Where do the latest U.S. sanctions leave Russian oil?


The Rosneft headquarters in Moscow. (Yuri Kochetkov/European Pressphoto Agency)

When it comes to bolstering its oil exploration and production, Russia has repeatedly turned to U.S. and other Western companies for help.

More than a decade ago, when Russia wanted to halt the steep decline in many of its older oil fields, it brought in Britain's BP, which revived output.

When Russia’s oil giant Rosneft wanted to minimize the time needed for the construction of a certain kind of drilling well, it turned to the U.S. company Halliburton, which figured out how to shorten the time from 38 to 30 days and to reduce the cost of drilling fluids by 20 percent.

And when Rosneft needed expertise to explore for oil in Russia’s Arctic waters, it turned to Exxon Mobil, the U.S. oil and gas corporation. In February 2013, Exxon Mobil and Rosneft said they would explore 150 million acres of the Russian Arctic, including seven blocks in the Chukchi, Laptev and Kara seas. These blocks are among the most promising and least explored oil prospects in the world.

On Tuesday, the Obama administration moved to choke off the flow of U.S. technology for Arctic and shale oil exploration in Russia, the country's next hydrocarbon frontiers. The Commerce Department announced that its Bureau of Industry and Security would “institute a policy denying export, reexport or foreign transfer of certain items for use in Russia's energy sector that may be used for exploration or production from deepwater, Arctic offshore, or shale projects that have the potential to produce oil.” The European Union adopted similar sanctions blocking the flow of oil industry technology.

"Even a year ago, western collaboration with Russia on developing oil and gas was one of the few bright spots in an increasingly dour relationship and now that’s under pressure," said Daniel Yergin, vice chairman of IHS, a consulting firm, and author of "The Quest" and other energy books. "What happens on the energy side is hostage to the overall deterioration in the relationship and the stand off."

How big an impact the Obama administration's latest actions will have depends on how strictly the Commerce Department applies the sanctions. As the department stated: "While these sanctions do not target or interfere with the current supply of energy from Russia or prevent Russian companies from selling oil and gas to any country, they make it difficult for Russia to develop long-term, technically challenging future projects."

The U.S. sanctions have been tailored to gradually ramp up pressure on the Russian economy — without raising the international price of oil by taking any oil production off the market. J. Robinson West, a senior adviser at the Center for Strategic and International Studies, said it would be best to use sanctions as "a scalpel not a meat ax." He said it would be best to force companies to defer projects and to "avoid any impact on existing production."

Exxon Mobil said Tuesday that it was still trying to figure out whether it will be forced to halt its Arctic venture. Analysts are expected to press the company in its quarterly earnings conference call Thursday.

The new sanctions could also affect the business of oil service companies such as Halliburton, Schlumberger and Technip and oil giants such as Exxon Mobil, BP and Shell, which use their services. These companies have been involved in a wide array of highly technical activities. Schlumberger, for example, said in April that it had helped Russia locate oil in complicated reservoirs in western Siberia by dropping its sophisticated sensors down a well hole.

To some extent, Rosneft has already been girding itself for sanctions. Just a couple of days before the U.S. sanctions announced in mid-July, Rosneft completed a deal to buy the Russian operations of Weatherford, a major international oil services firm.

Pavel Molchanov, an oil analyst at the investment firm Raymond James, believes the sanctions will have "minimal" impact. "Even from a multiyear perspective, the new rules are highly unlikely to be game-changing," he said. "This is partly because of how narrow the rules are, but also because Russia has fairly well-developed capabilities in energy technology/infrastructure (though admittedly not much when it comes to unconventionals)." He says that oil service companies will be able to continue to do business as long as their equipment had been previously contracted. That might protect Exxon's Arctic exploration and drilling in Russia's massive Bazhenov shale region.

Molchanov also says that it is ironic that the new U.S. sanctions on technology apply only to Russia's oil sector, leaving the natural gas sector alone. It is the natural gas weapon that Russia has used to pressure Ukraine, yet the E.U. is still reluctant to target the gas sector when Europe relies on Russia for 30 percent of its gas needs.

The new sanctions could put a crimp in a variety of technical cooperation projects — unless they are exempted because they are already in progress. In June 2013, Exxon Mobil and Rosneft agreed to develop oil exploration technologies at a new Arctic Research Center to help their joint venture to search for oil in the Russian Arctic. At the time, Exxon Mobil chief executive Rex Tillerson said it “will provide the Rosneft and ExxonMobil joint ventures a full range of research, development and technical services, with near-term focus on the Kara Sea.” In February, Halliburton inked a partnership agreement with Gubkin Russian State University of Oil and Gas for the development of unconventional resources in Russia, including the Bazhenov shale. Russia's shale prospects are considered among the best in the world,

For now, Russia can shrug off some of the sanctions. Russia's existing oil and gas sector remains enormous and prosperous — especially with high international prices for oil and natural gas, the sector dominates the Russian economy. The U.S. Energy Information Administration says that sales of oil and natural gas "accounted for 68 percent of Russia's total export revenues in 2013," based on figures from Russia's Federal Customs Service. The EIA added that "oil and natural gas activities make up a large portion of Russia's federal budget. According to the Ministry of Finance, 50 percent of Russia's federal budget revenue in 2013 came from mineral extraction taxes and export customs duties on oil and natural gas."

Whether the dominance of energy in Russia's economy is a strength or a liability remains to be seen.

Steven Mufson covers energy and other financial news.
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