Roland Nash of Verno Capital -
The partnership between Rosneft and ExxonMobil to explore and develop Russia's Arctic Basin has been met with some scepticism - understandably given some of the experience of western oil majors in Russia. But the deal is potentially of major significance for the Russian investment environment.
Exxon has a deserved reputation for doing a lot of due diligence and then making big commitments. They are the most globalised of all the oil majors with large-scale investments across the Middle East, Africa, and South America. The company tends to negotiate hard and is not afraid to fight its corner. They are suing Venezuela for $7bn rather than rolling over to Hugo Chavez as Chevron or BP have done.
They also have plenty of experience in Russia. Exxon was one of the first western oil companies in Russia after the fall of the Soviet Union. They helped pioneer the highly controversial Production Sharing Agreements (PSAs), and signed one of the biggest in 1996 alongside the Russian government to exploit the gasfields in the Sakhalin-I consortium. In the 15 years it has taken to bring the field online, Exxon has faced as many of the idiosyncratic risks of doing business in Russia's oil sector as any foreign company except, perhaps, BP.
Most significantly in 2003, Exxon was heavily rumoured to be close to buying 40% of Yukos-Sibneft from then-CEO and owner Mikhail Khodorkovsky. Some say that it was the potential sale of one of Russia's biggest oil assets by Russia's richest tycoon to an American company that catalyzed the process that ended with Yukos' oil assets in the hands of Rosneft. Exxon is unlikely to have gone into the Arctic deal with Rosneft with its eyes closed.
Looking long term
Clearly in terms of oil out of the ground, the deal is unlikely to produce anything concrete for many years. If it took 15 years to get hydrocarbons from Sakhalin, it is likely to take at least as long from the Arctic Basin. The multi-hundred-billion barrels of reserves bandied about by officials should be heavily discounted. Equally, the $500bn of potential investment announced by Prime Minister Vladimir Putin is for headlines, not for the economy.
But in terms of what it means for the Russian investment environment and, potentially for Rosneft, it can prove very significant, for four reasons:
First, it shows that the Russian oil sector is still open to international majors. Exxon had been amongst the most sceptical towards Russia since the Yukos case. This deal indicates that they are convinced that there is opportunity in Russia.
Second, it shows that American companies are welcome, and are choosing to invest in Russia. While President Barack Obama's "reset button" seems sometimes to be a bit sticky, private sector companies in the US are stepping into Russia post-crisis. Earlier this year, PepsiCo paid $3.8bn for a 60% stake in Russian juice-maker Wimm-Bill-Dann. Microsoft and Intel have been active in the Skolkovo high-tech park. Boeing is increasing its investment into titanium producers. While it sometimes seems that European companies, particularly German, are more comfortable investing in Russia, and that Russia has been looking increasingly towards Asia for investment, the Exxon deal proves that, at least commercially, ties with the US remain important.
Third, it should be seen as a big signal of Russia's intentions post-next year's presidential elections. The timing of the announcement and Putin's personal involvement is surely not coincidental. Putin wants to build a big, powerful economy, and he recognises the need for foreign investment to do that.
Fourth, and perhaps most interestingly, it is the latest example of Russia's national champions going international. The headlines are all about Exxon's investment into Russia. But just as significant is Rosneft being invited into the international arena alongside Exxon. It has proven difficult for emerging market oil companies to make an impact outside of their own countries. It has also proven difficult for Russian companies to grow outside of their borders. By utilising its comparative advantage in reserves, Rosneft is being given the opportunity to shift from being a national oil company into an international oil company.
Western majors (and many Russian oil companies) have often had a torrid time investing into Russia's oil sector. But precisely because of those difficulties, the Exxon deal with Rosneft may prove to be a key milestone. Exxon, as much as any company, understands the risks, and Russia wants foreign investment. With all of their global and Russian experience, Exxon have chosen to enter into a partnership with a Russian state-owned oil company which contains the legacy Yukos assets and is closely associated with some of Russia's most powerful politicians. The deal's size and timing seems to say a lot about how Russia's investment environment is changing.
Roland Nash is Chief Investment Strategist of Verno Capital
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