Sanctions Aimed at Russia’s Efforts to Develop Offshore Arctic Deposits

Economic sanctions imposed on Moscow over the conflict in Ukraine might threaten Russia’s energy future – a serious threat many analysts say, given the country’s over reliance on oil and gas revenues.

The list of sanctions announced by the EU and US in September includes restrictions on sale, supply, transfer or export, directly or indirectly, of certain goods, services and technologies for the oil industry and prohibits the provision of services for deep water oil exploration and production, Arctic oil exploration and production or shale oil projects.

Analysts say the sanctions are mostly aimed at Russia’s efforts to develop oil and offshore Arctic deposits. In its latest report Fitch ratings agency said that oil producers are unlikely to have a short-term impact on credit profiles due to their strong liquidity.The list of sanctions announced by the EU and US in September includes restrictions on sale, supply, transfer or export, directly or indirectly, of certain goods, services and technologies for the oil industry and prohibits the provision of services for deep water oil exploration and production, Arctic oil exploration and production or shale oil projects.

Gazprom's main exposure to sanctions is through Gazprom Neft, whose ambitious plans for tight oil and the Arctic shelf may suffer from the new sanctions in the medium term, Fitch reported in a press-release. Gazprom Neft also has a joint venture, Salym Petroleum Development, with Shell in Western Siberia and a technology cooperation agreement with Schlumberger. These ventures could be hampered by the new sanctions, as they aim at developing hard-to-extract shale oil reserves, mainly from Bazhenov deposits.

LUKOIL is probably the least affected by the US sanctions, as it has ambitious long-term tight oil plans but little current exposure to tight oil or the Arctic shelf. In the long run Russian oil companies can do without the Western technology, market participants said at an international business forum in Sochi last month. At what cost? LUKOIL’s head Vagit Alekperov thinks the cost is 20 percent of Russia's total oil output, or some 100 million tons of annual oil production, which is at risk because of sanctions related to the supply of Western technology and expertise to Russia.

On the other hand, the squeeze of sanctions has bolstered interest in a partnership with other countries, China in the first place. While European and US oil firms such as ExxonMobil, BP and Royal Dutch Shell can't have any new energy-related transaction with Russia, the two neighboring states are about to complete talks on building an additional natural gas pipeline to China, which will deliver Russia's energy via a western route by 2015.