There's still hope for Exxon's rivals in the Russian Arctic

The Rosneft-ExxonMobil deal looks sensational at first sight, but the actual commitments from the two companies are still quite small. Both sides look to be hedging their bets. Which means Exxon's rivals can still hope to become part of Russia's Arctic future.

Roxxon Oil company appears in comics such as Captain America and Spiderman (illustration: comicbookreligion.com)
So much for ‘Bolshoi Petroleum’, the Congressional quip fired at BP when it raised the prospect of a tie-up with Rosneft on the back of the Macondo oil spill. This pun is not just dead, but buried as deep as Arctic reserves themselves thanks to Exxon Mobil, the US oil major taking BP’s place alongside the Russian state entity. ‘Roxxon’ is the new acronym to play with, but amid the considerable media hype the deal has attracted, few have asked whether there will prove to be a sting in this unlikely US-Russian tail. Or indeed just how significant the deal is.

The agreement clearly looks good on paper. Exxon gets access to potentially enormous upstream Arctic reserves in the Kara Sea; the Kremlin can start staving off future depletion thanks to Exxon’s technological edge (previously seen on Sakhalin 1); while Rosneft can start to spread its international wings thanks to the deepwater stakes in the Gulf of Mexico and a number of technically challenging ‘tight oil’ plays that have been tabled by Exxon as part of the deal. The shadow of the Yukos controversy is slowly fading for Rosneft: an internationalised future supposedly awaits.

None of that can be directly refuted, but it should at least be put in context. Given the deal only amounts to a slender $3.2bn commitment so far, Houston is basically just dipping its toes in Arctic waters. It hasn’t taken a full plunge yet. The figure barely amounts to 1% of Exxon’s total market capitalisation, and Rex Tillerson (unlike his St. James rival, Bob Dudley) has no intention of doing equity deals with Rosneft, despite state spin-offs slated for 2013.

The real space to watch is how much cash Exxon is willing to pump into the Kara Sea blocks to truly transform the upstream Russian landscape. Russian news agencies made mention of $500bn multi-year investment programmes – large (some would say unrealistic) figures, but these are of course, massive challenges. Exxon has every interest in bringing Arctic reserves to market given the prizes involved, but by offering stakes in international fields rather than equity swaps, it has left ample scope
Roxxon assets may yet get caught in political crossfire when Washington's mood switches the wrong way
for itself to walk away should political risk rise in Russia, or US-Russia relations take a turn for the worse. Those relations will get their first test when the deal is scrutinised by the US Congress; they will get many more as the 2012 Presidential race heats up and far beyond. Roxxon assets may yet get caught in political crossfire when Washington’s mood switches the wrong way.

The Russians know all this of course, so we can safely infer that Exxon is highly unlikely to be Moscow’s ‘single play’ to develop its Arctic riches. Irrespective of Rosneft’s protestations of exclusivity, the fact that Putin settled for a miserly deal with the mere promise of future assets and cash, points towards the strong likelihood that the Kremlin is looking for multiple players to develop its high cost Arctic reserves. The region’s strategic significance can hardly allow for much else. Keeping Russian oil production high and Moscow in the international political mix are the Kremlin’s overriding priorities, ones they are unlikely to singularly place in American hands. More cash and more flags will be the inevitable result.

The question is who comes in next, on what terms and at what speed? All the usual candidates apply including Shell, Chevron, Total and Eni alongside new national players from the East. Additional Russian players can’t be discounted either. The race is on, but whether additional players will look to cement their positions by offering attractive equity deals and wads of cash to surpass Exxon’s initial lead remains to be seen. The fact that broader international interest has remained very mute since BP’s fatal misreading of Russian political-oligarch dynamics tells you all you need to know about perceived political risk in Russia. No one knows if Russia is playing politics, yielding to the rule of law, or a combination of both. Sending armed forces to harass BP’s outstanding holdings is hardly going to clarify the situation, nor are spurious legal claims brought against BP via its AAR partners. Doing business (and being confident doing so) remains extremely difficult in Russia as a result - irrespective of how Medvedev-Putin presidential scores are ultimately settled.

If my hunch is right and Russia is lining up multiple Arctic players, the onus is on Moscow to get its political act together. They can forget Exxon - or anyone else - taking the necessary financial plunge to bring the Arctic online if it doesn’t. History doesn’t bode well; once more international players are involved, Russian fun and games tend to start – and as yet, it’s very unclear where they will end in the Arctic. If Moscow makes a mess of things, don’t be too surprised to see Rosneft back at BP’s table. Bolshoi Petroleum might yet stage a comeback to take on Roxxon Energy Corporation.