Joe Parson in Moscow -
US and EU sanctions are threatening to derail a monster exploration and production project in the Russian Arctic between state-owned Rosneft and US oil major ExxonMobil.
The threat is not that Washington will pressure US companies to pull out of Russian deals. Rather, the latest round of sanctions includes bans on the transfer of technology vital to the future development of Russia's increasingly hard-to-get-at oil and gas deposits.
Rosneft and ExxonMobil opened an Arctic Research Center in June 2013, in order to prioritize technology-sharing adaptable to the challenging Kara Sea. ExxonMobil likely contributed the first $200m in order to give the project a quick boost, and since the pair has jointly contributed an additional $250m. By funding research and development costs up front, the companies may have provided a buffer against short-term sanctions impact.
On top of that, Rosneft and ExxonMobil have a long partnership. They've been working together since launching development of fields on the Far-East island of Sakhalin over fifteen years ago. That suggests knee-jerk political pressure will need significant substance to disrupt relations.
At the same time, Exxon is not invulnerable. Shareholders have been increasingly concerned over the US giant's recent financial juggling in preparation to acquire US shale producer XTO for $41bn. That threatens to limit ExxonMobil's ability to weather a political storm should relations between the West and Russia continue to deteriorate.
Although the US sanctions - a bid to persuade Moscow to cease what Washington says is its support for pro-Russian separatists in east Ukraine - initially targeted only specific individuals, they have now grown to include many state-owned banks - specifically banks used by the state-owned energy companies - as well as other companies. Another round of sanctions restricted access to European and American financial resources. By and large, several Russian companies have sought to mitigate this threat through non-dollar financing from East Asian partners. Gazprom even listed on the Singapore stock exchange in June.
The most recent sanctions, unveiled in late July, will restrict the export of technologies patented in the US, as well as prevent investment in Russian Arctic projects. If alternatives are not found, this could have a substantial impact. However, for the time being, sanctions apply only to new contracts. In other words, should ExxonMobil and Rosneft seek to expand their cooperation to new deposits, then problems may occur.
Notwithstanding, Schlumberger - the world's largest oilfield services company - says it will begin adapting to the sanctions in order to continue operations in Russia and "mitigate predicted short-term impacts on operational costs and efficiency". At the same time, Schlumberger CEO Paal Kibsgaard claims that for now, the Russian energy sector is "business as usual".
The Sea of Kara project has already sidestepped one obstacle, moving swiftly to purchase six drilling rigs from Norway-based North Atlantic Drilling on July 31. Norway was late getting onboard the EU sanction initiatives.
Rosneft and Exxonmobil could potentially continue to avoid the technology clampdown by claiming to be searching for natural gas - which is specifically not covered in the sanctions. The distinction is essentially meaningless in practical terms, as both oil and gas utilize similar, and often identical, exploration and production methods.
The targeting of oil technologies specifically is a passive financial attack on Russia; the oil sector makes up the vast majority of budgetary revenues. The exclusion gas from technology sanctions is likely due to Europe's heavy reliance on it for energy consumption.
Elsewhere in Russia, energy firms may have difficulty acquiring necessary technologies adapted to oil exploration. At many of Russia's conventional fields, much oil remains, but is located in disparate sections that are difficult to target with horizontal drilling without highly accurate reservoir modeling. If later sanctions decide to include natural gas, it will impact the entire upstream sector in Russia. However, at the same time limit that would test the ability of Russia to provide Europe and China with contracted levels of gas in the medium term.
The Arctic is the prime region from which Russia seeks to supplement declining production rates from its long maturing Western Siberian fields. Russian companies, with little experience with such challenging off-shore drilling, have launched projects with significant financial - and crucially technical - support from Western companies. Chinese and South American competitors lack the expertise needed, and are unlikely to substitute any exit of US or European firms. This is likely at least partly mitigated for the meantime as many Western players maintain active cooperation with Russian research universities and institutions.
This will probably lead to a rebalancing of the relationship between Russia and international companies. Sanctions impacting Russia's ability to directly purchase Western technologies for Arctic and shale projects will require them to rely on already existing partners to sidestep them, or funnel expertise through existing joint institutions. Along those lines, further pressure from governments will likely only result in the reduction of new Western service companies entering Russia. This may decrease Russia's bargaining power in future projects, although at the same time the ability of Russia's regulatory structures to support national companies shouldn't be discounted.
In the event that oil and gas companies begin acquiring financial capital from regions outside of the EU and the US it will likely reduce the West's ability to influence international energy relations. The recent actions by Norway to support new sanctions are possibly an attempt to slow down Russia's rapid advance into the Arctic shelf. This is also likely given the failure of Norway's Statoil to make any discoveries this past summer in the Arctic area of the Barents Sea, despite its world-renowned offshore experience.
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