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Russian Sanctions Lead ExxonMobil to End Rosneft Partnership

ExxonMobil Corp. plans to formally withdraw from what were expected to be lucrative Russian oil and gas partnerships because of U.S. sanctions.

In a Form 10-K filing in late February with the Securities and Exchange Commission (SEC), the Irving, TX-based supermajor said it decided late last year to withdraw from the joint ventures (JV) with Russia’s state-owned Rosneft. The formal withdrawal is expected this year, the filing said.

Under former CEO Rex Tillerson, who now leads the State Department, ExxonMobil in 2011 forged an exploration alliance with Rosneft that included joint exploration and development in North America, including in Texas and the Gulf of Mexico (GOM), as well as in Russia and other countries around the world. The two oil giants also agreed to share technology.

In 2013 and 2014, ExxonMobil and Rosneft established various entities to conduct the exploration and research ventures. Initial funding was earmarked to explore offshore Russia in the Kara and Black seas, considered some of the most promising and least explored offshore areas globally.

Rosneft also was to gain an equity interest in several of ExxonMobil's North American exploration opportunities, including the deepwater GOM and in the U.S. onshore. In addition, the companies planned to work on developing Western Siberia’s tight oil resources.

Another piece of the partnership was designed to create the Arctic Research and Design Center for Offshore Developments in Saint Petersburg, Russia, which was to use proprietary ExxonMobil and Rosneft technology for joint Arctic projects.

However, following Russia’s military intervention in Ukraine in 2014, the European Union and the United States imposed economic sanctions. The U.S. Department of Treasury followed up with sanctions specifically targeting U.S. firms operating in Russia's energy sector. The sanctions were codified and expanded last year.

Because of the sanctions, ExxonMobil has “decided to withdraw from these joint ventures,” it said in the SEC filing. “The corporation expects it will formally initiate the withdrawal in 2018.” The decision to withdraw is expected to result in an after-tax loss of $200 million.

“At year-end 2017, ExxonMobil’s net acreage in the Rosneft joint venture agreements for the Kara, Laptev, Chukchi and Black seas was 63.6 million acres, all offshore,” the filing noted.

The Kara Sea licenses are through 2040 and include exploration periods through 2020 and 2022. Additional licenses in the Kara, Laptev and Chukchi seas extend through 2043 and include an exploration period through 2023.

“The Kara, Laptev and Chukchi sea licenses require development plan submission within eight to 11 years from a discovery and development activities within five years of plan approval,” the filing noted. “The Black Sea exploration license extends through 2020, and a discovery is the basis for obtaining a license for production.”
ExxonMobil has a separate development underway at Sakhalin Island, offshore Russia’s Pacific coast. At the end of 2017 it said it held an estimated 85,000 net acres in the play, which it operates with partners.

According to the filing, a total of 2.1 net exploration and development wells have been completed at Sakhalin, with Odoptu Stage 2 ramping up last year.

“Terms for ExxonMobil’s Sakhalin acreage are fixed by the current production sharing agreement between the Russian government and the Sakhalin-1 consortium, of which ExxonMobil is the operator.”

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