Purpose of the report
This report is prepared for Exxon Mobil Board and US Congressional Oversight Committee for acceptance of the Strategic Cooperation Agreement under which the two organisations plan to undertake joint exploration and development of hydrocarbon resources in Russia, the United States and other countries throughout the world, and commence technology and expertise sharing activities.
Exxon Mobil has formed an Arctic exploration partnership with Rosneft, the Russian state oil company. In return, Exxon, the world??™s largest oil company by market capitalisation, will give the state-controlled Russian group minority stakes in projects in the US Gulf of Mexico, in onshore fields in Texas and elsewhere. The deal underscores international oil companies??™ determination to explore and develop the Russian Arctic, one of the few places in the world with large, untapped oil and gas reserves, and Russia??™s recognition that it needs international help to exploit those resources. (The Financial Times 2011)
Figure 1: Kara sea operation area
The aim is to develop strategic partnership between Exxon and Rosneft in exploration of Russian Arctic and Black sea. This cooperation is as important for companies businesses as it is significant politically for both countries relationship.
First production from Kara Sea blocks to be started in next decade (Market Watch 2011)
Initial step of the project is a $3.2b exploration program on Prinovozemelsky blocks in Kara Sea and Tuapse block in Black Sea.
The Prinovozemelsky blocks of the Kara Sea have been explored using 2D seismic. Estimated recoverable oil resources in the three blocks stand at 6.2 billion tons and hydrocarbon resources at up to 20.9 billion tons of oil equivalent (Rosneft 2011). First exploration well is scheduled for drilling in 2015. Data received from the exploration phase to be analyzed and option for further field development chosen.
Exxon will invest $1b in exploration program in Tuapse block which has also potentially huge hydrocarbon deposits. 2D seismic done by Rosneft revealed approximately 70 prospective structures in a sea depth varying from 1,000 to 2,000 meters.
Exxon and Rosneft agreed to establish a joint Arctic Research and Design Centre for Offshore Development in St. Petersburg.
Benefits and Incentives of Exxon-Rosneft Deal
Exxon gets access to the one of the potentially largest untapped oil and gas reserves on the planet. Fossil fuel is still the dominant energy source in the world and Exxon access to the world??™s largest oil discoveries will help the company maintain leading position in the industry
Russia has no limitation??™s on drilling in the areas of Arctic while it??™s forbidden elsewhere else in this region.
The deal also demonstrates that the “reset” in relations sought by President Barak Obama has worked in reducing significant political barriers for U.S. business opportunities in Russia. Agreement is supported by Prime Minister Putin, which has the Russian government highest level of backing to avoid any political issues. Furthermore Putin announced he will contest in 2012 Presidential elections and putting a public endorsement on the deal shows him as a reformer and is in support of the ???Reset??? project between US and Russia. (NYTimes 2011).
Having watched BP failure of pending partnership with Rosneft earlier this year, Exxon should be able to learn lessons and avoid a few pitfalls.
15 years partnership with Rosneft is a big advantage to Exxon which will help to realize future projects having past experience. Exxon completed Sakhalin 1 project in 2010 on time and on budget.
Exxon-Rosneft deal is not a shares swap deal. Exxon is only providing Rosneft opportunity to participate in six projects. Rosneft access to US resources will not be the first Russian businesses operating in US. For example Lukoil owns approximately 2000 gas stations all over the East Coast, Norilsk Nickel had a big mine in the north of the US, and one of the biggest steel companies in US are Severstal and Evraz.
Rosneft participation in Exxon??™s US and other projects
Rosneft is lacking of technological expertise and Exxon Mobil will help russian company in bringing its deepwater and offshore technological expertise to projects in the Kara and Black Seas as well as allowing to participate in some Texas and possibly Canada projects. The fact that most of the projects Rosneft is going to participate are in exploratory phase showing that for Rosneft it??™s more important to get knowledge rather than financial benefits. Those operations could include two of the industry??™s most contentious oil extraction methods ??” drilling for oil in the deep waters of the Gulf of Mexico and using the so-called hydraulic fracturing, or fracking, technique on land. The Russians want to learn about both types of drilling for use at home. (The New York Times 2011)
??? Open Arctic Research and Design Centre for offshore developments by 2014
??? First exploration well which is scheduled to be drilled in 2015
??? Offshore infrastructure in Kara sea to be developed by 2023
??? First oil from Arctic sea in January 2026
A comprehensive and rigorous appraisal process is important to meet policy, project requirements and standards. It provides an opportunity to fully assess the economic, social and environmental impact of options.
Following conformation of hydrocarbon presence and evaluation of field capacity the following options to be considered:
1. Proceed with development
2. Sell the discover. In which case further valuation will be required.
3. Do nothing.
The ???Do Nothing??™ alternative refers to the option of not implementing the proposed Development. This option would compromise the long term operation of this nationally important gas facility, and is therefore not considered a viable option.
Benefits of ???Proceed to development??? option
??? Exxon Mobil experience. Exxon Mobil is an operator will bring required expertise to the project development. Exxon experience from Sakhalin and other ???Arctic??? location projects. Access to Exxon experts across the group.
??? Work in collaboration with partners to ensure: Country alignment working in partnership with Rosneft??™s
??? In a long term, successful development the one of the world??™s most promising oil & gas reservoirs will help Exxon to hold the leading position in the industry.
This option for development of Kara sea field is based on successful Exxon operated Hibernia project which has the similar climatic conditions and technological issues.
The Kara sea field will be developed using special gravity base structure (GBS) consisting of concrete caisson, constructed using high-strength concrete, reinforced with steel rods and pre-stressed tendons. This structure is supposed to be strong enough to withstand a collision with million tons icebergs. GBS caisson will have up to 1 million barrels of oil storage capacity.
Topsides will include: Accommodation module, Process area, Drilling rig and Utilities.
Transportation and infrastructure
Oil stored in GBS will be exported by means of an offshore loading system (OLS) consisting of subsea pipelines, a subsurface buoy and flexible loading hoses, feeding a purpose-built shuttle tanker. Network of oil transmission pipelines on the ocean floor will be encased in concrete for protection against icebergs passing over. A redundant OLS system will be in place to serve as an auxiliary, in the unlikely event that the other system is damaged.
The other infrastructure supporting the field production will include platform support facilities, shorebase facility, Warehouse Complex facility, transshipment terminal and a remotely operated vehicle.
Identified Areas of Further Research
??? Consider the requirements of the client, potential solutions, feasibility study, objectives and the Exxon??™s capability of delivering the proposed project.
??? Examine different solution options(option appraisal) and present a preferred solution
Understand the rationale, objectives and benefits of the project and detailing the preferred option for the project and ensuring that it meets all the project requirements.
??? Use PID requirements such as Project Scope Definition, Planning, Budgeting, Scheduling, Contracting and Procurement, Risk and Issue Management, Change Management Plan, Quality Management Plan, Safety and the Environment Plan
Project Business Case
??? Examine the business benefits, costs and the risks of the project and demonstrate that benefits outweigh project costs, considering the following: Option Appraisal, Risks, Rationale for the Project including the business benefits ,Contractual provision, Description of the Scope, Estimated costs and Schedule, Investment appraisals, Success Criteria, Identification of constraints, assumptions and considerations.
??? Examine Techniques such as Payback period, Accounting rate of return, Net present value ??“ a discounted cash flow approach. Most preferably the Net present value ??“ a discounted cash flow approach, because it is a superior approach to decision-making, in that it takes account of the ???time value??™ of money. Cash flow profiles are in effect discounted to express them all in terms of their value at the start of the project . Projects are accepted or rejected on their ability to generate a positive return (i.e. a positive net present value) at the chosen discount rate.
High level Business case
Initial investment in exploration phase of the project agreed to be $3.2b. Further investments into development phase are estimated to be between $200b and $300b and $200b to be spent during production. Companies are to agree on how these expenditures to be allocated between them.
Kara sea field contains 36 billion barrels of recoverable oil resource and assuming oil prices for the next two decades stay around $100, generated cash flow after 15 years of production will be $3600b. As it was agreed, Exxon will get 33.3% in the blocks while the rest 66.7% will be Rosneft??™s share. Final Exxon benefit at the end of the project could be $500-600b.
The Field Life Cycle & Cumulative Cash Flows
Project Network Diagram
Table below shows estimation of funds to be allocated by both companies to the project under Exxon-Rosneft financial agreement.
Project Stage Cost $ Funding Period
Gaining Access Phase February 2012 – February 2013
Exploration Phase $3.2b March 2013 ??“ March 2017
Appraisal Phase $1b March 2017 ??“ March 2020
Development Phase $240b March 2020 ??“ December 2025
Production Phase(Opex) $300b January 2026 ??“ January 2040
Project Estimation $534.2b
The table below shows high level activities schedule for the project.
Milestone Duration Start date Finish Date
Start December 2011
Gaining Access Phase 2 years February 2012 February 2013
Final Agreement to carry out exploration in Kara sea December 2012
Collaboration has fully backing of US and Russian government December 2012
Investment agreement for exploration phase January 2013
Agreement to open Arctic Research and Design Centre for offshore developments January 2013
Exploration Phase 4 years March 2013 March 2017
Analysis of Geological history of the area 6 month March 2013 September 2013
Carry out field work(magnetic, gravity, seismic surveys) 2 years September 2013 September 2015
Drilling starts for appraisal wells September 2015 March 2017
Appraisal Phase 3 years March 2017 March 2020
Options selection basing on data from exploration Phase December 2017
Develop technology strategy for selected option March 2020
Investment agreement for development stage May 2018
Prepare PSCM Strategy for selected option March 2020
Development Phase 5 years March 2020 December 2025
Complete engineering and develop work packages for fabrication/construction 10 month March 2020 January 2021
Place order for long lead items 10 month March 2020 January 2021
Conduct Hazard and Operability studies August 2022
Start drilling production wells March 2020 December 2024
Implement PSCM Plan November 2022
Offshore infrastructure construction February 2021 January 2023
Subsea pipeline infrastructure construction November 2022 December 2024
Transportation and installation rigs offshore 1 year December 2024 December 2025
Commissioning activities December 2025
Production Phase 15 years
First oil from Kara sea January 2026
As Exxon experience and knowledge level is much higher comparing to Rosneft??™s, project organization will be formed on basis of crucial positions will be held by Exxon employees. The typical organizational structure will be as follows:
Contracting and Procurement
??? Prepare PSCM plan for selected option
??? Place order for long lead items to allow fabrication and construction activities start on schedule.
??? Implement PSCM plan during development phase
Change Management Plan
Change management is an important part of successful project management. A change management process defines the steps used to identify and make changes to a project including its scope. The elements included in a change management process include the purpose of the change management plan, change control procedures, roles and responsibilities for managing change, a change request form, and a change request log (Collegiate Project Services).
Change request form
Risks and Issues management
There are always risks in partnership with a Russian state-controlled entity, with all the underlying political risks, instability and inefficiencies that are implied.
As Vladimir Frolov, president of LEFF Group, a government relations and PR firm based in Moscow, states in his interview ??? For Exxon, political risk is much reduced compared to what BP faced- there are no Russian oligarchs in the Exxon deal structure. ??? Putin made clear he was the key figure behind Rosnefts deal with Exxon by attending the signing ceremony on Tuesday and saying it would open “new horizons.” (Real Clear World 2011)
Exxon to conduct its business in compliance with Russia??™s legal, environmental, economic and other regulatory systems.
Falling crude oil prices and fears of another global economic recession could potentially impact the project. Another issue could be discrepancy between Russian state policy and American private policies. There will be a lot of difference between a state owned and private facility, but through a clear outlined contract as well as the proper policy market control by a state entity will not affect the market.
Final investment decision delay
There is disparity between Exxon and Rosneft in terms of investment required though both companies seem to agree it??™s very large. (Engineer Live 2011). Russias Prime Minister Putin has suggested that the Exxon-Rosneft deal could ultimately call for the investment of $500-billion — including a direct investment of between $200 billion to $300 billion (Market Watch 2011).
Ice management program to be developed to reduce a risk of ice formations impact to offshore structures.
To design offshore structure that will strong enough to withstand iceberg collision and at the same time be constructible, transportable and economically feasible.
Find a reliable and economical construction method for underwater pipelines/transportation means for extracted hydrocarbons.
Exploration in the arctic area will be done in water depth of between 40 meters and 350 meters, under complicated ice conditions, with winter temperatures as low as minus 50.8 F. The Hibernia offshore project in Canada, in which Exxon Mobil participates, is reportedly similar in terms of its climatic conditions (Market Watch 2011).
Safety and Environmental
??? Global Warming
??? Offshore structures damage by ice packs and icebergs
While drilling is strictly forbidden in the other areas of Arctic region due to environmental concerns, there are no such limitations in the Russia??™s sector of Kara sea. However there remains much risk during exploration, drilling and production. The ice pack and icebergs pose threats to drilling rigs and crews. And if oil were spilled in the winter, cleanup would take place in the total darkness that engulfs the region during those month( New York Times 2011)
??? A full Environmental Impact Assessment (EIA) will be carried out to document the potential physical, biological, social and health effects of planned activity. Exxon-Rosneft will employ the best leading environmental technology at each of their sites. Rosneft and ExxonMobil experts will pay special attention to environmental safety and interaction with the regions indigenous population. Research and Design Center for Offshore Developments. It will be used to monitor and evaluate the impact of each shelf project on the environment as well as monitor and prevent emergencies.
??? A Mobile Emergency Prevention and Rapid Reaction Centre to be formed. Past experiences such as the Valdez Exxon incident in 1989 has left valuable information for spill clean up. Also, this information has improved through out the years to be the leading technology in spill clean up.
??? There have been extreme measures enforced by the Russian government upon heavy industry. This resulted in 30% emission reduction. Russia is open to analyze western environmental practices. Due to the Kyoto protocol ratification, any possible climate consequences have been addressed and will not represent any harm to global climate.
??? TRAMMELL, ELIZABETH. Russian Political Reactions to a Changing Climate: Environmental Cases in the Arctic and Siberian Hydrosphere. Published Thesis, Wesleyan University.
??? THE NEW YORK TIMES 2011. Exxon Reaches Arctic Oil deal with Russians. (Online) : http://www.nytimes.com/2011/08/31/business/global/exxon-and-rosneft-partner-in-russian-oil-deal.htmlpagewanted=all Accessed 15 November 2011
??? ROSNEFT 2011, Russia??™s Arctic Seas. (Online) : http://www.rosneft.com/Upstream/Exploration/arctic_seas/ Accessed 12 December 2011
??? REAL CLEAR WORLD 2011. Analysis: Exxon deal sets stage for Putin return to Kremlin.(Online):http://www.realclearworld.com/news/reuters/international/2011/Aug/31/analysis__exxon_deal_sets_stage_for_putin_return_to_kremlin.html Accessed 9 December 2011
??? ENGINEER LIVE 2011. Exxon Mobil strikes Arctic exploration deal with Rosneft. (Online): http://www.engineerlive.com/Oil-and-Gas- 2011Engineer/Exploration_Drilling/ExxonMobil_strikes_Arctic_exploration_deal_with_Rosneft/23663 Accessed 25 November 2011
??? MARKET WATCH 2011. Wall Street Journal. Rosneft: Exxon Deal Expected to Close in 2012. (Online) : http://www.marketwatch.com/story/rosneft-exxon-deal-expected-to-close-in-2012-2011-08-31 Accessed 10 December 2011
??? THE FINANCIAL TIMES 2011. Exxon and Rosneft sign Arctic deal (Online): http://www.ft.com/cms/s/0/ffa9d962-d319-11e0-9aae-00144feab49a.html#axzz1gPhwEef8 Accessed 10 December 2011
??? REUTERS 2011. Rosneft and ExxonMobil to Join Forces for Development of Arctic and Black Sea Resources, Expand Technology Sharing and Implement Joint International Projects (Online) : http://www.reuters.com/article/2011/08/30/idUS159107+30-Aug-2011+BW20110830
??? OFFSHORE TECHNOLOGY 2011. Hibernia, Canada (Online): http://www.offshore-technology.com/projects/hibernia/ Accessed 12 December 2011
??? COLLEGIATE PROJECT SERVICES. Project Scope & Change Management (Online) http://www.collegiateproject.com/articles/Preliminary%20Change%20Management%20Plan.pdf. Accessed 13 December 2011