To Russia With Love For Exxon

Todd Shriber
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In a final stinging blow to rival BP, Exxon Mobil, the largest U.S. oil company, is teaming up with Russian counterpart OAO Rosneft to explore the oil rich Kara Sea in the frigid Russian Arctic region. Shares of Dow component Exxon traded fractionally lower today, but it is still reasonable to say this is very good news for Exxon. All one needs to do is remember how desperate BP was to see its partnership with Rosneft take flight.

So desperate was BP (BP) that it was willing to part with a 5% equity stake for the privilege of extracting oil from the Kara Sea. For its part, Exxon (XOM) is replacing BP in the Arctic alliance with far better terms. Rosneft will not become a major Exxon shareholder.

Rather, Russia's largest oil company will receive interests in various Exxon projects throughout the world, including some in the Gulf of Mexico. That means Rosneft becomes the first Russian firm to develop U.S. oil and gas assets, though this should not be a problem for regulators as Chinese companies currently hold stakes in some U.S. shale plays.

To say this is a feather in Exxon's cap is an understatement. It was not just BP that wanted to dance with Rosneft. When it became apparent that BP would not be able to make its Russian dreams come true, Royal Dutch Shell (RDS-A) and Chevron (CVX) were also viewed as possible replacements for Rosneft. So in effect, Exxon did not trump one rival, it trumped three.

Exxon and Rosneft agreed to terms on a $3.2 billion project, but Russian Prime Minister Vladimir Putin said the partnership could result in $500 billion in investments over time. That is more than the current combined market caps of Exxon and BP. As is always the case with these types of deals in the oil sector, it is all about potential, but the potential does jibe with the cost for Exxon.

Not only is Exxon fighting to hold onto a 1 billion-barrel field in the Gulf, analysts and investors have voiced concern over the past year that the company's reserves are growing because of natural gas production, not oil. A jaunt to the Russian Arctic could change that. By BP's own estimate, the three blocks in the Kara Sea that are part of the now Exxon/Rosneft accord may be home to 100 billion barrels of oil equivalent, Bloomberg reported.

Now you see why BP was so desperate to get this deal done and why it has the potential be a significant for Exxon going forward. On the surface, it appears to be a win-win for Rosneft and Exxon.

Rosneft gets the reliable, far less controversial partner it craved. There will be no drama with Exxon on par with what Rosneft had to endure with BP. And Exxon gets access to one of the last great untapped oil resources in the world. Again, on the surface, it is a winner. Then again, what really matters is what is below the surface, the surface of the Kara Sea.

Todd Shriber