You may have noticed that OPEC has modestly lowered its expectations for global oil supply and demand. The rationale behind the changes involves a combination of economic slackening in many parts of the world, a weaker-than-normal driving season in the U.S., and an expectation of reduced demand from China.
Actually, I'm inclined to look farther ahead to a Goldman Sachs estimate that crude in the U.S. will average about $126.50 a barrel next year, while prices for (primarily European) Brent oil will average in the vicinity of $130 per barrel in 2012. The key is that, while faltering economies in Europe, Japan, and the U.S. have trimmed prices this year, the intermediate- and longer-term directions are likely to be northerly -- as to both crude prices and the majors' geographic areas of exploration and production activity.
Heading for a big chill
By northerly geographic areas, I'm of course referring to the Arctic waters of Russia, Canada, Alaska, and other places where you and I would prefer not to hang out extensively. But with meaningful new oil finds becoming more and more scarce, Big Oil clearly is inclined to don its protective cold-weather gear and head for the frigid but generally unexplored Arctic locations.
The entirety of the Arctic region that's now being eyed -- most notably by ExxonMobil (NYS: XOM) and its new partner, Russian state oil company OAO Rosneft -- covers about 12 million square miles, or 6% of our planet's land. At the same time, it likely is hiding more than 400 billion barrels of oil and gas, or 22% of the world's total, beneath its ice caps.
Beginning in about 2015, under an agreement reached earlier this month, Exxon and Rosneft will commence their exploration in water depths of 40 meters to 350 meters in the chilly (winter temperatures that plummet to a -50 degrees Fahrenheit) Kara Sea in the Russian Arctic. There's increasing optimism about finding oil and gas in a stretch that begins at Russia's border with Finland and covers about 1,000 miles to the east, with the Kara Sea sitting about in the middle. Another Arctic area thought to contain significant hydrocarbon deposits includes the waters north of Alaska and Canada's Northwest Territories.
Rosneft geologists have estimated that the Kara Sea contains about 36 billion barrels of oil and gas. However, not all Big Oil geologists are inclined to blindly accept the Russian company's scientific conclusions. Indeed, in June Chevron (NYS: CVX) withdrew from an agreed-upon venture with Rosneft to explore a portion of the Black Sea known as Shatsky Ridge. The reasons involved a disagreement over geological assessments and a one-sided appropriation of costs.
In my mind, this experience -- along with Russia's history of sharp-elbowed treatment of Western oil companies -- raises a key question about the likely future of the nascent Exxon-Rosneft partnership: Will the two companies live happily ever after, or, once its considerable technological brains have been picked, will ExxonMobil become the victim of typical Russian autocratic treatment of its foreign partners?
Exxon's just a pinch hitter?
You likely know that the Exxon-Rosneft partnership replaced a pact agreed to in January between Rosneft and BP (NYS: BP) , which was halted by BP's partners in TNK- BP, an 8-year-old 50-50 joint venture between the British company and a group of Russian billionaires. The Russians maintained that BP's hook-up with Rosneft violated the terms of their agreement with BP -- a contention that was agreed to by a London court. When subsequent negotiations among BP, the Russian partners (who operate as AAR), and Rosneft failed to save the day, the January agreement was scuttled.
Those contretemps followed a series of contentious 2008 events wherein Bob Dudley, BP's current CEO and the then-leader of TNK-BP, was forced by his Russian oligarch partners and the country's authorities to steal away from Russia and run the partnership form an unknown location. He later passed management of the entity to the Russians, and the relationship appeared to improve -- at least until January.
Nor have moods improved since BP bowed out of its Arctic deal with Rosneft. Just this month, court officers in Moscow raided BP's offices in the city in a search for documents for a court case that stems from the now caput deal with Rosneft. It appears that the AAR billionaires, along with a group of minority shareholders, are seeking compensation -- possibly in the billions of dollars -- for "damages" related to what they perceive as a missed opportunity in the Arctic.
As The Wall Street Journal noted following the raid, It "suggests that BP's difficulties in Russia are likely to continue despite its efforts to put the fiasco of the Rosneft deal behind it." BP's ongoing difficulties from its relationship with AAR give me pause relative to owning the London-based company's shares, regardless of the direction taken by events stemming from the company's 2010 Macondo tragedy in the Gulf of Mexico aboard Transocean's (NYS: RIG) Deepwater Horizon rig.
Blew them away
But back to Rosneft's lingering need to tap Big Oil's technological expertise and experience in order to enhance its efforts in the Arctic. Once it became clear that its partnership with BP was a nonstarter, the company sought proposals from other large integrated oil companies. Reportedly, ExxonMobil's entry materially outshone those of Royal Dutch Shell (NYS: RDS.B) , France's Total (NYS: TOT) , and Norway's Statoil (NYS: STO) .
In assessing the safety and viability of its new Rosneft pact, there are other items you should be aware of relative to Exxon's history in Russia. First, the company has operated with noteworthy success -- if not always tranquility -- on its Sakhalin-1 project on the remote and inhospitable 600-mile-long island east of Russia and has gotten along adequately with Russian authorities.
That's in marked contrast to Shell, which while operating Sakhalin-2 in 2006, was forced to execute a below-market sale of its operating position at bargain prices to Gazprom, the country's giant gas gathering and distribution company. As but one example of the differing perspective of the two companies' approaches, Dimitri Lisitsyn, the chairman of the local Sakhalin Environment Watch, has noted quite simply that, "Exxon addresses issues much better."
Furthermore, the Exxon-Rosneft deal has another side involving participation by the latter in Exxon-operated deepwater projects in the Gulf of Mexico and onshore Texas. Beyond that the Russian company may become a participant in Canada's 33% ExxonMobil-owned Hibernia project. These offsets to the companies' joint efforts in Russia will seemingly offer Exxon an element of counterbalance to Russian heavy-handedness at home.
During his ascendency up the corporate ladder, Exxon CEO Rex Tillerson completed a stint overseeing the company's Russian activities. His ultimate assumption of the giant oil company's top post may therefore provide some indication of the potential and fragility with which activities on the Russian subcontinent are viewed at ExxonMobil's Irving, Texas, headquarters. Under Tillerson, ExxonMobil has demonstrated a willingness to stand up for what it perceives as its rights: It was the only company to fully contest Hugo Chavez's nationalization of the energy industry in Venezuela.
Finally, rumors are beginning to circulate that Russia intends to construct a $65 billion, 64-mile tunnel linking Siberia and Alaska. Whether this turns out to be true, it's easy to imagine the benefits that would come from hordes of U.S. families piling into their automobiles for Thanksgiving drives to Grandmother Olga's toasty home on the Kamchatka Peninsula.
Obviously the last item is somewhat fanciful. Nevertheless, it should be clear that, for a host of reasons, including ExxonMobil's unique ability to distinguish itself in Russia, the company stands an excellent chance of making its Rosneft deal work to the benefit of both companies. And while things don't occur quickly in the world of international energy, the new partnership nevertheless seems to me to constitute a new reason to include the biggest of Big Oil -- and Big Gas, for that matter -- on your version of My Watchlist.
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