Streetwise Professor

August 30, 2011

A Pale Imitation

Filed under: Energy,Politics,Russia — The Professor @ 6:47 pm

Today’s big news was the announcement of a exploration joint venture between ExxonMobil and Rosneft.  This is widely being portrayed as a substitute for the abortive BP-Rosneft deal, but there are crucial differences.

First off, though let me say that it is unfortunate that western majors deal with unreliable Russian partners, and in so doing finance the kleptocracy that is Putin’s Russia.  In a better world, a modern version of medieval guilds consisting of major energy companies would boycott Russia in the aftermath of expropriations and other hijinks until Russia put safeguards in place that would reduce the hazards of doing business there.  In an even better world, companies would not be tempted to fund corruptocracies, individually or collectively.  But in this fallen world, achieving such cooperation is virtually impossible, so it is inevitable that companies will take the political and legal risk in order to get access to the physical resources.

That said, in my view ExxonMobil is less likely to get strongarmed than BP.  ExxonMobil has much more heft, much more pull, and is far less desperate.

Due to those features–notably the lack of desperation on XOM’s part–the deal is also structured in a way that gives much less to Rosneft. Recall that Sechin crowed about how the BP-Rosneft deal involved a share swap that gave Rosneft a large piece of BP stock, and board representation.  That was the crown jewel for him: the proof that Rosneft had arrived as a major player.  No such share swap here.  On this basis alone, this is a pale imitation of the BP deal.

Some are drawing an analogy between the share swap in the BP deal, and the agreement with Exxon in which Rosneft gets an equity participation in developments in the Gulf of Mexico and Texas tight oil.  Not even close.  Indeed, I think this misinterprets the purpose of this aspect of the deal.

I view this part as a hostage exchange.  If Rosneft/Russia screw around with XOM in the Arctic and western Siberia, they have assets at risk in GOM and Texas (and perhaps elsewhere).  Hostage exchange is a well-known way of supporting transactions that are difficult to enforce through formal legal channels.

Moreover, this should be viewed as Exxon putting its toe in the water.  The dollar number in the deal–$3.2 billion over several years, a sum that presumably includes a previous XOM-Rosneft agreement for development of Black Sea prospects–is not chump change, but it is small relative to XOM’s approximately $30 billion/year capex.

Over the years we’ve seen many Russian energy deals announced with great fanfare.  The follow through is usually far less impressive.  Shtokman comes to mind.  (How’s that working out for you, Total?)  Russia, thy reputation precedes thee.  I am sure that XOM will tread very carefully, and protect itself every step of the way.  The hostages will likely come in very handy.   But regardless, I would wager that this is the high point of the deal, and that this is another deal that will fade away.

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7 Comments »

  1. Hopefully, the next time the CEO of E-M is in Moscow, he will get the Magnitsky treatment. He richly deserves it, and the stockholders of E-M deserve to lose their shirts. What goes around, comes around.

    Comment by La Russophobe — August 30, 2011 @ 8:21 pm

  2. Only a matter of time until they come for E-M

    http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/8732510/BP-offices-raided-a-day-after-Rosneft-Exxon-Arctic-oil-deal.html

    Comment by La Russophobe — August 31, 2011 @ 5:15 am

  3. As Chevron was recently reminded with their Black Sea Rosneft JV-the devil is in the details especially when dealing with zero sum negotiators. Chevron did have a wonderful signing ceremony at Putin’s official residence (not his recently constructed castle). The brotherhood and solidarity simply evaporated at the very start of more detailed discussion.

    Comment by pahoben — August 31, 2011 @ 10:01 am

  4. You are right about the dollar amount. The licenses require an exploration program spread over the next few years and so at this stage it is just chump change for Exxon.

    Comment by pahoben — August 31, 2011 @ 10:14 am

  5. “I view this part as a hostage exchange. If Rosneft/Russia screw around with XOM in the Arctic and western Siberia, they have assets at risk in GOM and Texas (and perhaps elsewhere). Hostage exchange is a well-known way of supporting transactions that are difficult to enforce through formal legal channels.” Yeah, but if you’ll notice Randy Scheunemann and co are keeping their mouths shut on this one — not a peep out of McCain’s office either. I guess the anti-Russia Lobby still holds out hope for Rick Perry nuking the ‘reset’ by listening to Darth Cheney and setting up some stupid provocation, but the Kremlins have the old fart Cold Warriors outmanuavered again.

    And the Russians are right on your other post. If asked to choose between blaming the Kremlins and the Chinese the Economist will always blame the Kremlins. They know which side owns more U.S. and Euro debt, regardless of the fact the Chinese may be trying to rip the Russians off.

    Comment by Mr. X — August 31, 2011 @ 7:00 pm

  6. That said, in my view ExxonMobil is less likely to get strongarmed than BP. ExxonMobil has much more heft, much more pull, and is far less desperate.

    Indeed. ExxonMobil is already partnered with Rosneft on Sakhalin 1, so it’s not like the two companies haven’t partnered up before. And when the Russians tried to strong arm ExxonMobil on Sakhalin 1, during the construction of the Odoptu OPF, Exxon walked away leaving the facility half built with one executive allegedly saying “If the Russians don’t want our investment, there are plenty of others who do.”

    Some are drawing an analogy between the share swap in the BP deal, and the agreement with Exxon in which Rosneft gets an equity participation in developments in the Gulf of Mexico and Texas tight oil.

    The source I read said that Rosneft would get access to a deep water field in the GOM. This is either a mistake on the part of a journalist or Rosneft are being sold a sucker: Rosneft have no deepwater capability whatsoever, and would be unlikely to even satisfy the regulatory bodies that they are capable of developing a deep water field.

    Comment by Tim Newman — September 1, 2011 @ 2:11 pm

  7. In the anecdote above regaring the Odoptu OPF construction, I meant to add that the Russians quickly backed down after a couple of months when they realised Exxon was not pissing about.

    Comment by Tim Newman — September 1, 2011 @ 2:12 pm

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