ExxonMobil was forced to suspend cooperation with Russia's state-owned oil company Rosneft just two days after tapping a major oil and gas field in the Kara Sea — part of the Arctic Ocean north of Siberia.
"We are complying with all US sanctions," ExxonMobil spokesman Alan Jeffers told VICE News.
The US and the European Union imposed restrictions on Rosneft's chief executive Igor Sechin in April, and the company itself in July, as part of increasingly tight sanctions aimed at punishing Russia for its support of separatist rebels in eastern Ukraine.
ExxonMobil was partnered with Rosneft on 10 projects, including exploration and production in the Black Sea, West Siberia, and the Arctic. It halted cooperation on nine joint ventures by a September 26 deadline set by the US Treasury Department.
"Given the complexity of the University-1 well and the sensitive arctic environment in the Kara Sea, ExxonMobil sought, and was granted, limited relief from the Treasury Department sanctions to enable a safe and orderly wind down of operations related to this exploration well," said Jeffers.
University-1 is the name of the Rosneft-ExxonMobil well that drilled 7,000 feet below the Arctic Ocean floor to reach deposits estimated to hold 87 billion barrels of oil. In announcing the find, Sechin said the field would be called Pobeda — "Victory" in Russian.
Without technical assistance from Western oil and gas companies, however, Rosneft may be unable to continue its offshore exploration in the Arctic, says Heather Conley, senior vice president for Europe, Eurasia, and the Arctic at the Center for Strategic and International Studies (CSIS).
'I'm not surprised ExxonMobil walked away from their partnership with Rosneft because there's no reason to believe that in Russia their property rights would be secure.'
"Clearly ExxonMobil — according to its reading of the sanctions law — had to depart the field," Conley told VICE News. "Time will tell if Russian companies can develop these resources without the technological expertise of Western companies and the backing of international finance."
Russian companies, added Conley, lack offshore drilling expertise and rely on other producers like BP, Shell, and ExxonMobil for help in the technically challenging waters of the Arctic Ocean. Specialized equipment is needed to withstand the frigid conditions of the far north and rough conditions can test the abilities of even the most skilled drillers.
China might be able to offset the loss of international finance due to US and EU sanctions, explained Conley, but it won't be able to replicate the West's technological know-how.
Benjamin Zycher, of the American Enterprise Institute, believes that ExxonMobil's joint venture with Rosneft was likely to end in the near future, regardless of US-imposed sanctions.
"I'm not surprised ExxonMobil walked away from their partnership with Rosneft because there's no reason to believe that in Russia their property rights would be secure," Zycher told VICE News.
Russia threatened in July to seize the assets of BP and Shell in retaliation for British Prime Minister David Cameron's call for tough sanctions against Russia. BP and Shell have large investments in Rosneft and the Russian natural gas producer Gazprom.
"Even without sanctions I expected them to pull out anyway because when you look at what Putin did to BP, to Shell, there's no way to be confident in expecting to realize profits from your investments," said Zycher.
The Arctic holds an estimated 13 percent of the world's undiscovered conventional oil and 30 percent of conventional natural gas, according to the US Geological Survey. Those vast deposits may have kept ExxonMobil involved in Arctic Ocean exploration despite the uncertainties of Russia's business environment.
Rosneft's Sechin highlighted the vast potential of Arctic development, telling Der Spiegel: "We expect to open a new oil province there, with reserves comparable to the developed reserves of Saudi Arabia."
'In the US we underestimate the importance of Arctic economic development to Russia's future — not just to energy production but also to shipment.'
Environmental groups have opposed offshore oil and gas exploration in the Arctic, however, citing concerns over potential spills, which would be especially difficult to manage in the remote region.
"The plan to extract oil at a depth of about 100 meters, amid an ice-free period of only four months, in an area with icebergs and storms, which is surrounded by vulnerable protected wildlife — sounds absolutely crazy," Vladimir Chuprov, head of Greenpeace Russia's energy unit, told VICE News.
Rosneft's drilling permits, he added, overlap with several important nature reserves, among them the Russian Arctic National Park and Wrangel Island, a UNESCO heritage site.
The amount of area covered by sea ice during the summer months in the Arctic has decreased by about 12 percent per decade since the late 1970s and temperatures in the region have increased at twice the rate as the rest of the world.
With less sea ice cover in the summer previously inaccessible areas of ocean have become viable sites for offshore drilling and international shipping.
CSIS's Conley says that Russia has hitched its future economic prosperity to Arctic development more than any other country.
"This is a story that will be very interesting to follow," she told VICE News. "In the US we underestimate the importance of Arctic economic development to Russia's future — not just to energy production but also to shipment. Russia's economic development relies very much on what happens in the Arctic."
Follow Robert S. Eshelman on Twitter: @RobertSEshelman
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