Exxon Said to Halt Arctic Oil Well Drilling on Sanctions

Exxon Mobil Corp. (XOM) and OAO Rosneft halted drilling on an offshore oil well intended as the first step in unlocking billions of barrels of crude in Russia’s remote Arctic, according to people familiar with the project.

Work stopped just a few days after the U.S. and European Union barred companies from helping Russia exploit Arctic, deep-water or shale-oil fields, said three people with knowledge of the rig’s operations who asked not to be named since they weren’t authorized to speak about the project. The U.S. sanctions, meant to punish Russia for escalating tensions in Ukraine, gave American companies until Sept. 26 to stop all restricted drilling and testing services.

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Exxon, Rosneft and Seadrill Ltd. (SDRL)’s North Atlantic Drilling (NADL) unit are under the gun to finish or temporarily seal the $700 million well off Russia’s northern coast before the sanctions deadline, said Chris Kettenmann, chief energy strategist at Prime Executions Inc., a brokerage firm in New York. With just eight days left before sanctions require Exxon to stop all Arctic work with its Russian partner Rosneft, the project probably is on hold until next year at the earliest, he said.

“This has been one of the most-watched wells in the industry, so this is a huge deal,” said Kettenmann, who has a sell rating on Exxon’s shares. “There’s a hard stop here.”

Building Industry

Rosneft fell as much as 1.5 percent in Moscow, trading 0.8 percent lower at 236.9 rubles a share as of 11:26 a.m. local time. Seadrill dropped as much as 1.5 percent in Oslo, before paring its loss to 1.1 percent. Exxon closed 0.5 percent lower yesterday at $96.6 a share.

Waging Financial War

Since the Soviet Union broke up a quarter-century ago, U.S. and European companies have helped build Russia’s energy industry in the hope of capturing some of its 75 billion barrels of reserves. The drilling halt of the Universitetskaya-1 well is the first tangible evidence that sanctions are now slowing that investment.

The well was the opening shot at tapping an estimated 9 billion barrels of crude deep under the floor of the Kara Sea, worth about $885 billion at current prices. It’s key both to Russia’s quest to find new oil fields to replace its declining Soviet-era wells and to Exxon’s efforts to halt falling production.

Legal Compliance

“We are still assessing the sanctions, but will comply with all laws and regulations,” Dick Keil, an Exxon spokesman, said in a telephone interview. Keil declined to comment further. Rosneft’s press service declined to comment.

The U.S. and Europe have imposed a series of escalating sanctions against Russia since its annexation of Crimea in March and because of support for separatists in eastern Ukraine. The restrictions have pushed Russia’s economy to the verge of a recession, and the impact could last two to three years, former Finance Minister Alexei Kudrin said this week.

Putin has been unmoved. On Aug. 9, just days after the U.S. and EU announced that they would restrict the export of technology needed for Arctic, shale and deep-sea exploration, Putin -- speaking via satellite -- personally ordered the start of drilling on the well, Russia’s first in the Arctic Ocean. Exxon’s chief of Russia operations attended the event.

Expanded sanctions last week added a ban on services provided to such projects, effectively putting an end to Exxon’s continued work on the well.

Safe Exit

No official decision has yet been made on whether to try to restart drilling this year or wait until next year, two of the people with knowledge of the situation said. Regardless, Exxon and Rosneft have probably run out of time to get anything more done in 2014, said Sigbjoern Sangesland, professor in the Petroleum Engineering and Applied Geophysics department at the Norwegian University of Science and Technology.

Exxon must leave itself enough time to safely shut the well before abandoning it.

“I would think that they would stop where they are now,” said Sangesland. “If they have a week left, they need that time to set plugs in the well and pull out the blowout preventer and anchor.”

Rosneft has already felt the sting of sanctions, which have affected its financing and ability to acquire technology. Chief Executive Officer and long-time Putin ally Igor Sechin, 54, has also been personally sanctioned, banned from travel to the U.S. in April.