The alliance between Exxon Mobil (XOM) and Russia's Rosneft (ROSN) is yielding results that could boost future stock values. The American oil giant has agreed to help Rosneft develop a means of getting oil from tight formations in Siberia.
The two companies think that they could get up to 13 billion barrels of oil from tight underground rock formations. The oil would be extracted by a means similar to the fracking processed to extract natural gas from similar formations in the U.S. The agreement was signed in a ceremony that included Russian President Vladimir P. Putin, Exxon Mobil CEO Rex Tillerson, and Rosneft President Igor Sechin.
The deal could be a huge win for Exxon shareholders because the place they want to drill, the Bazhenov shale formation in Western Siberia, could hold as much oil as half of the U.S.'s reserves. Putin thinks that Bazhenov is similar to the Bakken shale formation in North Dakota.
This deal could boost Exxon's future revenues in three ways. First, it allows Exxon to establish a presence in the nation that is the world's second largest oil producer. Second, it gives Exxon a huge new oil field just north of the world's largest economy and fastest growing market for autos, China. Third, it puts Exxon in a position to develop an even better tighter extraction technology that it can use for exploration and development elsewhere in the world.
This is the second biggest deal that Exxon has made with Rosneft in less than a year. Last summer, Exxon signed an agreement that gave it permission to explore for oil in the areas of the Arctic Sea that was controlled by Rosneft. In exchange for those rights, Exxon-Mobil gave Rosneft access to some of its assets, including deep water areas in the Gulf of Mexico and land in Texas.
The deal signed last summer gave Exxon permission to explore and drill in Arctic waters, something it cannot do in waters off Alaska or Canada. The New York Times reported that Exxon will invest $3.2 billion in that deal. Last year's deal came after a similar deal between Rosneft and BP (BP) fell apart.
The Siberian fracking deal is less riskier than the Arctic Deal because Exxon and Rosneft should be able to put the Bazhenov wells into production in the near future. That means the company should be able to start producing more revenue from the deal within a few years.
Exxon could also save quite a bit of money by developing Bazhenov because it can take advantage of old wells drilled by the Soviet government in the 1950s and 1960s. Those wells no longer produce, but they could be put back into production by using Exxon's advanced technology.
OPEC Production Up
The Organization of Petroleum Exporting Countries (OPEC) agreed to put a ceiling of 30 million barrels a day on its oil production. This move probably will not affect oil prices because OPEC's production actually exceeds 30 million; analysts estimate that member nations produce around 31.6 million barrels a day. Most of them doubt that the cartel's members will actually adhere to its agreements.
That means OPEC production should remain high, which should keep oil prices lower. That, of course, could lower some oil stock prices, and it also may mean that OPEC is now irrelevant in the world of oil. It can no longer affect the prices or the supplies than in the way it did in the past. That could create a more stable market, which should be better for smaller oil producers.
Andarko Strikes Gas off Mozambique
Andarko (APC) has found a second major natural gas field off the coast of the island of Mozambique, which is the giant island located in the Indian Ocean just off Africa's east coast.
Reuters reported that the amount of recoverable gas Andarko has located off Mozambique could be between 30 and 60 million trillion cubic feet. That means the field could conceivably supply Europe's gas needs for a year. This field would put Andarko in an excellent position to supply gas to South Africa, East Africa, Saudi Arabia, and India. Saudi Arabia has no natural gas or coal, so it has to burn oil to generate electricity. That means the desert kingdom would be a natural customer for this gas.
The new field known as the Atum-Golfinho complex is located in a block completely owned by Andarko and its partner, Cove Energy (CNVGF.PK). This move has made a Cove a takeover target. Shell (RDS.A) has made a $1.8 billion offer for Cove. Shell has competition for Cove from Thailand's national oil PTT Exploration and Production (PTTE), which has made its own offer for Cove. Cove's shareholders have until June 27 to decide whether to take the offer.
This find should boost Andarko's stock values and profits because East Africa and Mozambique are considered major new gas fields. Several large international energy companies, including France's Maurel et Prom (MAUP), Exxon Mobil, and Statoil (STL), are also active there. Exxon and Statoil have found a major gas field off the coast of the nearby nation of Tanzania.
Andarko has found itself a huge new stream of revenue in the waters off Africa. It should be noted that it will take several years for Andarko and Cove to develop the field. To exploit it, they will need a means of getting the gas to market, which means the building of facilities to liquefy the gas and load it onto tankers in East Africa or Mozambique. Since the nations there are among the world's poorest, that will cost a lot of money.
Pirates Could Thwart Gas Field Development
This, of course, could expose all the companies involved in the area to some huge potential losses. The situation could be made worse by the fact that these waters are just south of the area off Somalia that has been infested with pirates. International naval patrols have failed to stop or control the pirates, who are now active as far north as the Persian Gulf.
If the pirates were to start targeting gas rigs or exploration ships, they could seriously disrupt gas field development. One successful pirate attack on a gas rig could send shares in companies invested in the area plummeting. Smaller companies like Anadarko and Cove would be at a bigger risk from such an event.
It could also increase expenses because energy companies might have to hire their own security forces or pay local navies to protect gas rigs. Either option would cost a fortune. Even paying local navies would be costly because the oil companies would probably have to pay to train their crews and replace whatever World War II surplus ships they are using.
It should be noted here that international military forces could quickly end the piracy by shelling or bombing the pirate bases. The U.S. could also quickly crush the pirates with drone attacks, such as those which have disabled Al Qaeda. Such aggressive action is unlikely unless the pirates commit an outrage, such as the murder of large numbers of people, so it is likely that pirates will be a major problem for the companies trying to develop East African gas.
The developments in Russia and East Africa show how truly global and complex the energy business has become. The political influence of companies, such as Exxon Mobil and Anadarko, could now be as important to stock values as their energy reserves.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.