Streetwise Professor

March 6, 2014

Perfidious Exxon

Filed under: Commodities,Energy,Politics,Russia — The Professor @ 6:26 pm

ExxonMobil’s CEO Rex Tillerson (whose first name gives you an idea of his self-image) has decided to suspend offshore gas exploration projects in Ukraine, while continuing extensive cooperation with Russia (including a project very close to Crimea).

Talk about shivving someone when they are down.  Although any project like that the one that Exxon shelved would only produce years from now, if ever, a necessary condition for Ukraine to escape the Russian yoke is that it reduce its dependence on Russian energy, particularly Russian natural gas.  The Exxon decision makes that prospect ever more unlikely.  Ukraine’s bargaining power vis a vis Putin has just taken a big hit.  The Exxon betrayal also has huge symbolic importance: it indicates that energy companies are likely to deal with the devil-Putin-and willingly throw Ukraine on his tender mercies.  This will further convince Ukraine, and the Euros, that the country’s only option is to kneel before Don Vladimir.

Tillerson claims that he has no qualms about continuing to work with Russia, because he perceives no political risk:

“As for the current situation, obviously it’s early days,” he said. “There’s been no impact on any activities or plans at this point, nor would we expect there to be any, barring governments taking steps beyond our control.

“In terms of our view of country risk, geopolitical risk, other than things like sanctions, we don’t see any new challenges out of the current situation,” he said.

If you don’t see any new challenges relating to political risks in Russia arising from this situation, Rex, you need to get an eye test.  The substantial sell-off in Russian stocks was all about political risk.  And a victory in Ukraine would embolden Putin and make him more likely to expropriate western energy companies, including Exxon.

But maybe Tillerson’s vision is just fine. As I wrote about a couple of years ago, Exxon has tried to manage that expropriation risk by tying its ventures in Russia to cooperating with Rosneft in the Gulf of Mexico in what is effectively an exchange of hostages: if Russia takes from Exxon in Russia, Exxon can retaliate against Rosneft here. Maybe that’s what convinced Tillerson he can deal with the devil.  He gets the devil’s goodwill by abandoning Ukraine, and feels confident that the hostage he holds in the GOM will protect XOM against future Russian predations.

Arguably this is a smart bargain from the perspective of Exxon shareholders. But there are huge externalities here. Ukraine is obviously a big loser.  But so are other investors in Russia who are not so fortunate as to have valuable hostages as does Exxon.  But US national interests, and the interests of myriad US allies, notably Poland and the Baltic states, are also severely damaged by Tillerson’s cynical calculation.

This is precisely the circumstance in which it is justifiable, and indeed necessary and desirable, for the government to address a serious collective action problem through the imposition of sanctions on Russia and companies that provide it material and moral support (as Exxon is doing), and through the use of carrots and sticks to cajole companies like Exxon to provide aid and comfort to Ukraine.

But, cynic that I am, I doubt that this will happen.   The reason that Germany and the UK are so adamant against sanctions or any other economic measures against Russia in response to Ukraine is that it hits their businesses’ bottom line, and those businesses are are pressuring their governments very hard to take a soft line on Putin.  No doubt Exxon is doing the same.

Lenin was right about at least one thing, perhaps.  That capitalists would sell you the rope you use to hang them.  Or in this instance, Exxon will gladly sell Russia the rope Putin uses to hang Ukraine.

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  1. While pretending to be an American company in its PR, Exxon is nothing but. It is an off-shore company and pays $0 in US corporate taxes. The only “American” things about Exxon is that its stock trades on the NY Stock Exchange and that Exxon uses paid Washington lobbyists to buy our Congress.

    Comment by vladislav — March 6, 2014 @ 9:36 pm

  2. if Russia takes from Exxon in Russia, Exxon can retaliate against Rosneft here.

    I’m not sure how that is supposed to work. Would the US courts agree to suspend the rule of law in the US by allowing Exxon to help itself to Rosneft assets, on the grounds that Russia has not played fair over there? Bit of a risk that, I’d have thought.

    Another betrayal that I thought went wholly unnoticed was the willingness of the major oil companies to do business with the Argentinians immediately after they’d screwed Repsol over. I thought long term the interests of the industry and its major players would have been better served by all the majors boycotting the place in protest rather than scrambling to get a share of the spoils.

    Comment by Tim Newman — March 7, 2014 @ 5:24 am

  3. It is an off-shore company and pays $0 in US corporate taxes.

    This is somewhat at odds with their 2012 annual report, signed off by auditors in Texas.

    Their rather large headquarters in Houston, in which most of their global decisions are made (I have personal experience in how centralised they are), would also serve to counter your claim. Out of interest, if ExxonMobil are not based in America, where do you think they are based?

    Comment by Tim Newman — March 7, 2014 @ 5:30 am

  4. Tim Newman, thank you

    vladislav, who purports to be for “our” country – you know, the USoA, is actually a Kremlinoid troll

    Comment by elmer — March 7, 2014 @ 7:59 am

  5. Vladislav, what are your feelings on the Crimean parliament that was illegally formed by the Russians in February, led by a party that got only 4% of the vote, that has barred elected representatives from voting?

    Comment by Andrew — March 7, 2014 @ 10:44 am

  6. … with no evidence that the session where decision about the referendum was made even took place.

    Comment by LL — March 7, 2014 @ 10:56 am

  7. @Tim. I am sure XOM wrote the agreement very precisely. You can put in all sorts of conditionality. And even if it’s not formally in the agreement, XOM would have a lot of ways of f*cking with Rosneft in the GOM if Rosneft f*cks with it in Russia. Contracts are incomplete, and companies like Exxon are great at find ways of evading performance in ways that are detrimental to Rosneft if it suits their interest.

    BTW, in 2012 after the deals were done I heard from a former XOM exec who worked extensively on a lot of their project financing deals. He indicated to me that in his opinion that the Rosneft-Exxon deal was indeed structured as an exchange of hostages specifically intended to protect Exxon against what happened to BP.

    Re Repsol-absolutely. The problem is coordinating a response. There is definitely a collective action problem here. You’d need something like what the Hanseatic League did centuries ago: they organized and enforced communal boycotts against any sovereign that defaulted against or expropriated any League member. Absent such cooperation, individual interest, exacerbated by divide-and-conquer strategies, makes it difficult to punish countries like Argentina.

    The ProfessorComment by The Professor — March 7, 2014 @ 11:52 am

  8. @swp: While XOM might hope & rosneft might fear an exchange of hostages, the US Courts will not swap. If the Russian govt expropriates XOM, it can easily be to a different entity than rosneft. Rosneft can then argue in US Court that it is only 70% Rus.govt (+20%BP+10%float) and any punishment will be unjustifiably prejudicial to minority shareholders.

    Comment by Robert in Houston — March 7, 2014 @ 12:56 pm

  9. @Tim: Boycotting the Argentinians after the Repsol expropriation is quite possibly against the wonderously convoluted US Anti-Trust Law (Sherman Act, rulings against horizontal boycotts).

    Nevermind the USG might not prosecute, nor the Argies win a suit, the lawyers have spoken and fear rules the land!

    Us individualist law has trouble coping with Mercantilist Nations who exploit competition when it is in their favor, and outlaw competition when it is not.

    Comment by Robert in Houston — March 7, 2014 @ 1:11 pm


    Comment by elmer — March 7, 2014 @ 8:28 pm

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