By Bradley Olson and Jay Solomon
Exxon Mobil Corp. is suffering from sanctions on Russia. The
same can't be said for other big Western energy companies, or for
Russia's oil production.
The sanctions, put in place by the U.S. and European Union in
2014 after Russia's annexation of the Crimea region of Ukraine,
were meant to limit Russia's pursuit of new technology for
extracting more crude oil and natural gas.The measures specifically
targeted deepwater drilling planned in the Black Sea, Arctic
operations and the use of fracking technology in Siberia.
The terms were a blow to Exxon because drilling in those areas
was at the heart of a landmark deal the company struck a few years
before to partner with state oil firm PAO Rosneft. The company
sought a waiver from U.S. sanctions to drill in the Black Sea, but
was rejected last month by the Trump administration.
At the same time, some of the company's European rivals are
moving ahead with projects in Russia, many under partnerships begun
before the sanctions. BP PLC was allowed to keep its nearly 20%
stake in Rosneft, which contributed $590 million to its net
earnings in 2016.
Italy's Eni SpA is preparing to drill a Black Sea well later
this year as part of a partnership with Rosneft, and also plans to
explore the Arctic waters of Russia's Barents Sea. The company has
proceeded because the EU allowed partnerships in place at the time
of sanctions to continue, Eni has said.
The U.S. didn't grant exemptions for existing partnerships, as
Exxon's experience showed. An EU spokeswoman said that while some
differences exist between how sanctions have been applied by
different countries, these have been limited and don't undermine
the overall impact of the restrictions.
Other European companies proceeding with projects in Russia
include Norway's Statoil ASA, which has another pre-existing
venture with Rosneft in Russia's Samara region that will require
advanced drilling techniques similar to modern fracking in the U.S.
-- wherein sand, water and other chemicals are blasted into layers
of dense rock to release oil and gas. The company also continues an
oil-drilling project in Siberia.
France's Total SA, together with a Russian partner subject to
sanctions, is building a massive natural-gas export plant, a
project that advanced in spite of financing limitations related to
sanctions by turning to China. The companies have said they
obtained clearance from the EU to proceed.
Sanctions didn't prevent Royal Dutch Shell PLC and four other
European companies last month from announcing $10 billion in
financing for a natural-gas pipeline to Germany that the EU
opposes.
While some diplomatic and oil-industry experts believe the
sanctions have crimped Russia's oil progress, the uneven
application of the restrictions has led to questions about how
effective they have really been.
"When sanctions are not uniform across the board, you get
unintended consequences," said Bill Arnold, a former Shell
executive and senior vice president of the U.S. Export-Import Bank
who teaches about the geopolitics of oil at Rice University. "If
the ultimate objective was to curb Russian industry, it isn't clear
that's taken place."
The sanctions weren't specifically designed to curb current
Russian oil production, and they haven't. Output rose above 11
million barrels a day last year, the highest level in decades.
That reflects more than the limits of sanctions. Other economic
forces, such as a sharp devaluation of the ruble, played a role.
Companies in the country have been able to sell oil in dollars and
pay for drilling with Russia's currency, allowing them to reduce
costs and invest more toward boosting output.
By design, the U.S. and EU sanctions on Russia were far less
extensive than those placed on Iran, given the complete dependency
of some European countries on Russia for natural-gas supplies. In
the case of Iran, the U.S. levied billion-dollar fines and tried to
make it impossible for companies that did business with sanctioned
Iranian enterprises to access the U.S. financial system.
Although President Donald Trump spoke of loosening sanctions on
Russia during his campaign, political resolve to keep the U.S.
sanctions in place has hardened in recent months.
Last month, Secretary of State Rex Tillerson, Exxon's former
chief executive, said relations between the countries had reached
"a low point" after the Pentagon launched airstrikes on a Syrian
military base believed to have been involved in a chemical-weapons
attack against civilians. Russia has supported the regime of Syrian
President Bashar al-Assad.
Analysts expect the EU sanctions to be renewed before they
expire in July. However, they are reviewed every six months, and
debate on whether to keep them could be fiercer by year's end given
new elections, burgeoning energy needs and other factors.
In seeking a waiver from the U.S. sanctions, Exxon was motivated
by a desire to maintain a foothold in one of the world's last
remaining oil frontiers. Executives feared the loss of their
competitive advantage, winning a hard-fought battle in 2011 to
access Russia's vast resources, the first such deal under Russian
President Vladimir Putin.
The Trump administration on April 21 rejected the request, which
originally had been made when Barack Obama was president. Recently,
the proposal had been circulated among various federal departments,
according to people familiar with the matter.
An Exxon spokesman said the company sought permission to drill
in the Black Sea to "meet its contractual obligations under a joint
venture agreement in Russia, where competitor companies are
authorized to undertake such work under European sanctions."
Igor Yusufov, a former Russian energy minister, said sanctions
have forced Russian producers to use Chinese equipment, which was
cheaper than U.S. or Western equipment but more prone to breakdowns
in Russia's extreme conditions.
Sanctions also limited the flow of money to Russian companies,
and they have at times upended European companies' projects.
Sanctions disrupted Shell's plan to form a strategic alliance with
Russian gas giant Gazprom and forced the company to put on hold
efforts to develop Siberia's shale fields.
They also appear to have curbed some of Mr. Putin's military
ambitions voiced after the Crimea annexation, said Edward Chow, a
former Chevron Corp. executive and now an energy fellow at the
Center for Strategic and International Studies.
"They have certainly had an impact," he said.
--Nathan Hodge, Sarah Kent and Laurence Norman contributed to
this article.
Write to Bradley Olson at Bradley.Olson@wsj.com and Jay Solomon
at jay.solomon@wsj.com
(END) Dow Jones Newswires
May 08, 2017 05:44 ET (09:44 GMT)
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