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.


  1. ExxonMobil are in business to make money. This might seem obvious, but having seen other oil majors close-up one could be forgiven for thinking some oil companies are in business to showcase technological competence, provide employment opportunities which would otherwise not exist for certain people, or to provide employees with a cushy salary and pension.

    But when you work for ExxonMobil – as I (sort of) have – it becomes quite clear that they are interested only in making money. This clarity of thought allows them to engage in brinkmanship: several years ago the Russian government tried to strong-arm them over the Sakhalin-1 budget, specifically over the Odoptu construction costs. Exxon’s response was to immediately demobilise everyone, close the site, and look for somewhere else to invest their money (and there were plenty of willing takers). The Russians soon backed down and the construction crews remobilised, because they knew Exxon was not bluffing: they are not in Russia for prestige, or because they need projects to keep people employed, there are in Russia to make money. And if they are being strong-armed over a budget, they are not making money, and if they are not making money they will stop and do something else. It really is as simple as that: ExxonMobil wants only to make money, whereas for everyone else things are a lot more muddy no matter what they may say to the contrary.

    • I would say it’s also a matter of strategy. BP entered Russia in the 1990s by teaming up with local oligarchs (they bought a minority share in a company controlled by Potanin and Prokhorov). Exxon preferred to deal directly with the government whenever possible.

  2. Also, ExxonMobil seemingly has more lawyers than engineers, and as such act with a certain clarity compared to the European majors who are happy if things are a lot more woolly. When Sakhalin 1 was approved, the law did not allow for some specific but vital component (it might have been for the export of oil). This oversight was discovered late, and Putin said he would sign a decree allowing Exxon to skirt the law. Lee Raymond, who was the CEO at the time, said no way, we are not working to decrees. If the project is to proceed, the law must be changed. The Russians were furious, but they changed the law anyway. The Europeans are a lot more willing to do cosy semi-legal “deals” with various strongmen, and then complain bitterly when the deal gets ruled illegal later on. See Tullow in Uganda, for example.

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