ExxonMobil Pins Hopes of Production Growth on Russia

Oil and gas giant ExxonMobil (NYSE: XOM  ) has been aggressively expanding into Russia in order to combat its sustained production declines, which have been an issue for the past half decade. Since 2009, ExxonMobil's production as measured in barrels of oil equivalent has decreased by 7.8%. This is a serious problem for the company because the amount of products that it is producing and selling is decreasing rather than increasing. By expanding into Russia, ExxonMobil hopes to undo this problem.

Why Russia?
So, why would ExxonMobil expand into Russia and not some other country? Well, one reason is that Russia is incredibly blessed when it comes to oil reserves. According to the Energy Information Administration, Russia had total proven oil reserves of 80 billion barrels at the beginning of 2013, the largest in the world. In addition, the Arctic waters off of the coast of Siberia are believed to contain more than 200 billion barrels of oil equivalent.

Russia also has enormous amounts of shale oil and gas that completely dwarf anything in the United States. Some estimates put the total amount of oil contained in Russia's giant Bazenhov formation at nearly two trillion barrels. This is four to ten times the amount that the highest estimates put in the Bakken shale, although estimates for both formations vary greatly. Regardless, Russia is by far the nation with the largest oil reserves in the world, and so just about any growth plan of any large oil producer needs to include the giant nation.

Sakhalin-1 Project
One of ExxonMobil's growth projects in Russia is the massive Sakhalin-1 project located in the Russian Far East. This project consists of the development of three oil and natural gas fields -- Chayo, Odoptu, and Arkutun-Dagi -- which are located off of the northeastern coast of Sakhalin Island.

Sakhalin Island is a large island that is located to the north of Japan and just off of the east coast of Russia.

Source: ArcticEcon

This project faces some challenges because of the local climate. While the southern part of Sakhalin Island is cold and humid, the northern part where the oil and gas fields are located is a sub-Arctic climate. The temperatures vary more in this type of climate than in any other, which means that ExxonMobil needs to use specially built equipment such as the rigs owned by North Atlantic Drilling (NYSE: NADL  ) in order to develop these fields. This type of harsh weather equipment tends to be much more expensive than comparable equipment that has not been designed to operate in these extremes.

As with most oil and gas development projects, the Sakhalin-1 project will be carried out in phases, meaning that the resources produced here will grow over time. For example, the first commercial production from the Odoptu field began in 2010 and has been steadily ramped up over time. Production from the Arktun-Dagi field is scheduled to begin this year. As this new production begins to come online it will help to offset the company's declining production elsewhere.

Laptev Sea
ExxonMobil has also teamed up with Russia's oil giant Rosneft to explore and develop two oil-rich reservoirs in the Laptev Sea, Anisinsk-Novosibirsk and Ust-Olenksk. These two reservoirs are located in the Russian Arctic and so have a good chance of yielding very large amounts of resources due to the richness of the area. If the two companies do discover rich resources in the area, as is likely, then this will be accretive to ExxonMobil's reserves and future production once the two companies begin developing and producing from them.

Foolish takeaways
In conclusion, ExxonMobil's business activities in Russia are crucial for the company in order to reverse its long-term trend of declining production. Through its strategic partnership with Rosneft, the company has access to the country's enormous Arctic oil reserves. Despite the current sanctions on Russia, ExxonMobil remains committed to developing these resources, as it must be in order to return to a growth trajectory.

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