Is Big Oil Headed for Hypothermia?

It's not a particularly pleasant thought, but one can imagine how at least some of the members of big oil could become buffeted about by both the U.S. and Russian governments.

If you spent time curled up with a hard copy of the weekend Wall Street Journal, you no doubt have been updated on the agreement between ExxonMobil (NYSE: XOM  ) and Russia's big state-run oil company Rosneft to jointly conduct operations in the Kara Sea of the Russian Arctic and the Black Sea. The ventures were agreed to last June and were further detailed last week. Also as part of the pact, Rosneft will begin participating in three areas of Exxon activity in the Gulf of Mexico, West Texas, and Alberta, Canada.

Can you say colder than cold?
The deal demonstrates the extent to which the major oil companies are now willing to go for the possibility of finding meaningful new stashes of black gold. An admitted hockey aficionado, I'm willing to wager that the participants in the current Stanley Cup playoffs would all find conditions in the Kara Sea, for instance, to far exceed their toleration levels. "Frigid" doesn't even begin to tell the tale.

And should the companies chance onto a portion of the estimated 90 billion barrels of oil equivalent thought to exist in the Arctic and Black seas, they'll need to spend a king's ransom, i.e., many billions of dollars, on infrastructure that'll include airstrips, pipelines, and production platforms that'll need to be impervious to marauding glaciers.

The Journal quotes Igor Sechin, Russia's deputy prime minister and energy point man, as saying that the projects "could generate" investments in the $200 billion to $300 billion range during the next several decades. Somehow, it seems likely that Exxon, which will have a one-third interest in the projects, will be socked with a far higher percentage of their costs.

Sharp elbows and broken kneecaps
And then there are the uncertainties of dealing with the Russian government, which has repeatedly displayed sharp elbows in its relationships with the Western companies. Perhaps the most egregious example targeted Royal Dutch Shell (NYSE: RDS-B  ) , which after developing the Sakhalin-2 project on remote and challenging Sakhalin Island several years ago, was forced to sell its operating assets to Gazprom, the big Russian gas operator and supplier, at a bargain-basement price.

Even ExxonMobil CEO Rex Tillerson, who earlier had played a major role in his company's ultimate success in developing the Sakhalin-1 project, said several years ago that Exxon would need "more clarity about how the Russian government will treat foreign companies before it will undertake more projects there." But with the globe's obviously dwindling oil deposits left to be uncovered, you can see how long that contention held up.

And Exxon isn't the only Western major willing to swallow its pride and chance hypothermia and nasty political surprises for a chance at a big Russian find:

  • Chevron (NYSE: CVX  ) , the second-largest of the U.S. majors, agreed early last year to work with Rosneft in exploring the Black Sea's Shatsky Ridge. By midyear, however, the California company had pulled out of the deal, ostensibly because of disagreements over geologic interpretation, but also likely because it was going to be hit with 100% of the exploration costs in exchange for a 33% stake in the operating company.
    Now, however, as my colleague Aimee Duffy told you not long ago, Vladimir Putin has indicated a willingness to at least consider permitting non-state-owned companies to gain controlling interests in Russian projects. So Chevron apparently is back talking to the powers-that-be in the country about Arctic projects. Since there haven't been instances of Chevron officials unknowingly negotiating with their Russian counterparts near live microphones, we'll have to wait and see how those talks eventuate.
  • BP (NYSE: BP  ) also had announced an unusual share-swap agreement last year that would have had it working with Rosneft in the Russian Arctic. But the kibosh was put on that deal by BP's Russian oligarch partners in TNK-BP, its joint venture in that country. That, it should be noted, was far from the first instance of contretemps between BP and its Russian billionaire partners.

So the oil business has become far more challenging and, frankly, more miserable, than in days of yore. In 1901, for example, wildcatters could turn a bit to the right in relatively hospitable places like Beaumont, Texas, only to become showered by oil gushing from what came to be known as the Spindletop.

The Foolish bottom line
On that basis, and given the virtually insufferable conditions in which they now must operate, there's something at least naive about persistent shots at big oil from the Obama administration. I'm referring to comments like the president's charge during his January State of the Union address (and repeated frequently thereafter) that, "It's time to end the taxpayer giveaways to an industry that rarely has been more profitable and double-down on clean energy."

Yes, the major oil companies produce large profits on an absolute basis. But if by "profitable" the president is referring to sizable profit margins, Apple (Nasdaq: AAPL  ) , to name but one example, is three times as profitable as ExxonMobil. It therefore seems appropriate to suggest that Mr. Obama recognize that, among all industrial endeavors, the search for oil and gas is least likely to be mistaken for a walk in the park.

Despite their challenges, however, I'm especially optimistic about the prospects for ExxonMobil, Royal Dutch Shell, and Chevron, all of which are named above. If you'd like another perspective, check out the Fool's free report, "The Only Energy Stock You'll Ever Need."

Fool contributor David Lee Smith doesn't own shares in any of the companies named in this article. The Fool owns shares of Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Motley Fool newsletter services have recommended buying shares of ExxonMobil, Apple, and Chevron. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (2) | Recommend This Article (5)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 24, 2012, at 3:52 PM, brutusmojo wrote:

    The fight to be the first to pollute the last pristine place on earth is saddening enough ,yet the polluters fail to clean up their spills where ever they go .They left Alaska,the gulf,Russia's own back yard in a mess.They don't trust one another enough to the extent that blood would be shed if cooperation in cutting each others throats were not on the table,Not a reassuring endeavor.

  • Report this Comment On April 25, 2012, at 1:15 PM, rfaramir wrote:

    "When buying and selling are controlled by legislation, the first things to be bought and sold are legislators." – P.J. O'Rourke

    The free market and property rights are the solution to pollution. The State interferes and gives immunity for (certain levels) of pollution. E.g., BP operated under the assumption of $75M liability limit on any accident, so no wonder they were careless. Who set that limit (and retroactively retracted it)? The State.

    No State, neither ours nor the Russians' can be trusted to honor property. Assume 'your' development will be nationalized, so put the immovable portion into the State's name to begin with. Most importantly, get your payments up front or you're just tempting them to screw you over.

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