Exxon Mobil Corporation (XOM) began drilling in the Russian Arctic on August 9, in collaboration with the Russian oil giant, Rosneft Oil Co (RNFTF), despite sanctions placed on Russia by the US and the EU over the Ukraine crisis. The joint project by the two oil companies was welcomed by President Putin of Russia, who called the venture a model of “cooperation.”
The start of the $700 million project is expected to help Exxon Mobil bolster its declining production levels. The company’s production declined 2.5% to 4,175 million barrels of oil equivalent per day (MBoe/day) in 2013.
If the project is successful, it will give the American oil giant access to nine billion barrels of oil reserves present at the drilling site. Concerned over its declining production, the company aims to increase its capital expenditure to $38 billion per year, till 2017; its capital expenditure increased at a three-year compound annual growth rate (CAGR) of 4.3% to $33.7 billion in 2013.
Rosneft is already facing sanctions by the US over rising tensions between Russia and Ukraine, whereby the company would now receive limited funding from the US. The sanctions also extend to Novatek OAO - ADR (NVATY), which is Russia’s second-largest gas producer. The sanctions do not however, prevent US companies from carrying out business activities with their Russian counterparts – they aim to restrict access of these companies to medium- and long-term dollar funding and modern technology.
The sanctions are a serious blow to Rosneft and Russia, as the company contributes 8% to the country’s GDP and 4% to the world’s production of crude oil. Since the sanctions will not prevent joint ventures between US and Russian companies, Exxon Mobil and other companies such as BP plc (ADR) (BP), which has a nearly 20% stake in Rosneft, face no immediate threat.