US supermajor ExxonMobil will on Saturday start drilling a controversial well in the Arctic alongside partner Rosneft, according to the Russian government, showing the Texas company is undeterred by sanctions against the Kremlin.
The well, which will be drilled with Seadrill semi-submersible West Alpha, is expected to cost $700 million to drill, Bloomberg reported. It will target the Universitetskaya prospect.
A release from the Kremlin said sanctions-hit President Vladimir Putin and Rosneft chief executive Igor Sechin, as well as ExxonMobil Russia head Glenn Waller will be standing by for the well spud on Saturday, according to Bloomberg.
As Russia’s relations with Europe and the US deteriorated to the lowest point since the Cold War over the conflict in Ukraine, the EU imposed a third round of sanctions last week, restricting the export of equipment used for offshore oil production.
The sanctions do not affect drilling plans at Universitetskaya because the contract to hire the rig was signed before the measures were announced.
"It is an anomaly in the current situation and just how long major western companies, such as Exxon, can carry on doing this, is anybody’s guess," John Lough, a London-based associate fellow at Chatham House, told Bloomberg. "They are light sanctions at the moment in terms of the energy industry."
Developing the Arctic is vital for Russia, where energy provides half the state’s revenue, to maintain oil production near a post-Soviet high of more than 10 million barrels per day.
For ExxonMobil, where output fell to a five-year low in the second quarter, a discovery would offer a vital new source of crude.
Universitetskaya is the first of as many as 40 offshore wells Rosneft plans by 2018 to test the potential of the unexplored the Arctic Ocean.
The geological structure targeted is roughly the size of the city of Moscow and may contain as many as 9 billion barrels of oil, according to a presentation on Rosneft’s website.
UK supermajor BP also has an interest in the well through its 20% stake in Rosneft.
Drilling is expected to take about 70 days.
Longer-term, the sanctions announced last week may start to slow the development of the Arctic shelf, said Edward Chow, a senior fellow at the Center for Strategic and International Studies.
"Sanctions were not designed to stop this, but overall the project is bound to slow down as would all long-term, high-risk projects of this sort until how sanctions are enforced and their duration are clear," he said.
Tensions with Russia will make companies pay more attention to risk, said Richard Mallinson, an analyst at Energy Aspects in London.
"A company could put a lot of money into a country and sanctions could reach the point where you couldn’t carry on, like in Iran," he told Bloomberg. "I'm not saying we're on that path yet with Russia. But from the company's point of view they have to have an eye on what level of risk there is and whether it's acceptable."
Meanwhile, environmental groups raised alarm about the imminent drilling campaign, with Greenpeace Russia saying in a statement that drilling in the Kara Sea "represents the next strategic mistake of the Russian government".
"President Putin himself has said that Russia needs to move away from an oil dependent economy. We would much rather see the president announce administrative and financial support for the existing state energy efficiency programme," the statement said.
"ExxonMobil and Rosneft have yet to make public their oil spill mitigation plans for the Kara Sea drillings. This is an oil accident waiting to happen."