Energy Sanctions Against Russia Could Freeze Exxon's Arctic Drilling

Photograph by Itar-Tass/Zuma Press

Reports from Bloomberg News and the Wall Street Journal indicate that the U.S. will announce further sanctions against Russia by targeting oil companies with joint projects in the Arctic. This spells particular trouble for , which has a $500 billion joint venture with Russia's oil giant to drill for extreme oil in the Arctic.

If new sanctions are announced on Friday, they will hit just weeks after Exxon and Rosneft began drilling in Russia's Kara Sea. Russian President Vladimir Putin reportedly dialed into a teleconference last month to officially launch the drilling, joining the head of Rosneft, Igor Sechin, and the head of ExxonMobil Russia, Glenn Waller, who were together in the Kara Sea. At the time, Sechin called the start of the drilling 'the most important event of the year for the global oil and gas industry' and said that developing the Arctic shelf for oil exploration would have 'a huge multiplicative effect on the whole Russian economy.' The Obama administration is hoping that pulling Western support for big oil projects will have an equal and opposite effect on Russia's economy. This has always been the final shoe to drop in the West's escalating sanction war against Russia over its role in fomenting the conflict in Ukraine this year. For months, the oil industry's ties with Russia have felt odd, given the deteriorating relationship between Russia and the West. Even as the U.S. and Europe went after entire sectors of Russia's economy, targeting its biggest banks, defense, and energy companies, these exploration deals remained intact and began sticking out like a sore thumb. If the West was really serious about punishing Russia, why on earth were our largest oil companies helping Russia tap the key ingredient to its economic power?

'They're long overdue,' says Fadel Gheit, an oil analyst with . Gheit says he spent time with Exxon executives in mid-August. 'They definitely felt this was coming back then. It's been on their radar.'

If enacted, these latest energy sanctions could sever what are arguably the closest ties remaining between Russia and the West. In the two decades since the Cold War ended, Russian and American astronauts have worked together on the International Space Station, and the Russian military has helped the U.S. get equipment in and out of Afghanistan. But the strongest area of cooperation has come in the energy industry, where U.S. oil majors such as Exxon and have entered into a number of joint ventures with Russia's state-controlled energy giants Rosneft and .

The immediate impact won't be felt on Exxon's bottom line or on the amount of oil the company is currently producing. Any oil found in the Kara Sea wasn't going to get extracted for another decade or so. But it does add to Big Oil's big problems of spending more money to find less oil. Shares of Exxon are down about 3 percent since Sept. 5.

This isn't just about Exxon. , which is based in the Hague, has multiple investments in Russia, including ventures aimed at increasing crude output from Soviet-era fields and at exploring some of Russia's shale formations. 'We are continuing to review the latest sanctions to assess the potential impacts on our business, and engaging with the respective authorities to gain further clarity,' Kayla Macke, a Shell spokeswoman, said in an e-mail to Bloomberg News. 'We are taking action to ensure we comply with all applicable sanctions or related measures. We're keeping the situation under close review.'

And perhaps the oil giant left most exposed in this whole deal is , which owns more than 19 percent of Rosneft.

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