priority set out by Russia’s Prime Minister. And Vladimir Putin misses no opportunity to emphasize the tremendous importance of Russia’s energy resources, saying that “without reserves Russia will be in danger”.

“Now the existing Russian sources of oil are either leveled off or facing a decline. The resources are likely to decline in 2 to 3 years and to sustain the current level of production will require a great deal of money and a lot of new exploration,” says Chris Weafer, chief strategist at Troika Tialog. “The Arctic is also the only place in the planet where a company like Exxon Mobil which is the largest listed oil firm in the world, can also get access to significant new reserves”.

However the cost of developing the Arctic will be very high. Analysts estimate the exploration fare alone to be standing at several billion dollars, with the total cost of eventually bringing oil and gas to surface likely to rise up to $400 bln.

“Working together makes a great deal of sense for Rosneft. The US giant has a lot of expertise in exploration in hostile parts of the world in deep water. And Rosneft needs to bring in more partners, including the government in terms of tax adjustments, making it more attractive to tap into Russian reserves”, says Weafer.

However, Christine Tiscareno, oil and gas equity analyst with Standard and Poors, warns that success of the project depends on different factors, including demand for oil and its price. “Just because you know how to develop natural gas or oil in Canada or West Texas doesn’t mean that you can apply the exact same technology in the Arctic. That remains to be seen. One thing that can be said for sure is that it is good for Russia to have a chance to develop its reserves when consumption is on the increase”.

It’s not yet clear what investment prospects the project is opening up for Exxon though since it’s hard to predict whether high global oil prices can be sustained if demand falls in a recession. And with uncertainty of investment prospects it looks reasonable for the Russian government to be promising to abolish export duties and reduce the mineral extraction tax to just 5 % for the next 15 years.

Christine Tiscareno says Exxon’s interest in the country might diverge at certain point at the time when you have different demand. “The money is not yet on the table. We are now talking about potential development, with Exxon not probably being able to develop all of the deposits there. It depends on whether oil demand will be growing or on the contrary decreasing in the future. As for Russia it remains to be seen whether they will stick just to one partner, Exxon, for the whole project or whether they will diversify”.

Due to the growing oil and gas demand from Europe and East Asia, combined with the decline in production output of Russia’s Western Siberia fields, Russia will be looking to get the exploration and development of its Arctic fields on track as soon as possible.

Russia has its South Stream Pipeline, which is being developed in conjunction with ENI. And therefore the development of the Black Sea would be good as it will allow increasing the capacity using the potential reserves that can be piped to Europe using the South Stream once it gets developed. “Exxon might want to go a little bit slower, while Russia will try to go a little bit faster. And in that sense other partners may come in to the table”, concludes Tiscareno....

Rosneft and Exxon Mobil have signed a partnership deal, which will see them work together to develop the Arctic's rich untapped reserves.

The deal also hands Russia's top oil firm access to projects in North America developed by Exxon.

Contracts creating two operating companies to develop projects in the Kara and Black Seas, worth around $1bn were signed by Rosneft president Eduard Khudainatov and Exxon Mobil CEO Rex Tillerson in the presence of Russia’s president-elect Vladmir Putin.

Russian Deputy PM & former Rosneft Chairman Igor Sechin told media that at least 15 sea platforms would be built on the Arctic Kara Sea. “The drilling process will be very complex and will require significant investment. Preliminary estimates put the Kara sea investment at up to $300 bln. Under the Black Sea exploration deal drilling is expected to start in 2015 and will require injections of up to $55 bln. Investments into other projects is still to be defined”.

Sechin estimates Kara Sea deposit reserves at about 4.9 billion tons of oil and 8.3 trillion of cubic meters of gas. The Black Sea shelf deposit reserves are estimated at 1.2 billion tons of oil.

Vladimir Rozhankovsky, Head of Research at Nord Capital in Moscow, however, says it’s too early to call the agreements game-changers. “It’s just a number of framework deals, which I believe will become a full-scale cooperation deals not until we know the name of the next US president. Politics is weighing on such big deals a lot. I don’t think real joint exploration will kick-off any time soon, as the US is still treating its Russian partners with a shade of caution.”Under a separate deal Rosneft will gain 30% stakes in three Exxon Mobil projects in the US, the Gulf of Mexico and Canada.

Rosneft & Exxon Mobil also inked an agreement to study development of difficult to reach oil reserves (Achimovka and Tyumen layers) in Western Siberia which Rosneft estimates at about 1.7 billion tonnes.

Sechin also mentioned last week’s decree lifting all export duties for new projects in the Аrctic shelf to boost investment into the area. It’s estimated that the Arctic may contain 20 percent of the world's oil and gas reserves, though the reserves are notoriously hard to reach and present huge environmental challenges.

“The huge Arctic deposit may contain up to 70% of Russia’s reserves. Exxon Mobil is a strong partner, which can offer Russia its shelf exploration expertise and technical facilitation. In turn it is likely to seek no less than a 49% stake in the joint venture, with Rosneft of course preserving the 51% blocking stake,” continues Rozhankovsky.

Rosneft had tried to partner up with BP last year, but it fell through as the British oil major became entangled in a legal battle with its existing Russian partners TNK-BP.

Russia's oil giant Rosneft on Monday detailed a strategic alliance with Exxon Mobil Corp. (IW 500/1) including agreements on offshore exploration and Rosneft's participation in North American projects.

The state-owned Rosneft and Exxon Mobil last August penned a landmark partnership agreement to invest $3.2 billion on offshore exploration in the Black Sea and Kara Sea.

The companies on Monday signed agreements to create joint ventures that will manage the offshore exploration programs, Rosneft said in a statement.

"Today Rosneft and Exxon Mobil enter offshore projects of unprecedented scale in the Russian Arctic and Black Sea regions, which are home to the world's largest hydrocarbon resources base," said Rosneft President Eduard Khudainatov, who signed the agreements with Exxon Mobil's Rex Tillerson.

Rosneft subsidiaries will also gain 30% stakes in Exxon Mobil's projects in West Texas, the U.S. Gulf of Mexico and Canada, the statement said without disclosing financial details.

Neftegaz Holding America Limited will acquire 30% of Exxon Mobil's share in the La Escalera Ranch project of the Delaware Basin in West Texas, and 30% in 20 drilling blocks in the Gulf of Mexico.

Another subsidiary, RN Cardium Oil Inc., acquired 30% of ExxonMobil's stake in the Harmattan acreage in the Cardium formation in Alberta, Canada, which "may become a source for the development of technologies for unconventional reservoirs in Russia," the statement said.

"(Work on these agreements) is for years ahead," Prime Minister Vladimir Putin told Rex Tillerson while overseeing the signing in his Moscow region residence. "I wish you luck."

The partnership with Exxon Mobil last year followed Rosneft's failure to strike a similar deal with BP plc (IW 1000/3) in its search for a global partner that would share expertise and technology to explore its vast Arctic reserves.

The agreement with BP fell through after the British company's Russian partners claimed it violated their own shareholder pact.

Exxon Mobil became Russia's new partner several months later, pledging to invest $2.2 billion into the joint Arctic shelf project and be the first to tap into reserves that some scientists estimate at 100 billion tons of oil.

Exploration activity already began in the Black Sea's Tuapse Trough, where Exxon Mobil is to invest $1 billion. Drilling of the first exploration well is planned for 2014-2015, Rosneft said....

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