Exxon Gets U.S. Sanctions Extension to Shut Russian Arctic Well |
Exxon
Mobil Corp. (XOM) said
the U.S. government is giving the company more time to shut its Russian Arctic
well beyond the deadline for sanctions aimed at halting the $700 million
project.
Exxon asked Washington for an
extension to allow it to continue performing shut-down work on the Universitetskaya-1
(University-1) well in Russia’s Kara
Sea to make sure the well was safe before it’s temporarily abandoned. The
Irving, Texas-based company already had ceased drilling the offshore well after
U.S. sanctions set a Sept. 26 deadline for ending the work.
“The U.S. Treasury Department,
recognizing the complexity of the University-1 well and the sensitive Kara Sea
arctic environment, has granted a license to Exxon Mobil and other U.S.
contractors and persons involved to enable the safe and responsible winding
down of operations related to this exploration well,” Exxon said in a statement
today.
The most-recent round of
sanctions intended to punish Russia for its involvement in separatist violence
in Ukraine barred U.S. and European Union companies from helping Russia exploit
oil resources in the Arctic, deep seas and shale formations.
The measures had prompted Exxon
and its partner OAO
Rosneft (ROSN) to
temporarily halt drilling at the well, which lies about 260 feet (79 meters)
beneath the sea surface off Siberia’s northern coast, according to three people
familiar with the project. The well is aiming to tap a resource estimated to
hold as much as 9 billion barrels of crude, worth $880 billion at current
prices.
More Time
Exxon sought the exemption from
the deadline after engineers involved in the project warned they needed more
time to properly plug the well with cement and conduct tests to ensure there
are no leaks, cracks or faults that could damage the reservoir or allow
environmental contamination, according to a source with knowledge of the matter
who asked not to be identified because he was not authorized to speak publicly.
Exxon and Rosneft are exploring
a geologic formation never before drilled by humans, which means the pressure
changes, layer densities and temperatures at various depths are unknown,
increasing the risks of unexpected collapses or pressure bursts. For that
reason, the engineers closing the well need to map the formation a foot at a
time as they back out of the well, a process that can take weeks.
Slowing Progress
The halt at Universitetskaya-1
is a blow to Russian President Vladimir Putin’s quest to find a new generation
of oil fields to replace declining output from some of the country’s Soviet-era
reserves. The Russian oil industry is dependent on expertise and equipment from
the U.S. and Europe to penetrate crude reservoirs that are deeper, denser and
more remote than anything they’ve attempted before.
The disruption also is a
setback for Exxon as the company seeks to lift production that touched a 4-year
low in 2013 as the rate it’s replacing output with new discoveries tumbled to
the lowest in half a decade.
Exxon’s $3.2 billion
exploration pact with Moscow-based Rosneft is a linchpin of the U.S. company’s
bid to spur production and reserves growth in the next decade, said Brian
Youngberg, an analyst at Edward Jones & Co. in St. Louis.
‘Enormous’ Potential
“The Arctic drilling potential
for Exxon is really enormous,” said Youngberg, who has a hold rating on Exxon
shares. “It’s one of the key growth areas they’re looking to post-2020.”
Rosneft’s press office in
Moscow declined to comment. Hagar Chemali, a U.S. Treasury Department
spokesperson, declined to comment and referred a Bloomberg News inquiry to
Exxon.
Exxon is using the West Alpha
rig owned by Seadrill
Ltd. (SDRL)’s North
Atlantic (NADL) Drilling
unit at the Universitetskaya-1 site about 70 miles offshore. The rig departed a
Norwegian shipyard in July and sailed around the northern coast of Scandinavia
and into Russian territory right before the U.S. and EU prohibited exports of
gear for Arctic, deep-water and shale drilling.
Within weeks, the U.S. and EU
moved to close loopholes in the sanctions by also banning the export of
services such as engineering expertise and geological analysis for Russian
Arctic, deep-water and shale projects.
Exxon rose 0.5 percent to
$97.12 at the close of trading in New York. Seadrill fell 4.1 percent today in
Oslo to its lowest closing price since November 2011.
The
measures left untouched so-called conventional oil developments that aren’t
part of Putin’s hunt for next-generation oilfields, including the Sakhalin-1
development off Russia’s Pacific Coast managed by Exxon and Rosneft.
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