Exxon gets U.S. sanctions reprieve to shut Arctic oil well

IRVING, Texas (Bloomberg) -- Exxon Mobil Corp. said the U.S. government is giving the company more time to shut its Russian Arctic well beyond the deadline for sanctions aimed at halting the $700 million project.

Exxon asked Washington for an extension to allow it to continue performing shut-down work on the Universitetskaya-1 (University-1) well in Russia’s Kara Sea to make sure the well was safe before it’s temporarily abandoned. The Irving, Texas-based company already had ceased drilling the offshore well after U.S. sanctions set a Sept. 26 deadline for ending the work.

“The U.S. Treasury Department, recognizing the complexity of the University-1 well and the sensitive Kara Sea arctic environment, has granted a license to Exxon Mobil and other U.S. contractors and persons involved to enable the safe and responsible winding down of operations related to this exploration well,” Exxon said in a statement Sept. 19.

The most-recent round of sanctions intended to punish Russia for its involvement in separatist violence in Ukraine barred U.S. and European Union companies from helping Russia exploit oil resources in the Arctic, deep seas and shale formations.

The measures had prompted Exxon and its partner OAO Rosneft to temporarily halt drilling at the well, which lies about 260 ft (79 m) beneath the sea surface off Siberia’s northern coast, according to three people familiar with the project. The well is aiming to tap a resource estimated to hold as much as 9 Bbbl of crude, worth $880 billion at current prices.

More Time

Exxon sought the exemption from the deadline after engineers involved in the project warned they needed more time to properly plug the well with cement and conduct tests to ensure there are no leaks, cracks or faults that could damage the reservoir or allow environmental contamination, according to a source with knowledge of the matter who asked not to be identified because he was not authorized to speak publicly.

Exxon and Rosneft are exploring a geologic formation never before drilled by humans, which means the pressure changes, layer densities and temperatures at various depths are unknown, increasing the risks of unexpected collapses or pressure bursts. For that reason, the engineers closing the well need to map the formation a foot at a time as they back out of the well, a process that can take weeks.

Slowing Progress

The halt at Universitetskaya-1 is a blow to Russian President Vladimir Putin’s quest to find a new generation of oil fields to replace declining output from some of the country’s Soviet-era reserves. The Russian oil industry is dependent on expertise and equipment from the U.S. and Europe to penetrate crude reservoirs that are deeper, denser and more remote than anything they’ve attempted before.

The disruption also is a setback for Exxon as the company seeks to lift production that touched a 4-year low in 2013 as the rate it’s replacing output with new discoveries tumbled to the lowest in half a decade.

Exxon’s $3.2 billion exploration pact with Moscow-based Rosneft is a linchpin of the U.S. company’s bid to spur production and reserves growth in the next decade, said Brian Youngberg, an analyst at Edward Jones & Co. in St. Louis.

‘Enormous’ Potential

“The Arctic drilling potential for Exxon is really enormous,” said Youngberg, who has a hold rating on Exxon shares. “It’s one of the key growth areas they’re looking to post-2020.”

Rosneft’s press office in Moscow declined to comment. Hagar Chemali, a U.S. Treasury Department spokesperson, declined to comment and referred a Bloomberg News inquiry to Exxon.

Exxon is using the West Alpha rig owned by Seadrill Ltd.’s North Atlantic Drilling unit at the Universitetskaya-1 site about 70 miles offshore. The rig departed a Norwegian shipyard in July and sailed around the northern coast of Scandinavia and into Russian territory right before the U.S. and EU prohibited exports of gear for Arctic, deepwater and shale drilling.

Within weeks, the U.S. and EU moved to close loopholes in the sanctions by also banning the export of services such as engineering expertise and geological analysis for Russian Arctic, deepwater and shale projects.

Exxon rose 0.5% to $97.12 at the close of trading in New York. Seadrill fell 4.1% on Sept. 19 in Oslo to its lowest closing price since November 2011.

The measures left untouched so-called conventional oil developments that aren’t part of Putin’s hunt for next-generation oilfields, including the Sakhalin-1 development off Russia’s Pacific Coast managed by Exxon and Rosneft.