August 30, 2011 / 1:50 PM / in 8 years

UPDATE 3-Exxon, Rosneft tie up in Russian Arctic, U.S.

* Putin blesses partnership

* Companies to invest $3.2 billion in Arctic, Black Sea (Adds detail)

By Darya Korsunskaya

SOCHI, Russia, Aug 30 (Reuters) - U.S. oil company Exxon and state-owned Russian peer Rosneft are to develop oil and gas reserves in the Russian Arctic jointly, opening up one of the last unconquered drilling frontiers to the global industry No.1.

Tuesday’s deal ended any hope British group BP had of reviving a pact with Rosneft to develop the same Arctic territory — that deal was blocked in May by the billionaire partners in BP’s existing Russian venture.

“New horizons are opening up. One of the world’s leading companies, Exxon Mobil, is starting to work on Russia’s strategic shelf and deepwater continental shelf,” Russia’s prime minister, Vladimir Putin, said.

Putin attended the signing of the deal in the Black Sea resort of Sochi by Exxon chief executive Rex Tillerson and Russia’s top energy official, Deputy Prime Minister Igor Sechin.

Under the deal, Exxon and Rosneft will invest $3.2 billion developing East Prinovozemelsky Blocks 1, 2, and 3 in the Arctic Kara Sea and the Tuapse licensing block in the Black Sea.

Rosneft will own 66.7 percent and Exxon 33.3 percent of a joint venture to develop the blocks, which Exxon said were “among the most promising and least explored offshore areas globally, with high potential for liquids and gas”.


Rosneft said the Kara Sea blocks contained an estimated 36 billion barrels of recoverable oil resources. Total resources were estimated at 110 billion barrels of oil equivalent.

The Black Sea block was estimated to hold 9 billion barrels of oil reserves. First drilling was planned to start in 2015, with Exxon shouldering most of the costs.

“The Russians very quickly had a plan B and plan B was Exxon,” said Fadel Gheit, energy analyst at Oppenheimer & Co, referring to the quick switch to Exxon from BP.

The deal marked a turnaround for Exxon in Russia. The U.S. oil giant was widely thought to be on the verge of taking over Yukos, then Russia’s largest oil firm, before its head Mikhail Khodorkovsky was arrested in 2003.

Khodorkovsky was subsequently jailed for fraud and tax evasion and Yukos’s prime assets bought at bankruptcy auctions by Rosneft, now Russia’s industry leader and with enough reserves to cover 27 years of production.

“Politically, it is significant that this 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 centre of a flagship announcement.”

The deal also demonstrated that the “reset” in relations sought by President Barak Obama was working to reduce the significant political risk for U.S. business of investing in Russia, analysts said.

Uncertainty persists over whether Putin or President Dmitry Medvedev will seek the presidency next March. Putin can now show off the deal as a success if he decides to run.

The transaction also marks a comeback for Sechin, who was ousted as Rosneft chairman earlier this year in a purge of state company boards ordered by Medvedev. Sechin estimated total investment in the project at $200-$300 billion.


Rosneft will be offered an equity interest in Exxon exploration projects in North America, including deep-water Gulf of Mexico and fields in Texas, as well as in other countries.

Thus, the deal fulfils the demand for reciprocity so often made by Putin, helping Rosneft, which already works with Exxon offshore Russia’s Sakhalin island, toward its long-term goal of being a global energy major.

“That is probably huge for them,” said Allen Good, Exxon analyst at Morningstar. “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.”

There will be no exchange of equity, Sechin told reporters.

The BP deal had called for a $16 billion share swap in which BP would have exchanged a 5 percent stake for 9.4 percent in Rosneft.

“It is the same plan with very small modifications. Instead of exchanging equity stakes with each other, Exxon instead is going to JV them into some of their properties in the U.S.,” said Gheit at Oppenheimer.

“Exxon is double or triple the size and market value of BP. So, obviously this would be much more important for a BP than it is for Exxon.”

Exxon’s coup deals a setback to other international oil majors, after Royal Dutch Shell (RDSa.L) was named earlier by Putin as a possible partner for Rosneft in the Arctic.

Rosneft shares closed up 1.4 percent in Moscow. Exxon stock traded 1.0 percent weaker. (Additional reporting by Vladimir Soldatkin, Katya Golubkova, Michael Ermann and Ernest Schneyder; Writing by Douglas Busvine; Editing by Dan Lalor)

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