Exxon Expands Russian Foothold

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ExxonMobil Corporation (XOM) has formed an alliance with Russian State-owned company OAO Rosneft to develop tight oil reserves in Western Siberia and establish a joint Arctic Research Center for offshore developments.

This move is part of a $3.2 billion agreement that was inked between the two companies for joint exploration in the Arctic and the Black Sea. The latest accord will expedite the companies’ efforts to develop oil reserves in tight, low-permeability formations in Western Siberia utilizing technology − horizontal drilling and hydraulic fracturing, or fracking − that ExxonMobil has already deployed in unconventional oil and gas formations in North America.

The partnership is also an addition to a technical research program the duo signed in April. That program allowed Rosneft to explore North American unconventional sources as well as gain access to the know-how for developing unreachable resources.

In the near future, Exxon and Rosneft will approve geological studies and drilling for selected Rosneft license blocks that include the Bazhenov and Achimov reservoirs. ExxonMobil will contribute geological studies and exploratory drilling, expected to start in 2013 and will own about 33.33% in a potential development phase. Rosneft will have the remaining 66.67% interest.

In recent years, the U.S. energy behemoth has been busy in tapping hydrocarbon deposits in the shale rock formation. An unconventional source of energy, tight oil, is similar to shale deposits and is locked in rock formations that must be cracked open to exploit oil reserves. In the past few months, Eni SpA (E) and Statoil ASA (STO) have also showed interest with Russian companies for the development of Arctic fields.

As an effort to strengthen its grip over unconventional oil and gas development across the globe, ExxonMobil is examining shale gas prospects in China and is in talks with a couple of Chinese national oil companies. The discovery of shale in China is expected to have as big an effect as it had in the U.S. The company is also exploring shale oil and gas in Germany and Argentina and is also expected to develop tight oil in Colombia.

With the XTO acquisition, ExxonMobil is enjoying access to significant unconventional resources and is now getting a major handle on North America's newest energy discoveries. It will help the company to look forward to the growth of natural gas in expanding its share of the world's largest energy market. The company is gaining its foothold in Canada, Argentina and Poland.

In a separate pact, ExxonMobil and Rosneft also decided to establish a joint Arctic Research Center for offshore developments. The center will facilitate all stages of oil and gas development on the Arctic shelf, comprising design of ice resistant offshore vessels and pipelines, ice monitoring, logistics and safety.

ExxonMobil holds a Zacks Rank #3, which is equivalent to a Hold rating for a period of one to three months. Longer term, we maintain our Neutral recommendation on the stock.

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