Western sanctions to hit Russia's vast oil industry

12th September 2014, Comments 0 comments

The new Western sanctions imposed on Russia over the unfolding Ukraine crisis chiefly target its vital oil sector and could drag down already falling production if maintained long-term.

- What is happening to Russia's oil production?

Russia's crude output has soared in the past 15 years, driving the impressive economic growth that marked Vladimir Putin's first two terms as president, between 2000-2008.

Since 2010 oil extraction has exceeded 10 million barrels a day (bpd), rivalling top producer Saudi Arabia. Last year's output reportedly hit its highest point since the Soviet era.

But this surge is now beginning to slow as key oil fields in West Siberia have been depleted and uncertainty about taxation policy has put off investors at a time when exploration in the Arctic is still in its infancy.

This week the International Energy Agency predicted that Russian crude output would fall by 90,000 bpd next year due to "current trends rather than an immediate effect of sanctions".

Leonid Fedun, the vice-president of Russia's second-biggest oil firm, Lukoil, has also recently warned of a possible decline in production from 2015.

- How do sanctions affect output? -

Western sanctions restrict the Russian oil sector's access to both financing and technology, which play a vital role in exploration.

The EU is blocking state-owned giant Rosneft, Transneft, and Gazprom's oil arm, Gazprom Neft, from raising money in its markets. Washington has also blacklisted Rosneft, which produces some 40 percent of Russia's oil.

The move effectively deprives these companies of their traditional sources of funding in a sector where projects can cost billions of dollars.

"Over time, with the restrictions on access to capital, we could see lower investment, which could lead to a decline in production," an expert with financial analysts InvestCafe, Grigory Birg, told AFP.

"But we are talking about years ahead rather than an immediate effect," he added.

Brussels has also decided to restrict sales of technology used for oil exploration to Russia.

Birg said that the ageing Western Siberian oil fields need "modern technologies provided by Western oil and gas companies" to stop the slowdown in production growth.

Fitch ratings agency has warned the restrictions on technology, such as horizontal drilling used by Gazprom Neft, would "reduce the life" of old deposits and "delay some of the most ambitious projects in Russia, including in the Arctic".

For now, Rosneft said its cooperation with American ExxonMobil and British BP were not affected. It even launched several new projects in August and early September, one of them in the Arctic -- a promising zone with extreme conditions where exploration requires advanced technologies and massive investment.

But reports suggest the new round of Western sanctions could throw them into greater uncertainty.

- How will the industry and Moscow react? -

Russia gets around half of its revenues from oil profits, allowing Moscow to balance the budget and maintain low debt levels. A decline in crude extraction -- even in the longer term -- would be very bad news for the country's already stagnating economy.

"Our research on Iran suggests it was energy sanctions, rather than financial sanctions, that finally prompted a change in Iran's policy," analysts with Renaissance Capital said this week.

Prime Minister Dmitry Medvedev acknowledged this week that the government had no choice but to support Rosneft, which requested a bailout to help it repay nearly $45 billion (34 billion euros).

"It is essential that the group maintains its production levels because Rosneft is the main contributor to the budget," Medvedev told Vedomosti newspaper.

Some expect Moscow to turn to number-two economy China in the face of Western sanctions.

Last week Putin offered China a stake in the huge Vankor oil field, considered one of the most valuable in East Siberia, and the two recently signed a $400 billion gas supply deal.

And as far as technology is concerned, Russia could "replace European and US equipment with its own or Chinese," VTB Capital analysts said.

© 2014 AFP

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