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Russian president Vladimir Putin presides over a meeting on July 30, 2014.
Reuters/Alexei Nikolskyi/RIA Novosti
Tougher.

How ExxonMobil swayed US sanctions and strengthened Putin’s hand

By Steve LeVine

Did ExxonMobil gull the Obama administration into bending its sanctions on Russia?

Ten days ago, the oil company obtained a two-week extension on new US and EU sanctions that bar work in the Russian Arctic. The extra time, ExxonMobil said, would allow it to safely shut down the potentially dangerous Universitetskaya well in the Kara Sea. But in a pivotal turn, the company confirmed over the weekend that, while ostensibly winding down, it instead discovered a huge new oil and gas field. The potential volume is 2.7 billion barrels of oil and gas, just short of a supergiant, according to Rosneft, ExxonMobil’s partner.

ExxonMobil’s motivation seems easy enough to understand—it hopes that by the time the ice melts and spring drilling season begins, relations between Russia and the West will have undergone a thaw and it will be able to resume work. In other words, it’s better to know what lies beneath. In the meantime, it can take its time deciding how to proceed with the field’s development.

A boon for Vladimir

The newly discovered bonanza certainly strengthens Putin’s hand. Enacted Sept. 12, the US and European sanctions were intended to intensify pressure on Putin to loosen his grip on Ukraine. Among the instruments was a threat to Russia’s future oil revenues, which account for more than 40% of the state budget.

Instead, ExxonMobil’s discovery, confirmed on Sept. 26, gives Putin a powerful triumph at a time he’s showing no sign of compromise but instead is cracking down broadly—arresting a billionaire oil oligarch, pushing Ukraine to repudiate a political deal with Europe, casting doubt on the validity of Azerbaijan and Kazakhstan oil projects in the Caspian Sea, and reviving a vow to defend Russian speakers in the Baltics.

The development, while largely overlooked by US and European political leaders and the media, is perhaps the most significant turn of events in Ukraine since a ceasefire was signed in early September. Armed with the knowledge that Arctic oil is not a concept but a tangible reality, Putin can start credibly strategizing how to parlay it into national wealth in the next decade and beyond.

For now, Putin will be content to wait out the coming months, and perhaps even longer, with the conviction that the West will ultimately relent. What he will almost certainly not do is threaten to seize ExxonMobil’s stake in the project. At this point ExxonMobil and Rosneft are tangled together like an old married couple: as part of the original 2011 Arctic deal, Rosneft obtained part-ownership of ExxonMobil acreage in Alaska, the Gulf of Mexico and US shale oil fields. Neither Russia nor ExxonMobil would want to risk a divorce and lose out on their co-mingled assets.

ExxonMobil responds

For the record, ExxonMobil denies that it pulled a fast one. Quartz asked the company whether, when it requested the safety extension, it also had in mind finishing the actual drilling and well tests.

“Our application was for a slightly extended compliance period because operations were at a critical stage and additional time was required to safely wind down activity, especially given the sensitive Arctic environment,” spokesman Alan Jeffers said by email.

So, Quartz asked in a follow-up, the discovery was inadvertent and not part of ExxonMobil’s calculus when it requested the extension? Jeffers did not respond.

An alternate view

Another way of looking at the discovery is that even if ExxonMobil was drilling and not winding down, Putin is now likelier to be willing to horse trade since Universitetskaya is a confirmed prospect. If the US government is thinking this way, it’s quite a gamble. Notwithstanding the dearth of evidence that Putin’s knees are wobbling, it appears likely to create new pressure on the US and Europe to cave in.

“If the status quo on the ground holds for the next few months, there will be lots of pressure from European companies to get back to business as usual in and with Russia, and that will in turn create pressure from American companies not wanting to lose out to European competitors,” the Kennan Institute’s Matthew Rojansky told Quartz.

Of course, even if the sanctions are lifted, ExxonMobil may decide not to develop the Russian Arctic right away.

“It strikes me as very expensive oil and gas to produce and transport compared to alternatives, both non-conventional and deep-water, elsewhere in the world,” Richard Kauzlarich, a former US ambassador and member of the US National Intelligence Council, said in an email. “Could Exxon choose to slow-roll the Russians?”

That seems unlikely—part of the deal when working in Russia is that you have to develop your oilfields expeditiously. This fact may have been part of ExxonMobil’s determination to finish drilling Universitetskaya now.