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Summary

  • XOM and its partner in Russia Rosneft, commenced oil drilling in Kara Sea on Saturday.
  • XOM doesn’t seem to be bothered about the ostensibly imminent sanctions that would target Moscow’s energy sector.
  • According to the company's Q2 report, XOM’s production touched a five-year low.
  • Kara Sea has more oil than Saudi Arabia.
  • XOM is making sure that it capitalizes on its profit in the coming quarters by significantly enhancing its production.

Last weekend American oil behemoth Exxon Mobil (NYSE: XOM) and its partner in Russia Rosneft, commenced oil drilling. The drilling's start was inaugurated by President Vladimir Putin in a teleconference that involved Rosneft Head Igor Sechin and Exxon Mobil Russia Head, Glenn Walker, both of whom were in Kara Sea as Putin cut the proverbial ribbon. Everything seems to be perfect for XOM, Rosneft and indeed Moscow, just one problem though: the West's sanctions on Russia that are generating a lot of political hullabaloo back home.

Russian Roulette

The ongoing crisis in Ukraine has compelled the U.S. and the E.U. to slash sanctions on Russia. Even though the sanctions haven't engulfed the American and Russian oil companies as yet, but if the crisis exacerbates there might be increasing political pressure on Washington to hit Moscow's nerve centre: energy. This pressure has resulted in a game of Russian Roulette between the U.S. and the E.U. as they individually augment the sanctions list, with the energy sector expected to be under the gun in the near future.

The Americans have put a ban on exchanging fracking related technology, while the E.U. has forbidden selling machinery components pertaining to exploration and production. What has also already come under the gun is financing Crimean oil and gas projects, with the Russians having recently annexed the peninsula from Ukraine.

Even so, XOM doesn't seem to be bothered about the ostensibly imminent sanctions that would target Moscow's energy sector. A look at XOM's Q2 report explains why.

Production Plunge

XOM's recent Q2 report showcased $8.78 billion worth of earnings on $111.65 billion revenue. The 28% increase in earnings as compared to 2013's Q2, was significantly more than what analysts had prognosticated. Even so, what makes these buoyant numbers even more surprising is the fact that they were achieved as XOM's production touched a five-year low.

XOM produced 3.84 billion barrels per day in Q2, which was a 5.7% plunge compared to 12 months ago, and fell short of the 3.96 billion barrel target that the analysts had expected. These are XOM's lowest numbers since 2009's Q3. And with the production touching its nadir, XOM cannot afford to give preference to political statements over exploration opportunities - especially ones that would bear fruit in the long run. Hence, the company looks all set to continue to ignore the Russian sanctions, with Kara Sea promising a historic hike in production.

A History Lesson

Moscow is in need of the latest technology to extricate the opulent hydrocarbons from Siberia and the Arctic Circle. The Kara Sea in particular promises a lot of oil, but the sanctions might spoil XOM's party.

While the company mulls over dodging the sanctions bullet it might look at a small chapter in the history book of Russian firms' relationship with foreign oil companies: the Russian firms don't make particularly memorable partners.

Rosneft was BP's partner not too long ago and the project the two companies were working on, in tandem with other private oil firms, bit the dust owing to infighting among the company's executives. Yukos Oil, which is now incorporated in Rosneft, saw itself go bankrupt up as it went at loggerheads with the government. The company's CEO Mikhail Khodorkovsky had to spend quite some time in jail.

Yup, not a particularly fond lesson if you're a part of the XOM hierarchy, which would be desperately hoping that Washington doesn't throw the proverbial cat amongst the pigeons by earmarking Moscow's energy sector while firing the next sanction bullet in its little game of Russian Roulette. XOM needs to up the ante on oil production, and Kara Sea has exactly that in abundance.

More Oil than Saudi Arabia

Optimistic company has stated that the expected oil reserves beneath the Kara Sea are northwards of 13 billion tons. This makes it more opulent than the Alaska, Canada or the Gulf Mexico. This means that Kara Sea potentially has more oil than Saudi Arabia!

West Alpha oilrig would be doing the drilling in the Kara Sea. Constructed by North Atlantic Drilling of Norway, West Alpha's deadweight is 30,700 tons, which helps it drill wells that are up to seven kilometers in depth.

Kara Sea can not only solve XOM's production dilemma with its 13 billion tons of oil, but it can ensure global energy security by giving Moscow a new perspective. That the perspective would also allow Russian economy to boom like never before, might be a cause of concern for XOM's PR department. In any case, pointing out the global energy security factor might be XOM's go-to play if Washington tightens the noose further on Russian sanctions.

Lucrative Long-term Prospect

XOM's expenditure is expected to touch $38 billion in the next three years, with the company working on 21 new projects, which would add a million oil barrels per day. The Papua New Guinea LNG plant, touched on last week, looks set to add Hides to the P'nyang field in order to halt the company's declining production.

Despite the increasing oil prices, which owe themselves to - among other factors - global political animosities, XOM wasn't able to capitalize and post higher earnings. XOM posted profit worth $22.55 for every barrel in Q2 - the company's highest in six years - and yet it could have made the most of it, had the production level been higher. XOM is making sure that it capitalizes on its profit in the coming quarters by significantly enhancing its production. Kara Sea promises to be the vanguard of oil production for XOM in the years to come.

While the West mulls more sanctions, companies like XOM that have so much to lose in Russia might not be strong buys in the near future. Even so, the amount of oil that the company is expected to extricate from Kara Sea makes riding the sanctions storm totally worth it for XOM. Those looking for a long-term investment would find XOM particularly appealing.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: Why Kara Sea Exploration Is Worth Dodging Russian Sanctions For Exxon Mobil