U.S. oil sanctions may cost Russia tens of billions of dollars in profits

Latest restrictions could hasten decline in Western Siberian production. Source: ITAR-TASS

Latest restrictions could hasten decline in Western Siberian production. Source: ITAR-TASS

The imposition by the United States of a ban on supplying Russia with high-tech equipment for oil drilling, could have far-reaching consequences for the prospects of Russia’s oil industry, with the new sanctions complicating international cooperation and putting future plans for expanding production in jeopardy.

The United States has followed through with new sanctions against the Russian oil industry, limiting the supply of equipment for the production of tight oil. Russia had hoped to earn $54 billion in revenue from the additional oil production over the next 20 years. However, the sanctions deal a significant blow to those plans.

The American restrictions, which were announced on August 6, are more stringent than those of the European Union, which previously banned the supply to Russia of technology for deep oil production and the exploration and development of Arctic shelf shale oil reserves, according to RBC.

In particular, the United States Department of Commerce has identified deepwater projects as projects at a depth of 500 feet, while the EU sanctions do not specify what ‘deepwater’ entails.

The list of products subject to export control under the U.S. sanctions on Russian industry almost coincides with the list compiled by the EU. This includes, among other things, drilling platforms, components for horizontal drilling, diving equipment, marine equipment for working in the Arctic, software for hydraulic fracturing, remotely operated underwater vehicles, and high pressure pumps.

The new American regulations also mentioned natural gas, as opposed to the European Union, which lifted sanctions on gas projects. It is understood that the license for the export of equipment which might be used for such gas projects will be considered on a case-by-case basis.

Experts believe that the sanctions could accelerate the decline in production from mature oil fields in Western Siberia, according to the Fitch rating agency. These reserves are depleted, and they require additional development of advanced technologies, since they have come under the EU and U.S. embargo.

“The decline in production in the West Siberian oil fields was planned to be offset by the production of hydrocarbons from tight oil reserves and on the Arctic shelf. However, due to the sanctions there is a likelihood that new projects in this area will be postponed, thus reducing the rate of growth of oil production in the Russian Federation,” agreed Yelizaveta Belugina, head of research at the FBS brokerage company.

For several more years Russian oil companies can count on relatively affordable conventional oil. But the future of the Russian oil industry depends on the development of sources of tight oil in the Arctic and other offshore fields, as well as from the development of depleting mature fields in Siberia.

Thus far, from the 523 million tons of oil produced in Russia in 2013, about 1 million came from tight oil. However, unconventional petroleum liquid reserves are vast. According to preliminary estimates, they may total 40 billion tons. The Ministry of Energy was anticipating an increase of 11 percent in the share of the total volume of production of tight oil. Forecasts for the development of tight oil for the entire period up until 2032 were to result in about 2 trillion rubles ($54 billion) in state revenue, from the additional production of about 350 million tons.

According to Fitch, Russian companies still do not have sufficient high-tech knowhow and therefore must enter into partnerships with Western firms that have expertise in the application of this equipment and technology. The new package of sanctions could complicate such a partnership. At present, Russian companies work mainly with Total, ExxonMobil, and Shell.

Developing its own technology and searching for other international partners will take Russia time and incur considerable financial costs. In addition, the negative effect will increase due to restrictions set by the West for the long-term financing of Russian companies.

“Over the next two years the situation will not cause any serious concern, but given that the sanctions are aimed precisely at Russia's strategic interests, it is necessary to revise the country’s energy policy,” said Belugina.

“Meanwhile, we can assume that the decline in production will lead to an increase in oil prices, which should somewhat offset the negative effect in material terms,” suggested an FBS analyst.

“It is likely that companies will have to use the equipment and techniques of the Pacific Rim countries or those made ​​in Russia, which may not reflect the standards and quality of West,” says RBTH Investkafe analyst Grigory Birg.

However, he said, we should not expect to see an immediate influence of the sanctions on production, as most of Russia’s projects to work on the shelf and for the development of tight oil reserves in cooperation with foreign companies are in the early stages of implementation.

It is worth noting that there are already cases in which companies have worked out how to bypass the Western sanctions on Russian industry. The Russian state oil company Rosneft, for example, has been able to circumvent the ban on shipments to Russia of technologies and equipment for deep-sea oil production from the European Union by entering into an agreement with Norwegian and Swiss companies.

Rosneft will receive from the Swiss units for drilling and the overhaul of equipment in Russia and Venezuela. From the Norwegians, Russia will receive rigs for offshore production, including in the Arctic.

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