Exxon Mobil Is Hurting From Economic Sanctions Against Russia

Source: Thinkstock

Source: Thinkstock

Exxon Mobil Corp. (NYSE:XOM) is feeling the heat from recent U.S. economic sanctions on Russia in the company’s 2014 first-quarter earnings report. The company reported earnings of $9.1 billion, dipping 4 percent from last year’s $9.5 billion. Capital and expenditures are down 28 percent from $11.7 billion to $8.4 billion, but Rex Tillerson, the company’s chairman, still sees great things on the horizon.

“ExxonMobil’s first quarter earnings and cash blow reflect the company’s focus on delivering profitable growth and creating long-term shareholder value,” Tillerson said. “Strong performance in the Upstream benefitted from improved production mix and increased unit profitability. Exxon attributes this to the end of a six-decade oil production agreement with Abu Dhabi that has minimized their output by 118,000 barrels of oil per day, which was the primary driver for the 2.5 percent production decline in the first quarter of 2014.”

But while the company is opening up a natural gas production plant at the Damar field off the east cost of peninsular Malaysia and a refinery and chemical complex in Baytown, Texas, Exxon, like BP (NYSE:BP), finds itself in a bit of trouble as the United States places sanctions on the president of Russia’s largest oil producer, Rosneft Igor Sechin. Fox News reports that this is the first warning shot: The West will next time go after Russia’s biggest companies if Moscow doesn’t resolve the crisis, and perhaps make it illegal for U.S. investors to do business with companies like Rosneft.

“Sanctions are a message,” Philip Hanson, associate fellow in the Russia and Eurasia program at the think tank Chatham House, told Fox News. “They are an instrument that are somewhere between pure diplomacy – talking – and warfare. If that message also has knock-on effects, it becomes more weighty.”

Targeting Sechin is seen by Adnan Vatansever, a senior lecturer at the Russia Institute at King’s College in London, as the beginning of something bigger. “They are targeting Igor Sechin, not the company itself — but it leaves open the question of whether (the U.S.) will target the company itself,” Vatansever told Fox News.

Exxon Mobil has been investing in Russia, most recently signing a joint venture to explore and drill shale deposits in western Siberia, along with conducting offshore drilling activities in the Arctic Ocean and the Black Sea, which could be a $500 billion opportunity unless political frictions derail it, according to The Motley Fool.

Per The Street, Exxon, through its Neftegas subsidiary, operates and owns 30 percent of the largest FDI spending projects in Russia (the upstream Sakhalin-1 in far east Russia).

If the hit in earnings to the company is any example, Exxon, like BP even more so, is coming to a standstill. With so much investment and attention focused on Russia and the Middle East, the company’s business strategy is in question. The political and economic volatility in the region due to war and sanctions doesn’t make the area very favorable to foreign investment or business collaboration.

With plenty of natural gas and oil available in the United States, Exxon is forced to travel overseas to do business due to tight regulations placed on the company by the Environmental Protection Agency. It would be smart for the United States to lower regulations for Exxon to expand further into America. The Texas-based company is placed in economic jeopardy and uncertainty as the U.S. and Russia continue to practice their economic and political war games.

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