Rex Tillerson, the Texas-bred Eagle Scout atop the world’s largest energy company, and Vladimir Putin confidante Igor Sechin, his counterpart at Russia’s state oil company, forged a partnership to tap billions of barrels of crude together in Russia.
Now, Big Oil’s power couple are being pushed apart in their boldest venture by U.S. and European Union sanctions imposed yesterday.
Last month, Exxon Mobil Corp. and OAO Rosneft started drilling their first Arctic oil well after sanctions were imposed to restrict such exploration. The move exposed a loophole that the governments have now closed. It also irked some competitors and European and U.S. officials who felt Exxon was violating the spirit of the sanctions, even if it was observing the letter of the law, according to people familiar with the discussions.
Exxon’s ventures with Rosneft illustrate how the interests of U.S. and European governments and their multinational companies often diverge, complicating diplomacy, trade and investment.
In President Putin’s Russia, there is often little distinction between the state and key businesses — especially state-controlled companies including Rosneft, led by Kremlin insiders. The same isn’t true for Irving, Texas-based Exxon, which has pushed ahead with new contracts while keeping a step ahead of U.S. and European sanctions.
“Exxon isn’t an arm of the U.S. government,” David Kramer, a former U.S. assistant secretary of state and president of Washington-based Freedom House, a human-rights research and advocacy group, said in an interview. “It reports to shareholders, so it looks for deals it thinks will turn a profit, and it’s not in the business necessarily of promoting U.S. foreign policy interests.”
In an interview yesterday, Exxon spokesman Alan Jeffers said the company complies with the law everywhere it operates, and is assessing the latest round of sanctions.
The U.S. and Europe have imposed a series of escalating sanctions against Russia since its annexation of Crimea in March and support for pro-Russian separatists in eastern Ukraine.
Russia has responded with defiance. Just days after the U.S. and EU announced last month that they would restrict the export of technology needed for Arctic, shale and deep-sea exploration, Putin — speaking via satellite — personally ordered the start of drilling for Russia’s first Arctic well. Exxon’s chief of Russia operations attended the event.
“Nowadays, commercial success is defined by an efficient international cooperation,” Putin said. “Businesses, including the largest domestic and foreign companies, understand this perfectly.” Exxon’s Russia country head Glenn Waller replied in Russian: “We see very strong prospects here, and are ready — with your permission — to work further.”
The new drilling not only annoyed Exxon’s competitors and U.S. and European officials, it also pointed out that the July sanctions had a loophole big enough for a 320-foot-wide rig to sail through, according to five people with direct knowledge of the discussions who declined to be cited by name to describe private communications.
The original measure, it turned out, while banning U.S. and European companies from providing technology, allowed them to provide services for long-term oil exploration. That meant Exxon could continue to oversee drilling and lend its expertise to its projects with Rosneft.
The U.S. and Europe moved yesterday to end that exception, giving U.S. companies 14 days to stop all drilling and testing services for deepwater, Arctic and shale-oil exploration and production. The European restrictions let contracts already signed remain in operation, though no major EU oil companies are drilling for crude in the Russian Arctic.
Russia’s quest to find new oilfields to replace declining, decades-old Soviet-era wells hinges on U.S. and European expertise to drill below ocean floors and through some of the densest rock on the planet. Russia has sought to import the practices that triggered a North American oil renaissance by partnering with international giants including Exxon, Royal Dutch Shell Plc, Halliburton Co. and Schlumberger Ltd.
The biggest loser from yesterday’s sanctions, at least among U.S. and European companies, is Exxon.
“Exxon is the one that has the joint venture with Rosneft and the easiest way to halt it is to bar Exxon from doing any business in these areas,” said Fadel Gheit, a senior oil analyst at Oppenheimer & Co. in New York. “We can’t have sanctions with loopholes. It’s a non-starter.”
Rosneft has already felt the sting of the sanctions, which have affected its financing and ability to acquire technology. Sechin, 54, has also been personally sanctioned, banned from travel to the U.S. and Europe and his assets there have been frozen.
As the U.S. and Europe have struggled for months with the best way to impose costs on Putin to pressure him to back down in Ukraine, Exxon emerged as the highest-profile example of a company supporting its Russian counterpart.
Exxon wasn’t subtle about its pursuit of new deals. Even after President Barack Obama’s administration urged the chief executive officers of several Fortune 500 U.S. companies not to attend Putin’s St. Petersburg Forum in May, a senior Exxon executive, Neil Duffin, went anyway, posing for photos with Sechin and inking a series of new agreements.
Tillerson, the chairman and CEO, flew to Moscow in June to attend the World Petroleum Congress where he appeared alongside Sechin, Rosneft’s CEO.
Tillerson, 62, told shareholders in May that sanctions were having no effect on the company’s business and questioned their rationale.
“We don’t find them to be effective unless they are very well-implemented,” Tillerson said at the company’s annual meeting in Dallas. Authorities imposing the sanctions, he said, should ask, “Who are they really harming?”
Rosneft also pushed ahead. On the same day in late July that the EU and the U.S. announced the export ban on some oil- drilling equipment, Rosneft signed contracts with a unit of Seadrill Ltd., the Bermuda-based drilling rig owner controlled by Norway-born billionaire John Fredriksen, for six rigs that would mainly service the venture with Exxon.
Then, on Aug. 9, Exxon employees working on the hulking orange-and-white West Alpha rig parked 72 miles (116 kilometers) off Russia’s coast began drilling.
At least one major European energy company withheld participation in Arctic projects after the July sanctions, sensing that lending its expertise would bump up against the intent of the restrictions, according to one of the officials.
Exxon’s actions, along with Rosneft’s contract for the six additional rigs, pushed U.S. and European governments to come out with the new measures, said Erich Ferrari, a Washington- based lawyer who specializes in sanctions.
“The signing of the July 29 deal exposed a flaw in the sanctions architecture which not only contradicted the spirit of the sanctions effort, but also undermined its efficacy in the public eye,” Ferrari said. “It was a dual problem, and had to be addressed in some manner.”
Since the Soviet Union broke up a quarter-century ago, U.S. and European companies have helped build Russia’s energy industry in the hope of capturing some of its 75 billion barrels of reserves. The limited sanctions that the U.S. and Europe laid down initially did little to slow that investment.
The new rules will curb Exxon’s Russian ambitions. Exxon owns drilling rights across 11.4 million acres of Russian land and sea, its second-biggest holding outside the U.S. Getting the Russian oil out might require Exxon to invest as much as $500 billion all told, Putin said when the agreement was signed in Sochi in 2011.
Conventional drilling, including Exxon’s Sakhalin-1 oil venture with Rosneft off Russia’s Pacific Coast, isn’t affected by the sanctions.
While halting specialized exploration and development has little near-term impact on Exxon, it points out a longer-term risk for the company: production. Exxon’s search of Russia’s Arctic seas for crude is the biggest part of its global effort to halt a trend of declining output.
Exxon’s shares have fallen 7.2 percent since it reported at the end of July that quarterly oil and natural gas output decreased 5.7 percent to the equivalent of 3.84 million barrels a day, the lowest since the third quarter of 2009, according to data compiled by Bloomberg.
“If policy makers see that there are unintended loopholes in their sanctions, they will try to close those,” said Michael Levi, senior fellow for energy and the environment at the New York-based Council on Foreign Relations, who said he wasn’t commenting on whether Exxon may have upset policy makers.
“You don’t need to be pissed off or annoyed about Exxon giving Putin good press to say, ‘We didn’t intend to allow these sorts of activities, but we accidentally did, and now we’re going to cut them off,’” Levi said.