BMI View : EU sanctions on technology exports to Russia will only affect its long-term oil production potential, having less impact on short-term oil and gas production. Sanctions against Russian banks would have a larger impact on Russia's highly-leveraged energy firms, stymieing long-term production potential of both oil and gas. We maintain our forecast for oil production, but have downgraded our medium-term gas production outlook to reflect project delays due to that difficulty in accessing capital.
Sanctions On The Oil Industry
The EU has specifically targeted the development of new oil resources with its ban on the export of deepwater and shale fracturing technologies. The US joined in to block the exports of, 'specific goods and technologies to Russia' that target the, 'long-term development' of its oil resources. Given that shale oil and offshore resources will be the new drivers of Russian oil production growth, the sanctioned items by the US are likely to be similar to the EU's.
The sanctions are unlikely to have an immediate impact on Russian crude oil production, as majority of the country's oil output comes from onshore conventional sources. However, it will halt early exploration and development of its shale and offshore resources, thereby hitting future production growth. According to Russian Energy Ministry Alexander Novak in a June 2014 interview, the country is nearly 100% dependent on imported equipment for its offshore developments.
Rosneft: Its large oil exposure will make the Russian national oil company (NOC) most heavily hit by these sanctions, following the US' restriction of access to US capital markets on July 16. Given its majority shareholding status in its Arctic ventures with Statoil, Eni and ExxonMobil, the US had already shut the door on financing Rosneft's Arctic exploration. The ban on export of deepwater technology would further clip its early ventures offshore to develop new sources of oil growth.
International Oil Companies (IOCs): BP's 19.75% interest in Rosneft makes it most exposed to the fortunes of the Russian firm, while its partnership to jointly develop the Domanik shale - signed in late-May 2014 - will be affected until the West lifts its sanctions on technology exports to Russia, or if Russia develops its own technology. Other firms with offshore and/or shale partnerships with Russian firms will also be hit: Eni, Statoil and ExxonMobil in their ventures with Rosneft, Total with Lukoil, and Shell with Gazprom Neft in the Bazhenov shale.
Oilfield Services (OFS): Technip, in particular, was poised to benefit from Russia's search offshore, having signed a Memorandum of Understanding (MoU) with Russian state-owned technology group Rostech that would see it help support subsea services development in Russia. It would be difficult for Technip to profit from the Russian market with the EU's ban on equipment export. GE Oil and Gas' venture into offshore Russia, through a wide-ranging partnership agreement signed in May 2014 with Rosneft, will also be stalled.
Gas Untouched But Could Prompt Russian Policy Changes
Gas production in Russia has been left relatively unscathed by EU sanctions on the energy sector. The EU has only explicitly barred the export of equipment aiding Arctic oil and shale oil projects. The exclusion of the gas industry also provides a potential loophole that oil producers can exploit, as some of these technology can be used for both oil and gas production.
Gazprom appears to be the unlikely winner in the stand-off between Russia and the West, escaping direct US sanctions on its borrowing ability and restrictions on exports that would limit its future production. This affirms our view that Europe's continued dependence on Russia for gas - especially in the short-term - will prevent the EU from taking drastic measures against Gazprom, which still holds the monopoly for Russian pipeline gas exports ( see 'Mutual Dependency To Maintain Energy Trade Dynamic', March 14).
The weakening of Rosneft and the relative isolation of Gazprom from sanctions will strengthen the latter's position in the Russian oil and gas sector, at a time when its privileges are increasingly being challenged by Rosneft. However, this could also step up pressure by Rosneft to end Gazprom's gas pipeline export monopoly, so that it can target gas developments and export revenues for new sources of growth as its oil production potential is compromised ( see 'Partial Pipeline Gas Export Liberalisation Expected', July 23). Therefore, sanctions could also provide momentum for further revisions of Russia's gas export policy.
Sanctions On Russian Banks
US sanctions limit the following state-owned banks from accessing the US equity or debt markets: VTB Bank, Bank of Moscow, Russian Agricultural Bank, Gazprombank, Vneshneconombank and Bank Rossiya. The European Union will also limit the access of five yet-unnamed state-owned Russian banks from accessing capital markets in the US.
Sanctions on Russian banks' access to European and US capital markets could have a greater effect on the oil and gas sector and hit Gazprom's operations even if it has been shielded from direct sanctions. At the close of 2013, about 46% of its borrowings from local banks - about 24% of its total long-term bank loans - were denominated either in USD or EUR. Banks sanctioned by the US also made up 72% of Gazprom's total loans from domestic banks. If both the US and EU were to sanction Sberbank, it could cripple Gazprom's ability to borrow from domestic banks, making it solely reliant on foreign financial institutions and individuals to raise debt.
| Being Hit From The Financial Side |
|Gazprom - Outstanding Russian Bank Borrowings By Currency (LHC) & By Bank (RHC), As Of Dec 31 2013|
Rosneft could be at bigger risk from sanctions on banks, given its significant leverage from financing its large acquisitions in 2013 mainly through debt. With the US financial market cut off from Rosneft and the finances of Russia's largest banks threatened, the firm will have to find alternative sources of debt financing. Although Novatek is less leveraged than Rosneft, we still note that it still has a high gearing ratio that makes it susceptible to a negative downturn in its financing environment.
| Rosneft & Novatek: In Precarious Positions |
|Leverage Ratios For Selected Major Russian O&G Firms, FY2013|
While European capital markets remain open to Russian energy firms, the growing risk of lending to these firms as the stand-off between Russia and the West intensifies will increase the cost of borrowing, or even restrict lending to the energy firms altogether. Moreover, given our forecasts for oil prices to trend downwards over the next ten years, we anticipate lower revenues and narrower profit margins for these companies. While this will not stop existing developments, tighter finances could force the firms to slow the rate of developing new and untested resources, thereby reducing future growth potential.
In our initial projections for Russian crude oil production, we had been cautious if Russian firms could raise the capital to fund new growth projects and if Russia's OFS could catch up with investment requirements. Western sanctions limiting Russia's future oil production growth validates our initial view that shale oil and significant volumes of offshore production will only pose upside risk to our outlook ( see 'Industry Forecast - Upstream Production - Oil - Russia - Q4 2014', July 24). We maintain our forecast for short-term production to remain fairly constant at around 10.4-10.5mn b/d through to 2018 but to trend slowly downward thereafter on the back of falling production especially in major West Siberian fields.
| No Shale And Offshore Boost To Long-Term Output |
|Russia - Crude Oil & Liquids Production|
We have downgraded our forecasts for gas production. Large projects tied to the development of Rosneft's Far East LNG, Novatek's Yamal LNG and Gazprom's Chayadinskoye field in East Siberia - which we had forecast to start production from late 2016 - had formed much of the basis of our bullish projections. The financing risks that all three firms face owing to the sanctions may push back development, and we expect the start-up dates of Yamal LNG and Far East LNG to be postponed by two years to 2018 and 2020 respectively, thereby lowering Russia's gas production growth between the years 2016 and 2018 in particular. Nonetheless, Chinese capital could keep these gas projects afloat, to allow Russia to meet its supply obligations both via Yamal LNG and from East Siberia via pipeline ( see 'Geopolitics Take Centre Stage In Sino-Russian Gas Deal', May 22).
| New Project Boost To Growth Delayed |
|Russia - Gas Production|