Sanctions against Russia – what will they really do?

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Source: DollarPhotoClub

Despite the new round of sanctions imposed by the USA on Russia, which intended to curtail Russia’s access to Western technology as it seeks to tap new Arctic, deep sea and shale oil reserves, Exxon Mobil and its Russian partner Rosneft have reported that they have begun exploration drilling in the Kara Sea in the Russian Arctic.

The drilling of Universitetskaya-1, Russia’s northernmost well, estimated to contain more than 9.3 billion barrels of oil equivalent was referred to as “the most important event of the year for the global oil and gas industry” by Rosneft’s CEO, and Vladimir Putin’s personal friend, Igor Sechin.

So how badly will the new technological sanctions really impact Russia, and how will they influence the future of global oil and gas exploration?

Russia is the second-largest producer of dry natural gas and third-largest liquid fuels producer in the world. Russia’s economy is highly dependent on its hydrocarbons, and oil and gas revenues account for more than 50 percent of the federal budget revenues. And while oil and gas majors are eager to get their hands on Russia’s rich hydrocarbon deposits, the attraction is far from one-sided. The allure of Western companies is their technological edge which Russia needs in order to unlock its rich Arctic deposits. This need is all the more pressing now that the conventional oil deposits in Western Siberia are depleting.

Russia is also rich in unconventional oil and gas resources. According to EIA estimates, Russia holds the largest shale oil deposits in the world, at 75 billion barrels of technically recoverable shale oil, and the tenth largest shale gas deposits, at 285 trillion cubic feet of technically recoverable gas.

If U.S. oilfield services companies specialising in shale extraction – such as Halliburton, Schlumberger, and and Baker Hughes – are barred from selling its expertise to Russia, Russian shale potential might remain locked for some time yet.

However, it would be a mistake to see the latest round of sanctions as a blanket ban on all Western interests in Russia’s oil and gas sector. The goal of the sanctions was not to inhibit current oil production but to cloud Russia’s energy future. And the energy technology restrictions do not apply to Russian natural gas, on which Europe relies heavily.

Nevertheless, oil and gas giants, initially dismissive of restrictions imposed on Russia, are now starting to acknowledge that the escalating tensions could sharply hurt those of them who have major investments in Russia.

Back in May, during the St.Petersburg International Economic Forum, BP’s chief executive Bob Dudley defended his company’s involvement with Russia by saying: “We work in a world today where politicians all too often only can look 18 months out before the next election, and there are countries like Russia in agreements with China that are looking out 25, 40, or even 50 years. That’s what we have to do as companies. These kinds of relationships that we have with Russia and Rosneft are not transactional, they are strategic partnerships based on mutual benefit and trust.”

Speaking to reporters on Tuesday, Mr Dudley sounded less defiant, warning that further economic sanctions could harm BP’s income, production and reputation. He also said that it was unclear whether BP would be allowed to proceed with a joint venture on shale oil with Rosneft; the companies reached a preliminary agreement over the deal this year. “We are in the heat of a very emotional stage,” he added.

Holding a stake of almost 20 percent in Rosneft, BP stands to lose the most among Western companies, but it is by no means the only company affected. Exxon Mobil, Shell and Total also have shale ventures in the country.

As Western oil companies pretty much monopolized the innovation of oil and gas exploration, the new round of sanctions has the potential to seriously impair Russia’s ability to extract its deposits. The matter is far from straight-forward, though.

As Stanley Reed in his piece in The New York Times has pointed out, it is uncertain what types of equipment or software may be prohibited from being brought to Russia. “Technology is a very hard thing to define,” Mr. Dudley of BP said. “So we will have to read [the sanctions] very carefully.”

Processes like hydraulic fracturing or horizontal drilling have been around for years and the currently used methods are just highly adapted and modified versions of old techniques. For this reason, some analysts say the shale technologies may be hard to block through sanctions, as they are, essentially, not new.

Analysts say that Arctic and deepwater drilling might be easier to restrict. The New York Times quotes one EU official who said that The European Union plans to prohibit not only the sale but also the transfer of specially adapted drilling rigs and machinery to Russia. It’s unclear how this step would influence – if at all – the current work of Exxon Mobil in The Kara Sea.

Another issue is the potential long term effects of the restrictions.

“The biggest edge that Western energy companies still have is their technological edge — that’s why these sanctions have the potential to have significant impact,” said Michael A. Levi, an energy expert at the Council on Foreign Relations. Quoted in The New York Times, he was adamant that “Chinese companies can’t step in and provide shale technology where U.S. companies are blocked. They can provide capital; they can provide people. They can’t fill in on the technology front.”

A different take on the matter was offered by Reuters analyst John Kemp, who predicted that the technological vacuum will eventually be filled by Chinese experts. He believes that sanctions are more likely to accelerate the development of an advanced petroleum industry outside North America and Western Europe, especially in China, which will emerge as an important alternative supplier of both capital and knowledge over the next 5-10 years.

While China’s track record in exploring its vast shale deposits has been less than impressive – only last week the head of China’s National Energy Administration, has downgraded the amount of shale gas China is aiming to pump by 2020 from 60-80 billion cubic metres (bcm) mapped out in 2012, to just 30 bcm – the country is committed to developing its own robust petroleum industry.

In terms of education, China is graduating more than ten times as many qualified petroleum professionals each year as the United States, based on university enrolments compiled by the U.S. Department of Education. As Kemp points out, China’s Petroleum University, with branches in Beijing and Huadong, has more than 1,300 full and associate professors, and with more than 12,000 registered students – including 744 doctoral candidates, 4,600 postgraduate students and nearly 7,000 undergraduates in its Beijing branch only, it is by far the largest institution for research and learning about all aspects of the oil and gas industry in the world.

Hydraulic fracturing and especially horizontal drilling are sophisticated techniques but do not require a Nobel Prize – Kemp further points out. So will the attempt to cut off Russia from Western expertise open the international market for oil and gas innovation? We’ll have to wait and see.

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