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article imageExxon and Rosneft reach agreement to develop Arctic Ocean

By Lynn Herrmann     Sep 6, 2011 in Politics
Irving - ExxonMobile and state-controlled Russian oil behemoth OAO Rosneft have reached a $3.2 billion deal to develop Arctic and Black Sea hydrocarbon resources, as well as in other countries across the globe, and will share their expertise in technology.
The surprise agreement was signed last week in the Russian resort town of Sochi, in the presence of Russian Prime Minister Vladimir Putin, who said: “The scale of the investment is very large. It’s scary to utter such huge figures,” the New York Times reports.
Although the agreement is considered risky, based on Russia’s past dealings with Western oil companies, Exxon already has a production sharing investment on Sakhalin Island, located on Russia’s eastern coast. 

In one of Russia’s more notorious dealings with big oil, it pressured royal Dutch Shell into selling 50 percent of an offshore development, also near Sakhalin, to Russian state oil company Gazprom, even after Shell had spent more than $20 billion of its own money and other investors, and a decade of time, in building infrastructure for the project.
Under outlines of the new agreement, state-owned Rosneft may become part-owner of certain drilling operations in the US, including deepwater drilliing in the Gulf of Mexico and fracking on the US mainland. The belief is Russia wants to learn the techniques for applications at home.
In a news release, ExxonMobile’s chairman and CEO, who attended the meeting, said: “Today's agreement with Rosneft builds on our 15-year successful relationship in the Sakhalin-1 project. Our technology, innovation and project execution capabilities will complement Rosneft’s strengths and experience, especially in the area of understanding the future of Russian shelf development.”
The new agreement sends yet another signal the oil and gas industry is set to explore and exploit vast reserves of oil and gas located above the Arctic Circle, a region encompassing just 6 percent of the globe’s land mass but the equivalent of around 22 percent of its undiscovered oil and gas.
Thinning sea ice in the region is already allowing the industry to access parts of the Arctic and combined with soaring gasoline prices, has given Exxon, Shell, and Cairn Energy, among others, the incentive for investing billions of dollars in unexplored areas.
Many challenges face the industry for Arctic drilling. Extreme weather and ice floes during winter months will likely be an issue for oil-rig platforms, but most importantly, as the BP oil spill last year in the Gulf of Mexico showed, the oil industry is ill-equipped for dealing with oil spills associated with offshore drilling, especially in the deep waters.
Air strips, villages and ports are hundreds, if not thousands of miles from where some of the drilling would take place. In August, Greenpeace noted that while Cairn Energy’s half-yearly results, recently announced, showed no oil has yet to be found in the Arctic, “the company has neither the technical know how or the cash to deal with an Arctic spill.”
Greenpeace pointed out BP spent $40 billion in Gulf cleanup efforts with its Macondo well disaster, and share prices took a 40 percent hit. By comparison, Cairn’s total worth is around $6 billion.
Marily Heiman, director of the US Arctic Program at Pew Environment Group, the Pew Charitable Trusts’ conservation branch, cautions against the fast pace currently underway by the energy industry. “The Arctic is one of the most dangerous places to drill in the world and we need to have standards in place to prevent oil spills,” according to the Wall Street Journal.
Shell, however, is attempting to allay such cautions by claiming it will have a fast-response plan for any possible accidents. “We could respond to any incident within an hour,” said company spokeswoman Kelly op de Weegh, WJS notes. “Pressures encountered in the Gulf of Mexico are five times greater than what we would encounter in offshore Alaska wells.”
Despite the obstacles and challenges, Rosneft expects the new agreement with Exxon will allow the two behemoths to drill their first exploratory well in the Arctic by 2015, and under an ideal scenario, production there could begin around 2020.
Rosneft said exploratory areas in the Arctic region are estimated to have around 36 billion barrels of recoverable reserves.
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