The frontrunner to become U.S. Secretary of State, Rex Tillerson, has a long history of pursuing favorable Russian oil deals for his company, Exxon Mobil, including a mega-project in the Kara Sea.

CEO of state-controlled Russian oil company Rosneft Igor Sechin, right, and Exxon Mobil CEO Rex Tillerson shake hands after signing an agreement at the Black Sea port of Tuapse, southern Russia, June 15, 2012. Photo: RIA Novosti 

On Dec. 10, U.S. President-elect Donald Trump expressed his intention to nominate Exxon Mobil CEO Rex Tillerson to serve as Secretary of State. The move is a surprising one, not just for Tillerson’s lack of formal diplomatic experience, but also for his ties to Russia. At a time when the U.S. political establishment has suggested that Trump might be “soft” on Russia, such a pick certainly has the potential to become controversial.

Tillerson has served 41 years as an employee of Exxon Mobil, initially starting as a production engineer and gaining successive management positions. In the late 1990s, Tillerson managed all of Exxon’s holdings in Russia and the Caspian Sea. Due to his business engagements with Russia, a significant relationship developed between Tillerson and the Kremlin leadership. During the presidency of Boris Yeltsin, Tillerson met Vladimir Putin for the first time, during Putin’s service as secretary of the Security Council and director of the Federal Security Service (FSB).

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In 2006, Tillerson was named as CEO of Exxon Mobil, the fifth-largest company in the world by market capitalization. Tillerson focused the company on the development of oil and natural gas assets by utilizing unconventional means to extract them, primarily in the form of hydraulic fracturing, or fracking. Further, Exxon began to engage in international partnerships to obtain new energy resources, developing deals with Australia, the People’s Republic of China and Russia.

One of the most abundant and least developed oil and gas fields in the world is located in the Kara Sea. The Kara Sea is located in Siberia near the town of Novyy Port and Dikson, with an estimated oil reserve of over 35.8 billion barrels and 10.32 trillion cubic meters of natural gas. The only way to extract these resources is to utilize offshore drilling equipment, an incredibly complex technological problem, made even more problematic by ice features prevalent in the Kara Sea.

However, in recent years, the ice features were receding, possibly as a result of global warming brought on by climate change, creating an easier pathway towards oil extraction. The Russian oil industry relies on technology and material imports from countries like Finland, United Kingdom, and the United States to develop offshore drilling and thus, began to seek a partner to extract the resources in the Kara Sea.

In early 2010, the Russian state oil company Rosneft began to look for a partner to develop in the region, which became known as the East-Prinovozemelsky Field. Initially, the intended partner was British Petroleum (BP), with initial financing done by BP. However, internal disputes between BP leadership led to the deal being blocked, and Rosneft was required to seek out a new partner.

In 2011, Exxon Mobil was asked to join the partnership to develop within the Kara Sea, along with Norwegian Statoil and Italian ENI. The projected revenue from the Kara Sea oil and natural gas extraction was estimated to be over $500 billion. The deal was touted as so profitable that the figures were said to be “scary” by the prime minister at the time, Putin.

For Exxon, federal government review was required to engage in a deal with Russia, a seemingly risky venture due to the complexity and policies of Russian business. To avoid some of the securities requirements, Exxon decided that instead of shares, it would exchange land and resource access with Rosneft.

Exxon determined that it would give Rosneft access to several of its assets, including its deepwater zones in the Gulf of Mexico and land-based Texas rigs. The Texas rigs utilized the hydraulic fracturing method that was undertaken by Exxon when Tillerson took the helm. It would allow the Russians to learn how fracking worked and allowed students at the Gupkin Oil and Gas Institute in Moscow to learn about the procedure to engage in it in future oil and gas developments.

It also allowed Russia to diversify international investments beyond its regular partnership with the Chinese. Both of these were essential, as the Russian economy is totally dependent on petroleum, accounting for over 60 percent of its exports.

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The Arctic is essential towards future growth in the oil and natural gas industry; holding the majority of undiscovered or underdeveloped reserves. Mutual exploration and extraction are necessary, a seemingly natural explanation to why the Rosneft-Exxon deal seemed so enticing. There was the mutual gain for both Rosneft and Exxon Mobil; Rosneft would understand hydraulic fracturing and Exxon would learn about the drilling for oil in the Arctic Sea, which could be utilized for future oil drilling in the Alaska region.

The deal was considered to be a profitable result of the what has now become known as the “Russian reset” or the detente between Russia and the United States led by former Secretary of State Hillary Clinton. However, on March 18, 2014, Russia annexed what is now known as the Autonomous Republic of Crimea from Ukraine following a referendum.

As a result, the United States imposed sanctions on Russia, primarily targeting the political leadership and leaders within the oil and natural gas industry. The sanctions directly impacted the deal between Rosneft and Exxon Mobil, requiring them to suspend their billion-dollar operation in the Kara Sea with immediate effect. On September 14, 2014, when the sanctions required Exxon to leave Russia, the first offshore well, known as University-1, struck oil.

Profits from Exxon Mobil began to dwindle, with the stock price steadily decreasing throughout 2014-2015. Further, Exxon regularly failed to meet profit expectations; in 2016, Exxon reported its seventh year of constant profit declines, with quarterly profit dropping by as much as 60 percent. CEO Tillerson attributed the loss to volatility in the markets and said he would intend to offset these losses by “cost discipline” and an advancement of new investments.

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The Russian ruble began to experience a decline, as the sanctions had directly targeted the primary sector of the Russian economy. By the end of 2014, Russia would enter a second recession, resulting in a major decline of the ruble and a new credit rating of Russian bonds to “junk” status.

Further, Russian oil rigs would now require the creation and utilization of indigenous technology to develop oil and natural gas, which in addition to being extraordinary costly, is difficult. An easing of sanctions would likely result in a recovery for the Russian economy, with international ventures creating profitability and increased resources to extract due to the dwindling of Siberian land-based oil.

The nomination of Tillerson as U.S. Secretary of State remains, as it should be, highly controversial. In addition to serving as CEO, Tillerson is the chairman of the Board of Directors, retaining significant personal investment in the performance of Exxon Mobil. It is impossible to know the amount of ownership Tillerson has in Exxon Mobil without a financial disclosure, which, ideally would be requested by the Senate during a confirmation hearing.

However, what is known is Tillerson’s position on sanctions: he remains in strident opposition to the imposition of sanctions on the Russian Federation. As Secretary of State, he would be in a position to lift these sanctions. While an improvement of the relationship with the Russian Federation and the United States would be beneficial, it must be pursued without the Secretary of State obtaining a significant personal financial benefit.

The opinion of the author may not necessarily reflect the position of Russia Direct or its staff.