Rosneft Chooses Exxon Mobil As Partner for Russian Arctic Exploration

Exxon Mobil (NYSE:XOM) and Russian state-owned OAO Rosneft will jointly develop oil and gas reserves in the Russian Arctic, one of the few remaining drilling frontiers yet to be conquered.  The deal puts an end to any hope that BP (NYSE:BP) had of reviving a similar deal for Arctic exploration with Rosneft, which was blocked in May by BP’s partners in an existing Russian venture.

Russian prime minister Vladimir Putin attended the signing of the deal. “New horizons are opening up,” he said. “One of the world’s leading companies, Exxon Mobil (NYSE:XOM), is starting to work on Russia’s strategic shelf and deepwater continental shelf.”

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Exxon (NYSE:XOM) and Rosneft will together invest $3.2 billion in developing East Prinovozemelsky Blocks 1, 2, and 3 in the Arctic Kara Sea and the Tuapse licensing block in the Black Sea. Rosneft says the Kara Sea blocks contain roughly 36 billion barrels of recoverable oil resources, while total oil resources are estimated at 110 billion barrels. The Black Sea block holds an estimated 9 billion barrels. Rosneft will own a two-thirds majority of the venture while Exxon will hold 33.3% of the oil blocks, though it will shoulder most of the costs. Drilling will begin in 2015.

The deal marks a new page in Russian-U.S. relations. “Politically, it is significant that [Exxon] is an American company,” said Clifford Kupchan, a Russia-watcher at the Eurasia Group. “Three years ago, American companies were being excluded. Here, an American company is at the center of a flagship announcement.” President Barack Obama has been working to reduce the political risk for American businesses of investing in Russia, and the deal announced Tuesday would seem to speak to his success.

As part of the deal, Rosneft will be offered an equity interest in some of Exxon’s (NYSE:XOM) exploration projects in North America, including its deep-water Gulf of Mexico project and its oil fields in Texas, fulfilling Putin’s common demand for reciprocity when doing business with foreign companies. “Being able to expand in deepwater and gain some experience and some knowledge from Exxon Mobil will probably benefit them as well as they look to explore offshore in Russia,” said Allen Good, an Exxon analyst at Morningstar. No equity will be exchanged between the two partners.