Energy Sanctions Unlikely, But IOCs Most At Risk

BMI View: We reiterate our view that the implementation of economic sanctions proposed for Russia's energy sector remains limited, as tensions between the West and Russia over Ukraine subside. That said, we highlight that the implementation of sanctions on Russia's oil and gas sector would have a substantial impact on the international oil and gas companies that are heavily invested in the country's highly prospective upstream.

The US, UK, Germany and France are reportedly preparing a new set of sanctions to be used against Russia if it seeks to disrupt the May 25 elections in Ukraine. A ban on exports of high-tech equipment for use in the Russian energy sector is thought to be among the key proposals included in wider economic sanctions. Such a move would have a limited impact on Russia's global oil and gas supply, but would severely restrict progress on a number of technically challenging future projects. In particular, developments on the Arctic shelf, shale oil formations, and the upcoming wave of liquefied natural gas (LNG) projects would be threatened. We have previously highlighted the importance of the Arctic to Russia ( see 'On Thin Ice In Arctic Offshore' December 8 2013), as well as tapping Asian gas markets through LNG.

If sanctions on technology were introduced, it would unlikely have an immediate impact on output, with around 99% of Russian oil and gas resources being produced from conventional fields. However, the implementation of such restrictions would threaten Russia's 10-20 year production profile by restricting access to technology and forcing the country to invest in domestic research and development. This would significantly slow the pace of technical developments in the Russian oil and gas sector.

Flat Outlook
Russia Oil And Gas Production

Energy Sanctions Unlikely, But IOCs Most At Risk

BMI View: We reiterate our view that the implementation of economic sanctions proposed for Russia's energy sector remains limited, as tensions between the West and Russia over Ukraine subside. That said, we highlight that the implementation of sanctions on Russia's oil and gas sector would have a substantial impact on the international oil and gas companies that are heavily invested in the country's highly prospective upstream.

The US, UK, Germany and France are reportedly preparing a new set of sanctions to be used against Russia if it seeks to disrupt the May 25 elections in Ukraine. A ban on exports of high-tech equipment for use in the Russian energy sector is thought to be among the key proposals included in wider economic sanctions. Such a move would have a limited impact on Russia's global oil and gas supply, but would severely restrict progress on a number of technically challenging future projects. In particular, developments on the Arctic shelf, shale oil formations, and the upcoming wave of liquefied natural gas (LNG) projects would be threatened. We have previously highlighted the importance of the Arctic to Russia ( see 'On Thin Ice In Arctic Offshore' December 8 2013), as well as tapping Asian gas markets through LNG.

If sanctions on technology were introduced, it would unlikely have an immediate impact on output, with around 99% of Russian oil and gas resources being produced from conventional fields. However, the implementation of such restrictions would threaten Russia's 10-20 year production profile by restricting access to technology and forcing the country to invest in domestic research and development. This would significantly slow the pace of technical developments in the Russian oil and gas sector.

The core view of our European Country Risk Team is that Russia will not deliberately aim to disrupt the Ukrainian elections and that wider economic sanctions will not be introduced. Hence while we expect a multi-year cool period between Russia and the West ( see 'Russia And The West: Multi-Year Cool Period Ahead', May 2), the energy dynamic between Russia and Europe will continue, and Russia's production outlook will remain unchanged.

Flat Outlook
Russia Oil And Gas Production

A number of major US and European international oil companies (IOCs) are working in Russia, and will have an increasingly important role in sustaining output in the country. These companies have been accepted into Russia's upstream sector to take on the more technically challenging areas that are being targeted by the proposed sanctions: the Arctic Shelf, shale oil and LNG.

US And European Majors In Russia
US/European IOC Russian Partner Project Areas
ExxonMobil Rosneft Arctic Exploration/Bazhenov Shale Exploration/Sakhalin LNG
Royal Dutch Shell Gazprom Arctic Exploration/Sakhalin LNG
Total Novatek Yamal LNG
BP Rosneft BP Holds 19.75% Of Stock, Following TNK-BP Sale
Source: BMI

Although our view is that economic sanctions will not be imposed on Russia's energy sector, if they were to be introduced we believe there would also be a substantial impact on the IOCs operating in Russia. The vast potential of Russia's below-ground resources has attracted the biggest oil and gas companies and forms quite a significant proportion of their future growth strategies.

BP has already taken a hit as the value of its 19.75% of Rosneft stock has fallen around 14% since the beginning of 2014, due to the tensions between Russia and the West impacting Russian stock markets. Over the longer-term, ExxonMobil's large exposure to the Russian market through its joint venture with Rosneft could see its future growth potential severely limited. Shell and Total would be similarly impacted, though to a lesser extent.

However, there is potential for some companies to benefit, especially those that are not incorporated in the US or Europe. One of the major companies that fits this profile is Schlumberger - the world's largest oilfield service company - which is a legal entity of Curaçao in the Southern Caribbean. Schlumberger is already widely involved in Russia's upstream, and although it would undoubtedly be pressured by US and European governments, it may be able to circumvent technology exports.

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