The Impact of Western Sanctions on The Russian Oil Sector

Prirazlomnoye rig in the Pechora Sea, operated by Gazprom Neft. Prirazlomnoye field is located in Russia. Prirazlomnoye field. Photo: WIkimedia

Western governments imposed sanctions on Russia for violating the sovereignty of Ukraine in the spring of 2014. Some of the restrictions were directed against one of the most important areas of the Russian economy: the oil industry.1 The sanctions affect the use of new fields under the seabed and in the Arctic, funding Russian companies through foreign loans, and restricting access to modern technology. Due to the sanctions, foreign companies withdrew their participation in new fields, the implementation of modern technology, conducting geological research and the extraction of difficult-to-access oil.2 The following analysis endeavours to answer whether and, if so, to what extent the two years of sanctions have influenced oil production in Russia.

Western sanctions on technology connected to oil production have forced Rosneft to postpone all planned exploration of deposits in the Arctic and offshore fields.

Restrictions on the Participation of Foreign Companies

Due to the sanctions, some large oil companies—ExxonMobil, Royal Dutch Shell and Total—have stopped cooperating in commissioning the following new fields with Russian companies:3

  • Rosneft–ExxonMobil joint venture in the offshore project Sakhalin-1;4
  • Rosneft–ExxonMobil JV for extracting difficult-to-access oil from the Bazhenov formation in the Khanty-Mansi Autonomous Okrug;
  • Rosneft–ExxonMobil JV in starting to use deposits in the Kara Sea (a test drilling in the Universitetskaja-1 field was undertaken in the summer of 2014);
  • Gazprom Neft–Shell JV to extract oil by multi-stage hydraulic fracturing (fracking) from the Bazhenov formation in the Greater Salym field;
  • Lukoil–Total JV to extract oil by multi-stage fracking from the Bazhenov formation in the Galyanovsk field.

Gazprom Neft and Lukoil, which possess expertise in horizontal drilling and shale fracking, have promised to continue with the planned projects independently. Rosneft announced that it had been forced to postpone its offshore projects in the Arctic until 2018. Rosneft is acquiring knowledge on horizontal drilling and multi-stage shale fracking to extract difficult-to-access oil.5

Sanctions do not stop oilfield service companies owned by foreign enterprises from working in fields already in use, including those in the Arctic, since the restrictions do not apply to subsidiaries of Western companies.6 For example, Schlumberger and Baker Hughes fulfil Gazprom Neft’s requirements at the Prirazlomnoye deposit.7 Halliburton did stop cooperation with Gazprom Burenie,8 which belongs to Arkadi Rotenberg, but is still doing subcontracting work for Gazprom Neft, Lukoil and others.

Restrictions on Importing Technology

Russian oil companies rely on foreign technology, and sanctions affect 68% of imported equipment.9 In order to extract difficult-to-access oil, Russian companies need to buy 50% of required equipment and 80% of the software used in the devices from the West; in the case of sub-seabed deposits, 80% of equipment and 90% of software must be imported.10

Western sanctions on technology connected to oil production have forced Rosneft to postpone all planned exploration of deposits in the Arctic and offshore fields.

Restrictions on importing technology also apply to spare parts that are not produced in Russia. For example, 90% of the spare parts used at Gazprom Neft’s drilling platform in the Prirazlomnoye field are foreign.11 The importation of spare parts decreased by nearly 10% due to the 2014 sanctions; however, imports from China and South Korea increased by the same proportion.12 Importing equipment for the oil industry from these countries on a large scale may be hindered by the fact that the devices also incorporate parts made in the West.13

Despite having plans to do so, the Russian government and companies have not yet managed to set up production to replace the imported goods.14 The so-called plan for replacing imported goods prepared by the ministry of industry and trade in early 2015 has not produced any tangible results.15

About 20 industrial companies received long-term, low-interest loans from the Russian ministry of industry and trade’s development fund for projects to replace imported goods.16 The size of the loans—one billion roubles—is only a fraction of what the industry needs.

Rosneft initiated the construction of the Zvezda shipbuilding complex in the Primorye region of the Far East; in addition to tankers, the facilities could be used to build offshore drilling platforms, etc. The investors in the undertaking are Rosneftegaz17 and the National Welfare Fund; Gazprom Bank has promised a loan. However, Rosneft has not yet managed to find a strategic partner to contribute modern technology for the plant.18 The sanctions make it unlikely that a Western company will agree to participate in the undertaking.19 Zvezda had planned to start work in 2018, but the commissioning will be probably postponed due to the sanctions.

Sanctions are hindering the use of Western technology in deposits on the mainland licensed to Gazprom Neft and Surgutneftegaz, and where it was planned to extract difficult-to-access oil from the so-called Bazhenov formation with horizontal drilling and shale fracking in several stages. The same applies to offshore deposits in the Pechora Sea and off the coast of the Yamal Peninsula, which have been allocated to Gazprom Neft.20 Surgutneftegaz and Gazprom Neft have promised to start using deposits on the mainland independently.

Russian oil refineries are almost completely dependent on equipment imported from the West;21 a large part of the devices can be replaced with equipment imported from China, but this does not improve the quality of the fuel produced. Russia exports petroleum products primarily within the Commonwealth of Independent States.

Restrictions on purchasing technology also affect the production of natural gas. Gazprom had to postpone expanding its natural gas liquefaction facility on Sakhalin as the US imposed sanctions on the offshore Yuzhno–Kirinskoye field, where oil can be found in addition to natural gas.22

Restrictions on Foreign Loans

Novatek,23 Rosneft, Gazprom Neft and Transneft cannot get favourable loans from Western banks, which makes it difficult to refinance and repay existing loans.

Financial difficulties arising from the sanctions have reduced the interest of Russian oil companies in deposits in need of large investment in the coastal Arctic Sea and extracting difficult-to-access oil.24 Restrictions on requesting foreign loans force the companies to focus on increasing production in existing fields—these also require the use of modern technology, but the oilfield service companies offering the equipment are not restricted by the sanctions.

The restrictions have forced Russian oil companies to turn to financial institutions in countries that have not imposed sanctions, or to ask for help from the government. Only Rosneft and Novatek dared to apply for help from the Russian government and National Welfare Fund to alleviate their financial difficulties.25 Rosneft asked for two trillion roubles to invest in five projects, but the government only agreed to support the Zvezda shipyard with 44 billion roubles.26 Due to the government’s refusal and financial difficulties, Rosneft reduced its investments in 2015 by some 30% compared to 2014.

Novatek applied for 150 billion roubles from the government to invest in its natural gas liquefaction facility on the Yamal Peninsula, and received this amount from the National Welfare Fund.27 Novatek wanted the support in dollars to pay for equipment purchased from the West, but the government refused.28 This is why Novatek still has difficulties with financing the LNG (liquefied natural gas) plant on Yamal. Due to the financial sanctions, Novatek applied for loans from Chinese banks, but it did not enter into loan agreements because of the relatively high interest rates.29 Novatek therefore had to turn to Russian banks again. Relations with Chinese financial institutions may improve since Novatek has sold 10% of the Yamal LNG plant to the Chinese Silk Road Fund.30

A few Russian oil companies can use political connections to overcome the restrictions on financing. In December 2014, Rosneft wanted to pay back part of a loan worth US$6.9 million; it sold securities to commercial banks for roubles and exchanged these into dollars at a closed auction of the Central Bank of Russia, which was accompanied by a sharp fall in the value of the rouble.31 To repay the second part of the loan, worth an equal amount, Rosneft sold securities at a closed auction of the Moscow Exchange in January 2015.32 Rosneft could only undertake these transactions thanks to high-level political support.

Rosneft is searching for project investors from China and India. Despite long-running negotiations and framework agreements, Chinese oil companies have thus far refused to invest in any fields in which Rosneft has a share;33 they prefer importing oil to investing. The interest of Indian companies has yielded more results—ONGC (Oil and Natural Gas Corporation Ltd) is to receive a 15% share of Vankorneft.34 Another Indian oil company (Indian Oil Corporation Ltd, IOC) also wants a share in that enterprise.

Conclusion

Thus far, sanctions have not had an impact on oilfields that are already in use and in joint ventures. This has allowed Russian oil companies to survive, and increase oil production and exports35 in order to maintain their market share (see graph) during the price war on global markets that started in late 2014. In 2015 Russia produced 534 million tonnes of oil (1.4% more than in 2014)36 and exported 241 million tonnes (10% more than 2014).37 In 2016 Russian oil companies will probably continue to produce and export oil in the same volume.38

The financial restrictions have already had an impact on the oil industry since the lack of funds is forcing Russian oil producers to reduce necessary investment39, which will inevitably lead to a decrease in production, exports and tax revenue. Specialists estimate that the Russian economy will lose approximately US$170 billion due to the combined effect of financial sanctions and low oil prices in 2014–7.40

Restrictions on importing technology have a long-term impact. The equipment used today allows the level of production to be maintained but there will be a greater demand for different technology as the proportion of difficult-to-access oil increases.41 Oil companies have to make do with existing equipment due to the sanctions because Russian companies are not capable of replacing devices imported from the West with equipment made in Russia any time soon. Importing goods from countries that have not joined the sanctions or purchasing Western companies that possess the necessary know-how only offers partial relief.

Originally published by The Estonian Foreign Policy Institute

Footnotes

1 Sanktsioonidest mõjutatud isikute ja firmade nimistu: http://ria.ru/politics/20140718/1016514535.html

2 Raskesti kättesaadav nafta hõlmab süvameres, Arktikas, kildas või raskesti ligipääsetavate geoloogiliste kihtide all asuvat või viskoosset naftat.

3 Санкции и нефть: какие проекты в России могут пострадать – Ведомости, 15.08.2014.

4 http://www.gazeta.ru/business/2014/05/15/6034441.shtml

5 http://www.angi.ru/news.shtml?oid=2833620

6 Западные компании нашли способ обойти санкции для работы в Арктике – РБК, 29.12.2014.

7 ibid.

8 Нефтяные компании получат санкции замедленного действия – РБК daily, 28.07.2014.

9 Параллельный путь в обход санкций – Ведомости, 17.07.2015.

10 Energeetikaministri Aleksandr Novaki ettekandest Venemaa nafta ja gaasifoorumil 2015. a märtsis Moskvas, vt http://oilandgasforum.ru/data/files/Files%200315/Novak.pdf

11 Буровая угроза – Коммерсант, 17.09.2015.

12 Долгий путь к своим – Эксперт, 14.03.2015.

13 http://www.znak.com/urfo/news/17-04-19-02/1038666.html

14 Venemaal toodetakse puurimisseadmeid, kuid kaasaegsel tehnoloogial põhinevate vahenditega (nt horisontaalseks puurimiseks ja kilda lõhustamiseks) varustavad neid Lääne firmad.

15 Россия сама не справится – Ведомости, 23.09.2015.

16 http://angi.ru/news.shtml?oid=2827995

17 Riigi osalus suureneb Zvezdas kahe kolmandikuni, kui Rosneft ja Gazprom Bank müüvad ühise tütarfirma Rosneftegazile (vt “Звезду” возвращают государству – Коммерсантъ, 11.12.2015).

18 Koostöö Lõuna-Korea ettevõttega DSME katkes kolm aastat tagasi.

19 Импортозамещение спасет только импорт – Коммерсантъ, 23.09.2015.

20 Санкции и нефть: какие проекты в России могут пострадать – Ведомости, 15.08.2014, op. cit.

21 Российская нефтянка остается сырой – Независимая газета, 07.10.2015.

22 http://www.bloomberg.com/news/articles/2015-08-07/gazprom-offshore-field-in-russia-s-far-east-sanctioned-by-u-s-

23 Pm maagaasi tootvat Novateki karistatakse sanktsioonidega suurosaniku Gennadi Timtšenko tõttu.

24 http://www.angi.ru/news.shtml?oid=2832845

25 Правительство «всерьез рассмотрит» заявки «Роснефти» и НОВАТЭКа – Коммерсантъ, 22.09.2014.

26 «Роснефть» теряет шансы на деньги ФНБ – Ведомости, 06.08.2015.

27 «Новатэк» первый в очереди – Ведомости, 15.12.2014.

28 «Новатэку» ни рубля – Ведомости, 21.11.2014.

29 Financing for Russia’s Yamal LNG plant stalls – sources – Reuters, 19.10.2015.

30 http://uk.reuters.com/article/russia-yamal-lng-china-idUKL8N1560NX

31 “Роснефть” провела секретное размещение – Коммерсантъ, 12.12.2014.

32 «Роснефть» нашла 400 млрд рублей всего за час – РБКdaily, 27.01.2015.

33 http://top.rbc.ru/politics/05/05/2015/5548e2a09a7947f67dda97cb

34 Покупку ONGC доли в Ванкоре рассмотрит правительство – Ведомости, 25.12.2015.

35 sellele aitas kaasa ka 2015. a. jõustunud maksumuudatus, mis andis eelise toornafta ekspordile naftatoodete ekspordi ees

36 http://www.interfax.ru/business/488240

37 Экспорт нефти вновь может упасть, Ведомости, 14.01.2016

38 kui 2016. a. riigieelarve sissetulekute suurendamiseks Venemaa valitsus tõstab maksukoormust ja/või dividende, siis vähendavad naftafirmad tootmist (vt Снизить добычу вместе, Ведомости, 28.01.2016; http://www.rbc.ru/business/28/01/2016/56a9edf59a7947b6a87d9bb5)

39 vt nt http://www.finanz.ru/novosti/aktsii/gazprom-neft-snizit-v-2016-g-kapitalnye-zatraty-do-$5-mlrd-1001024862; Инвестиции сбило котировками, Коммерсантъ, 21.01.2016

40 Россия теряет $600 млрд, Ведомости, 05.02.2016

41 energeetikaministeeriumi prognooside kohaselt toodetakse 2020. a. Venemaal 417 mln t naftat, millest 62 mln t moodustab raskesti kättesaadav nafta (ehk ligikaudu 15% kogutoodangust), vt http://oilandgasforum.ru/data/files/Files%200315/Novak.pdf, op. cit.

 

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