Experts Weighing All The Pros & Cons Of Pending U.S. Sanctions On Russian Oil & Energy Sectors

Fuad Muxtarlı Analysis 4 March 2019
Experts Weighing All The Pros & Cons Of Pending U.S. Sanctions On Russian Oil & Energy Sectors

On 27 February, the US Congress made public a draft law on new sanctions against Russia. If the law is adopted, Russia is unlikely to be able to extract as much oil as now. Russian oilmen will be unable to buy, lease or obtain by other means the goods, services, technologies or financing that are used in oil extraction costing over 1m or 5m dollars a year.

The sanctions will not affect projects that are already working. Their list and schedule of banned goods, service and so forth will appear within 90 days of the law's entry into force.

In 2018 Russia provided 11.5 per cent of the extraction and 13 per cent of the export of oil in the world. EU and US sanctions similar to those now proposed by US Congress have been operating since 2014, but relating only to projects on the Arctic shelf, deep water projects and deposits with hard-to-recover reserves.

The sanctions had a powerful influence on the oil sector, Vedomosti's interviewee from a major oil company admits. The new ones will hit, but not like the previous ones. Russia has already managed to find import replacements for critically important extraction technologies in on-shore sectors. "In the other cases, we are resolving the issue," he says.

"The oil companies have already adapted to the U.S. sanctions, they are not influencing the oil sector," an Energy Ministry representative agrees. If the new sanctions package is adopted, it will not have an influence either.

Experts are also pessimistic. Sanctions in the form in which they are described in the draft law will put Russia's oil industry in a dangerous position, BMS Law Firm partner Denis Frolov believes, although much will depend on interpretations: at the moment everything can be subsumed into the sanctions, from software to equipment and pipes.

Unlike the 2014 sanctions, the new ones extend to all the oil projects in Russia, which will have a bad impact on extraction, a Moody's vice president says. "This may lead to a technological lag and an increase in costs and will make the exploitation and reproduction of reserves difficult in the medium to long-term."

The new sanctions could become a source of big problems for both the oil companies and their international contractors, Dmitry Marinchenkov, director of the Fitch Corporations Department says. "The important thing is interpretation: what to consider a new project. In theory, it is not only new fields that may come under sanctions, but also the next phases of current fields."

Russia is not so heavily dependent on foreign money now and will be able to get by using its own means, he believes. Russian companies have not yet learned how to carry out complex work: directional drilling, hydraulic fracturing and so forth, without international oilfield services companies such as Schlumberger or Halliburton and this is specifically what stabilized extraction from mature fields and enabled new ones to be exploited effectively. "Within a few years the oil companies may encounter the problem of falling extraction," Marinchenkov says.

Theoretically, the proposed sanctions also affect new oil extraction projects planned for commissioning and the intensification of extraction at existing fields, Tatyana Mitrova, director of the Skolkovo Moscow School of Management Energy Centre, believes, and then the sanctions will have a powerful influence on extraction and export.

"The key risk is technological sanctions. Hard-to-recover reserves accounted for around 20 per cent of extraction in 2018 with a further 40 per cent represented by reserves with a water content of over 80 per cent," Darya Kozlova, Vygon Consulting director for the state regulation of the fuel and energy sector, says.

"Their exploitation requires the drilling of complex wells, foreign contractors are often recruited and foreign technologies and software are used." But new projects - Eastern Siberia, the Arctic and offshore areas - are also technologically complex, she says. "A large part of new extraction, or 45-50 per cent of all extraction by 2030-35, is now under sanctions risks."

But even without sanctions Russia faces a fall in extraction unless the oil sector is given preferences, Energy Minister Alexander Novak says. By 2035 it will be 310m tons.

The U.S. draft law prohibits investment in Russia's LNG projects abroad. Thus, any operations connected with LNG could be affected by the draft law, a TA Legal Consulting partner says.

The sanctions will most probably affect only LNG export projects, that is, gas liquefaction plants, Maria Belova, Vygon Consulting research director says, commenting on the draft law: these are Etinde in Cameroon, where Lukoil owns 30 per cent; the Rosneft and ExxonMobil partnership in Mozambique and also Gazprom's possible participation in LNG projects in Iran which have already been complicated by US sanctions against Iran.

The draft law envisages measures against Russian energy projects in other countries worth from 250m dollars which are supported by Russian state or quasi-state organizations.

Foreign projects are a significant part of Rosatom's work. In 2017, they generated revenues of 6.1bn dollars. The state corporation is building 36 power units in 12 countries and Rosatom has foreign orders for 10-year-worth 133,5bn dollars in 2017. Aleksandr Pakhomov, managing partner of the company Pravo i Biznes, believes that sanctions against Rosatom are unlikely: in the United States the nuclear power industry is regulated by special legislation.

Quotas on the import of Russian uranium into the United States were introduced in 2014 and have gradually been raised; they will be abolished in 2021. But if the sanctions are approved, the quotas will remain and become even stricter.