Register to download the report. Already a member?

Download PDF

Click Here for $250 / 6 months

Click Here for $450 / year

Russian Oil Companies In No Rush Over Sanctions

On March 15, the US decided to enact new sanctions on 19 Russian individuals and five groups, including Moscow’s intelligence services, for meddling in the 2016 US election and malicious cyber-attacks, including the 13 Russian individuals and three Russian companies that US Special Counsel Robert Mueller brought charges against on February 16, 2018. This adds to the spate of sanctions imposed since the 2014 Russian annexation of Crimea from the Ukraine. Intended to strike at Russia’s largest export industry – oil and gas represents around half of Russian exports by value, and specifically “Russia’s ability to develop so-called frontier or unconventional oil resources” – most of the sanctions have thus far targeted Russian companies such as Rosneft, Transneft and Gazprom Neft (Gazprom’s oil arm), barring them from receiving Western oil technology, services as well as financing, with at least five major Russian banks (including Sberbank, VTB and Bank Rossiya) blocked from raising cash in the West.

“Four years into the sanctions, their impact on Russian oil and gas production seems limited.”

Russian individuals placed on the Office of Foreign Assets Control’s (OFAC) Specially Designated Nationals list include Igor Sechin, CEO of Rosneft; Gennady Timchenko, owner of Volga Group, a private investment fund that counts Novatek as an asset; and Sergey Topor-Gilka, who runs the engineering company Technopromexport and a few subsidiaries of Surgutneftegaz. Rosneft is Russia’s largest petroleum company and third-largest gas producer, Novatek is Russia’s largest independent natural gas producer, while Surgutneftegaz is a Russian oil and gas company owning large reserves in Western Siberia. In January 2018, Russian Deputy Energy Minister Andrey Cherezov was also added to the list.

Four years into the sanctions, their impact on Russian oil and gas production seems limited. Firstly, the sanctions only target oil production – and specifically only involvement in deepwater [defined by both US and EU sanctions as depths deeper than 150 meters], Arctic offshore, and shale activities, whether on Russian territory or, for projects initiated from January 29 2018 onwards, in any location as long as sanctioned Russian entities or individuals own more than 33 percent of the project. For context, on top of being one of the world’s largest producers of gas, Russia also sits on top of the largest natural gas reserves in the world, estimated at around a staggering 1700 tcf. Russian gas production rose to an all-time high in 2017.

“Scrutinizing Russian oil figures reveals that production has ramped up around four to five percent since sanctions were first applied”

In any case, scrutinizing Russian oil figures reveals that production has ramped up around four to five percent since sanctions were first applied. 2017 Russian oil production reached a 30-year high with an average daily output of 10.98 million barrels per day. This is impressive, especially when one takes into account this is in spite of Russia’s decision to work with the Organization of the Petroleum Exporting Countries (OPEC) to cut combined oil production by almost 1.8 million barrels per day (bpd) in order to shore up prices. Russia pledged to cut output by 300,000 bpd – from the record 11.247 million bpd in October 2016. To date, Russia remains the largest non-OPEC crude oil producer, exporting 75 percent of its oil. More generally, after a disastrous economic performance in 2015 and 2016, the Russian economy has also swung back to growth in 2017 with 1.5 percent GDP Growth, in part fueled by the oil price recovery.

These figures reflect the ineffectiveness of US sanctions. It must be highlighted that the largest international projects for Russian companies globally are the Iraqi fields Badra and West Qurna-2, and projects in Venezuela’s Orinoco belt – neither of which are targeted by sanctions. The 33 percent ownership cap also allows Russian companies room to maneuver. In October 2017, Rosneft bought a 30 percent in Egypt’s Zohr field, the largest gas deposit in the Mediterranean, held by ENI and BP.

While all proposed deepwater projects involving Western partners – with the single exception of Shatsky Ridge – have either been postponed or abandoned, shrewd Russian producers and their international partners have nevertheless found other workarounds around the limitations imposed by these sanctions, in particular looking to new vistas and strengthening partnerships with non-Western countries. For instance, since 2013, Venezuela has been Rosneft’s largest source of crude oil outside Russia and the company has provided billions in crude prepayments to the crisis-torn country. In November 2017, Rosneft also signed a new oil supply deal with China’s CEFCm supplying around 12 million tonnes of crude in exchange for a USD 9.1 billion investment – one of the largest Chinese investments in Russia. More notably, in 2017, the expansion of the Eastern Siberia-Pacific Ocean (ESPO) oil pipeline saw Russia replacing Saudi Arabia as the top oil exporter to China.

“US sanctions may well be hurting its companies more than Russia”

More recently, Exxon Mobil’s February 28 2018 announcement that it is abandoning its joint exploration ventures with Rosneft, taking an after-tax loss of USD 200 million, seems to reinforce an unpleasant truth: that US sanctions may well be hurting its companies more than Russia. To add insult to injury, sanctioned Russian oil and gas giant Gazprom, majority owned by the Russian state, toppled Exxon from its 12-year reign as the world’s largest energy company according to the 2017 S&P Global Platts Top 250 Global Energy Company rankings.

Friendly fire is a concern not only for US companies but also its allies. Despite calls to reduce its dependence on Russian gas, the European Union still relies on Russia for a third of its natural gas supply. US and EU actions are already diverging. In particular, financing for the EUR 9.5 billion Nord Stream 2 pipeline through the Baltic Sea was agreed in April 2017 with European partners Uniper, Wintershall, Shell, OMV and Engie. The single deepwater project in progress belongs to Rosneft and ENI at the Shatsky Ridge. While the EU sanctions allow a “grandfather clause” for projects started before 2014, the US sanctions do not allow such a concession. As yet, there has been no American response. In 2016, BP acquired 49 percent of Yermak Neftegaz (of course, BP also owns 20 percent of Rosneft). Rosneft has also moved forward with Norwegian major Statoil on the Domanik formations in Russia’s Volga-Urals region and expects to start drilling in late 2019. The Domanik formation, while an unconventional oil resource that would have to be extracted through fracking, is a limestone formation, not shale, allowing the project to slip through US sanctions restrictions.

“To replace Western funding, Russia has stepped up its charm offensive with Middle Eastern and Chinese players”

Even the one obvious pain point – financing – may well have been overstated. As late as 2013, the Russian industry was tremendously dependent on Western capital to the tune of credit reaching USD 660 billion. According to Deloitte’s 2016 Oil and Gas Outlook Survey on Russia, 64 percent of respondents cited ‘restricted access to capital’ as one of the most serious problems facing oil and gas companies in Russia, and a whopping 82 percent agreed that ‘less favorable terms for long-term loans’ was a potential short-term impact of the US and EU sanctions. 55 percent also believed that the sanctions would lead to decreased foreign investment in Russian field development. However, to replace Western funding, Russia has stepped up its charm offensive with Middle Eastern and Chinese players. In addition to the USD 9.1 billion CEFC China deposited into Rosneft, 2018 also saw an investment deal struck with Saudi Aramco for the Novatek-led Arctic LNG -2 project.

In light of all these considerations, the US game of sanctions could well be a long, drawn-out one of attrition.

Writer: Karen Xi



Most Read