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Our Take: Ending Exxon’s Era in Russia

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Russia hopes to keep the Western exodus from its oil patch in a holding pattern — with one exception. Multiple sources tell us that relations with Exxon Mobil have soured and Moscow wants it out, in contrast to hopes that other investors will rethink exits or return if Russia's relations with the West thaw. A protracted legal fight is possible, but even a swift resolution likely marks the final chapter of Exxon's 26-year run in Russia’s upstream.

  • The breakdown is rooted in the US major’s handling of Sakhalin-1 following its March announcement that it would “discontinue operations” and “develop steps to exit.” The major has reduced output at the 200,000 barrel per day scheme in the Russian Far East to below 5,000 b/d (i.e. minimal operating levels) and is content holding there until a buyer is found. Partner Rosneft — like the Kremlin — is understood to be furious and did not endorse the move.

  • Exxon’s degree of control at Sakhalin-1 is unique in that it can make unilateral decisions given its sole operatorship, via a Bermuda subsidiary. By contrast, the Bermuda-incorporated operating consortium of Sakhalin-2 was jointly held by Shell, Russia's state-controlled Gazprom and Japanese duo Mitsui and Mitsubishi. That allowed Moscow to revise the operator structure and have direct oversight over how the asset and ownership stakes are managed. At Sakhalin-1, the best Moscow could devise was restrictions around how Exxon exits, with a sale requiring President Vladimir Putin’s special permission and a Russian buyer. Exxon is questioning the validity of those restrictions and considering its legal options.

  • Culturally, the standoff is not surprising. Exxon’s prioritization of legal protection over relationships in dealmaking predates the 1998 Exxon-Mobil merger. In particular, Exxon has avoided the pitfalls of peers BP and Shell in Russia by only agreeing on arrangements that heavily insulate it from political risk. It was US sanctions following Russia's 2014 annexation of Crimea, not Moscow’s meddling, that eventually disrupted Exxon's plans.

  • Still, Exxon’s willingness to act unilaterally at Sakhalin-1 speaks to the decline of Russia’s strategic value to the major. Sanctions killed its sweeping joint venture with Rosneft in 2018, but stricter breakeven requirements mean its appetite for Russian Arctic and tight resource development wouldn’t return even if sanctions were lifted, limiting the stakes of its hardline stance. Exxon’s objective now is to make the most of its remaining Russian assets — and that means exiting on its own terms. Investors’ deprioritization of growth offers Exxon strategic breathing room to hold out, while cutting output to minimum levels limits Western government pressure to exit at any cost. Yes, Exxon's initial move to cut Sakhalin production followed a force majeure claim in April. But preserving partner goodwill through the process has not been the priority, sources argue, and both sides appear ready to fully sever ties.

For more coverage of the Ukraine crisis, visit Ukraine Crisis: Energy Impact >

Topics:
Majors, Corporate Strategy , Resource Access, Ukraine Crisis
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