Exxon, Rosneft get reprieve on Arctic well drilling

After ExxonMobil Corp. mounted a campaign to warn U.S. officials that prematurely halting work with Russian oil giant Rosneft on an exploratory oil well could foul the Arctic, the Obama administration last week gave the company a two-week reprieve from sanctions on Russia.

The temporary retreat has given Exxon and its Russian partners a chance to proceed with the well to find out whether there’s oil in the Arctic — information they’d otherwise have been denied.

Progress at the $700-million well beneath the Kara Sea off Siberia’s northern coast is being closely watched by Rosneft leader Igor Sechin, the ex-Soviet apparatchik hand-picked by Putin to oversee an entity that out-produces every other publicly traded oil company in the world. Rosneft is expected to announce an update on the well in the coming days.

“Clearly the Russian government, and by extension big state companies like Rosneft, want to show wherever they can that business as usual is possible despite the sanctions regime, knowing full well” that everything will be harder now, said Andrew Weiss, head of the Russia program for the Washington- based Carnegie Endowment for International Peace.

Exxon persuaded top U.S. Treasury and Energy Department officials that it couldn’t safely obey a White House order to halt the venture with Russia’s national oil company by Friday, according to four people with knowledge of the talks.

Exxon warned that rushing to shut the well could spark an environmental disaster on the scale of the 2010 Deepwater Horizon blowout in the Gulf of Mexico. Treasury Secretary Jack Lew decided Exxon would get two extra weeks; the company had asked for an extra month to wind down its work safely, according to one U.S. official involved.

The U.S. sanctions imposed Sept. 12 were meant to punish Russian aggression against Ukraine by forcing Exxon to halt its $3.2-billion joint Arctic venture with Rosneft, Russia’s second- biggest company by market value, almost immediately.

President Barack Obama said the new sanctions would increase Russia’s political isolation and economic costs in areas important to Putin.

They did — for a week. After the Treasury Department approved the extension, Rosneft announced Sept. 20 that drilling had resumed.

While some U.S. officials had worried that making an exception for Exxon, the world’s largest oil company, would undercut their own sanctions, Energy Department engineers concluded that forcing the company to plug the well by the deadline could risk an environmental disaster.

The Treasury Department decision to issue Exxon a license to continue the Arctic drilling until Oct. 10 has allowed the company and Rosneft to stick close to the drilling schedule their engineers and logistics staffs had laid out during planning sessions in early 2013, said a person familiar with the planning.

While Rosneft is expected to portray progress on the well as a victory and proof that sanctions can’t hurt Russia, the financial and trade restrictions imposed by the U.S. and European Union in the six months since Russian leader Vladimir Putin’s annexation of Crimea have hobbled his country’s economy and energy exploration efforts far more than Russia admits, Weiss, a former National Security Council and State Department official, said in an interview.

“Any sanctions regime, particularly with Russia, involves a lot of trial and error,” Weiss said.

“Exxon is one of the largest foreign investors in Russia,” and even if drilling continued for some days after a reprieve was granted, the sanctions will have a long-term and “clear impact on Russia’s government and Rosneft, which have staked so much on this,” Weiss said.

Any sanctions regime, involves a lot of trial and error

ANDREW WEISS, CARN

EGIE ENDOWMENT FOR INTERNATIONAL

PEACE