December 11, 2016 by AK
In dealing with Russian authorities, Exxon has always stood out among its peers for toughness. The company has steadfastly rejected opportunities that would not put it in control of a project: it would rather stay away altogether. As a result, 20 years after signing the original production-sharing agreement (PSA), ExxonMobil remains the operator and the largest (30%) shareholder of the Sakhalin-1 project. In contrast, Shell agreed to halve its 55% share in Sakhalin-2 in 2006, making Gazprom the majority shareholder in the operating consortium.
Apart from Sakhalin, Exxon has only one significant joint venture in Russia, the suspended Arctic exploration JV with Rosneft. Technically, Exxon’s share is only 49% – the Russian law prohibits non-Russian companies from owning majority stakes in such ventures – but the actual rights and responsibilities of the parties are likely set out in a shareholder agreement that, understandably, has not been made public. The JV drilled a single well in the Kara Sea in 2014, finding some oil and gas. (I doubt either company added any proven reserves – with the falling oil price, the remote location and the US sanctions.) With Exxon’s experience in the Arctic and Sakhalin, there’s a good reason to assume it was in the driver’s seat while the well was being drilled – with SeaDrill’s semi-submersible West Alpha rig that had been on a contract to Exxon. With prices at $50 or even $60 per barrel, the Kara Sea does not appear a viable source of oil (much less gas) but oil majors tend to plan well ahead. A quarter of a century isn’t that long for an Exxon.
No doubt other global majors have done pretty well in Russia in the past 10-15 years – but none with Exxon’s Jacksonian attitude. Shell keeps cooperating with Gazprom and its oil subsidiary despite the 2006 Sakhalin defeat. Total is always smart and willing to get along, hoping for reciprocity. BP used to protest much but never threatened a complete pullout from Russia, not credibly at least, so the protestations came across as a public relations campaign to boost corporate defenses.
BP’s TNK investment, while it lasted, provided BP with an almost-guaranteed cash flow to pay for their adventures elsewhere. While the Russian experience was a little bumpy for some BP execs, their head- and heartaches were of little importance to BP’s shareholders as long as the return on investment was good. BP’s strategy under John Browne was getting what they could in Russia, even small stakes, and never quitting even as they lost battle after battle against the oligarchs of the AAR group, who eventually forced BP into that bizarre but profitable venture, TNK-BP. Under Bob Dudley, whining and handwringing were added to BP’s negotiating arsenal. All in all, the company has always been open to compromise to a degree that Exxon would never accept.
The relevant question to ask about Rex Tillerson, ExxonMobil’s chairman, is not how much time he spent with Putin but what he got in return – what Exxon gained out of those meetings. If Tillerson is good at getting what his company needs, he should be OK at getting what his country needs, too. (It goes without saying he should dispose of all his XOM holdings and ties if nominated.)
Update. Sakhalin-1 is to produce 175,000 bpd in 2016-17. Exxon’s net share should be less than 30% because there’s also the government’s take. But let’s say it’s exactly 30% – 52,500 bpd – how does that compare with Exxon’s overall 4 million boepd? At most 1.3%, I think. Sakhalin’s contribution to the bottom line might be a little more than that because oil tends to be worth more than gas on the barrel of oil equivalent basis. But it’s not a critical mass.