Last week, the largest U.S. energy company, ExxonMobil, bowed to Western sanctions against Russia and withdrew from a joint venture with the Kremlin-owned oil giant Rosneft in the Russian Arctic, but not before it discovered what may be a vast amount of oil.
Rosneft CEO Igor Sechin said Sept. 27 that the finding shows the Arctic Ocean’s Kara Sea north of Russia could become one of the world’s richest sources of crude oil. Before Exxon was forced to withdraw, he said a well containing around 1 billion barrels of oil was found. He added that neighboring geological formations may contain more oil than in the U.S.-controlled area of the Gulf of Mexico.
Sechin told Bloomberg News that the discovery “exceeded our expectations.” He said the well could begin production in as soon as five years, and that the field, now called Universitetskaya, would be renamed Pobeda, or “Victory” in Russian.
Exxon’s reaction was more measured. “We have encountered hydrocarbons, but it is premature to speculate on any potential outcome,” Alan Jeffers, an Exxon spokesman, told The Wall Street Journal.
The European Union and United States have imposed economic sanctions on Russia for what they see as Moscow’s aggressive involvement in the affairs of neighboring Ukraine, unilaterally annexing the Crimean peninsula in March and reportedly providing support in personnel and equipment to Ukraine’s pro-Russian separatists.
The sanctions forbid Western banks to provide long-term financing to Russian oil companies and bar the sale of Western technology to Russian firms. As a result, Rosneft and Exxon can conduct no further drilling, leaving development of the Kara Sea field in limbo.
The Arctic is one of the last regions to be exploited for energy, even though it’s estimated to hold among the largest deposits of gas and oil. In 2011, Exxon and Rosneft agreed to work together to explore a sector of the Russian Arctic larger than Texas at a cost of more than $3.2 billion, most of it to be paid by Exxon.
The first joint drilling project was the Universitetskaya well. But regardless of the amount of oil that may or may not have been found there, and regardless of the Western sanctions, neither Rosneft nor Exxon will feel the brunt of the field lying fallow. Under the best of circumstances, it would be years before the two companies could begin extracting useful quantities of oil or gas.
Still, the well has long-term importance for both companies. Exxon needs new sources of oil to make up for the vast amounts it’s already pumped from older wells, which are now becoming depleted.
As for Russia, developing access to the potentially huge energy resources of the Arctic would only strengthen its strategy to increase domestic oil and gas production, the key to its economy and its international influence.
By Andy Tully of Oilprice.com
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Andy Tully is a veteran news reporter who is now the news editor for Oilprice.com