Exxon Mobil deal with Ukraine factors in Russia’s Crimea policy

The August 2012 awarding of rights to develop a major natural gas find in the Black Sea near Crimea to a consortium led by Exxon Mobil and Royal Dutch Shell may have strongly predisposed Russia to support the referendum which resulted in the reunion of Crimea with Russia. The Skifska gas field is estimated to hold recoverable gas reserves in the range of 200-250 billion cubic meters. The field is likely to produce five billion cubic meters of gas annually once developed.

The Skifska gas field was not the only reason for Russian support of the referendum – NATO threats to the Black Sea Fleet base at Sevastopol and the possibility of NATO nuclear weapons being stationed on Russia’s borders, as well as the coup which brought virulent nationalist and neo-nazi political parties to power and threats to the Russophone population of Crimea and eastern Ukraine, were the primary reasons. However, it was certainly a major consideration.

A consortium of Exxon Mobil, Royal Dutch Shell, Romania’s OMV Petrom, and Ukraine’s state oil company, Nadra Ukrainy, outbid Russia’s OAO Lukoil Holdings to gain access to the field. A predetermined condition of the tender required the winning group to compensate the government with 2.4 billion hryvnias (roughly $300 million) subsequent to signing the 50-year production sharing agreement. This payment to the Ukrainian government has been lost by the investors as a result of Crimea’s nationalization of the field and the Crimean companies who originally held the rights.

Russia intends to use Gazprom – the Russian firm which is the world’s largest natural gas exporter – to develop the off-shore gas reserves of Chornomornaftohaz and Ukrtransgaz, two firms nationalized by the Crimean parliament which held the rights to the Skifska field before the auction. By reuniting Crimea with Russia, Russia gained control of about 70 percent of Ukraine’s Black Sea off-shore oil and gas drilling rights.

The Skifska deal paralleled the deal which doomed the economic fortunes of Russian oligarch Mikhail Khodorkovsky, who tried to sell a controlling interest in the Russian Yukos oil company to Exxon Mobil in 2003.  The government of President Vladimir Putin reacted decisively to the proposed deal which would have put Russia in the position of paying Exxon Mobil for its own oil.  Khodorkovsky was prosecuted in 2003 for fraud and tax evasion, and in 2010 for embezzlement and money laundering.  He was amnestied by the Duma in 2013 after serving ten years in prison and permitted to go abroad.

Revenue from the Skifska field will easily allow Russia to weather any Western economic sanctions, as Russia moves to concentrate oil and gas exports in Asia and away from Western Europe, focusing on expanding ties to the Shanghai Cooperation Organization as it completes a major pipeline terminating on the Pacific. 

Control of the Skifska field also tightens Russia’s hold over Ukrainian access to gas and oil.  Sixty-five percent of Ukraine’s natural gas is currently imported from Russia, and Russia has indicated that it intends to charge the new government in Kiev full market price for gas and oil exports, as well as to press Ukraine for repayment of more than $50 billion in debts to Russia since the fall of the Soviet Union.

Photo: Crimeans celebrate reunification with Russia. AP