Rosneft-Exxon deal to bear first fruit in distant future

A $3.2-billion shelf development deal between Russian state-controlled oil company Rosneft and U.S. energy giant ExxonMobil is profitable for both companies but tangible results of the landmark cooperation will only be seen in years to come, analysts said on Wednesday.

Rosneft and ExxonMobil signed an agreement to explore the East Prinovozemelskiy Blocks 1, 2 and 3 in the Kara Sea in the Russian Arctic and the Tuapse License Block in the Black Sea. Rosneft will hold 66.7 percent in both joint ventures.

The pact gives Exxon, which already works with Rosneft on the Sakhalin-1 offshore project in Russia’s Far East, access to substantial reserves in Russia, the world’s top oil producer, while Rosneft, which was in search of a partner to provide it with shelf technologies it lacks, will now be able to operate on ExxonMobil’s turf in the United States in the Gulf of Mexico and Texas, as well as in third countries.

VTB Capital analysts gave a cautious praise to the deal saying it would be hard to implement from a technological point of view.

“We think that the partnership with one of the global oil majors is generally positive for Rosneft in the longer term, but actually implementing technological cooperation might prove difficult in reality,” it said in a research note.

Exxon has replaced BP as Rosneft’s Arctic partner after billionaire shareholders in BP’s Russian joint venture protested against the $16-billion deal which also involved a share swap. Rosneft started to look for a new partner immediately after the deal had fallen apart for fear of license revocation.

Rosneft said the Kara Sea blocks contain an estimated 36 billion barrels of recoverable oil resources, while total resources are estimated at 110 billion barrels oil equivalent, more than four times Exxon’s proven worldwide reserves. The Black Sea block is estimated to hold nine billion barrels of oil equivalent.

Bank of Moscow analyst Denis Borisov said the companies’ priority would be the Arctic Sea shelf with its harsh, deep waters and poorly explored regions.

“The first step which will allow us to speak about the project’s future prospects will be the approval of the oil-bearing capacity in the region because the level of geological exploration of the northern sea shelf is extremely low. This means that the company will have to hold a seismic study first, then drill exploration wells and evaluate the results. Under our estimates, this could take up to seven years, while ExxonMobil is likely to shoulder the main capital expenditure,” he said.

Valery Nesterov, an energy analyst at Troika Dialog, was even more pessimistic saying that oil and gas production on Rosneft’s areas in the Kara and Pechora seas was hard to expect in the foreseeable future.

He also warned of more difficulties saying it was not clear whether the partnership would be welcomed in the U.S. Congress given Yukos’ legacy. Yukos was Russia’s top oil producer, controlled by then Russia’s richest man Mikhail Khodorkovsky, who was arrested in 2003 and jailed for fraud and tax evasion. Yukos’ core assets were bought at bankruptcy auctions by Rosneft, a relatively minor player in Russia’s oil sector 10 years ago.

“We also think there will be some noise on the partnership from the U.S. Congress on the back of the Yukos legacy, as we heard during the first deal with BP back in January,” Nesterov said.

The current deal could seem all the more suggestive as Exxon was in merger talks with Yukos before Khodorkovsky was arrested.

Nesterov said that the lack of cooperation details made Rosneft’s participation in Exxon’s projects in the United States and other countries doubtful.

“It is far from certain that Rosneft will be invited by ExxonMobil to participate in low-risk, immediately free cash flow generative foreign oil assets, whether in the United States or elsewhere,” he said.

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