Exxon Readies for Arctic Gushers with Rosneft Deal

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Exxon Mobil

Exxon Mobil (NYSE:XOM) and OAO Rosneft will look to explore the Russian Arctic in 2015 with production expected to start in the beginning of the next decade. [1] The $2.2 billion deal allows Exxon to participate in the exploration in the East-Prinovozemelsky licensed block, which is estimated to hold some 36 billion barrels of oil. The Arctic region is one the few remaining regions where large untapped reserves remain, and oil and gas exploration majors other than Exxon like BP (NYSE:BP), Statoil (NYSE:STO) and Royal Dutch Shell (NYSE:RDS) are also looking to explore the region that is bordered by several countries including the U.S., Canada, Norway and Russia.

We have a $93 price estimate for Exxon Mobil which is a 25% premium to its current market price.

The Arctic challenge

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The Arctic region which is estimated to hold approximately 400 billion barrels of oil – 22% of the world’s undiscovered reserves – has become the latest hunting ground for exploration firms looking to offset declining production rates and benefit from high oil prices. [2]

Extreme temperatures, remote locations far removed from human habitat and a melting permafrost are just some of the challenges that make exploration in the Arctic such a daunting challenge. The reserves that can be recovered economically from the East-Prinovozemelsky will depend on a variety of factors including the cost of production and the future pricing of oil.

Although the drilling for the Exxon-Rosneft project will be carried out at a depth 40-350 meters below sea level that is much more shallow than the depths encountered in Ultra Deepwater exploration in the Gulf of Mexico, complicated ice conditions and temperatures that go below -50 degree Fahrenheit in winters complicate matters. [1] Exxon however has some experience in dealing with similar conditions in its operations in the Canadian Hibernia project which has been in production since 1997. [1] [3]

Exploration in Alaska on the cards as well?

In addition to drilling in the Arctic, Exxon and other oil majors are hoping to receive permits for new projects in Alaska and the Gulf of Mexico. We recently discussed this in an article titled Oil Majors Wait for Permits to Drill in Alaska, Gulf of Mexico.

Royal Dutch Shell has already received partial approval to drill 10 wells in Alaska although it still needs additional permits to begin operations. [2] Further exploration in the Arctic and Alaska has met stiff opposition in the U.S. where environmental groups have raised concerns over the ability of energy companies to contend with an oil spill in the extreme conditions of these regions.

The government is walking a thin line trying to address environmental concerns with suitable regulation while also looking to boost employment and falling production among oil and gas majors like Exxon and BP by allowing new exploration projects.

Northern Alaska, the Artic and the Canadian Northwest are believed to hold massive oil deposits where exploration can help oil firms boost reserves and production rates in the long term. [2]

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Notes:
  1. Exxon, Rosneft Drilling to Begin in 2015, The Wall Street Journal [] [] []
  2. Arctic Riches Lure Explorers, The Wall Street Journal [] [] []
  3. Hibernia, Jeanne d’Arc Basin, Canada, Offshore Technology []