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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. 

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Can Russia’s Arctic Oil Boom Survive U.S. Sanctions?

Russia is betting big on offshore Arctic oil and gas projects and onshore deposits in Siberia to offset oil production declines at maturing fields and to become a dominant liquefied natural gas (LNG) player worldwide.

But the major Russian oil and gas companies have been banned from access to western capital, which they need in order to cooperate with U.S. and European oil majors in exploring and developing resources in harsh environments. The U.S. and EU sanctions on Russia’s oil and gas sector, first imposed in 2014, have driven away the world’s supermajors from ambitious projects in the Arctic offshore and in shale formations in Siberia.  

Russian companies are left without partnerships in technology needed to explore, drill, and potentially produce and process hard-to-extract oil and gas resources.  

For places like the Arctic and shale formations in Siberia, it’s not only the challenging and expensive exploration and drilling that is holding back significant progress at oil prices languishing in the low $60s a barrel.

The sanctions also play a role in stalled projects as international oil majors fled developments in the wake of the restrictions.

Five years ago, the U.S. imposed sanctions banning collaboration with the major Russian energy companies on Russian deepwater, Arctic offshore, or shale projects with Gazprom, Gazprom Neft, Lukoil, Surgutneftegas, and Rosneft. These are the largest energy firms in Russia and they don’t have access to capital at western banks to develop such projects.  Related: Why One Analyst Thinks Tesla's Stock Could Soar To $400 

Although Russian firms downplay the effects of the U.S. sanctions on their development plans and access to financing and foreign technology, and although domestic companies are focused on developing in-house technology solutions to replace foreign-sourced tech, analysts believe that 100-percent local content technology in challenging projects would likely take many years to implement.

“Although domestic oil producers are pursuing import substitution strategies through in-house research and development centres, the development of commercially feasible technologies and fully localised production of the required equipment will likely take years,” Artem Frolov, vice-president at Moody’s in Moscow, has recently told Nastassia Astrasheuskaya of the Financial Times.

The sanctions are specifically targeting several kinds of projects. In projects free of sanctions, Russian firms continue to work with world’s top oilfield services providers like Schlumberger.

But several major Arctic offshore and Siberian shale projects have failed to take off because sanctions have added to the low oil and gas prices and expensive development to stifle Russia’s ambitions.  

Right after the initial sanctions in 2014, Gazprom’s oil arm, Gazprom Neft, said that Shell had suspended work on a joint project to develop the Bazhenov shale layer under much of the existing deposits in West Siberia. Despite the fact that Bazhenov holds great potential, “Russian firms have made little progress in developing shale resources because sanctions and low oil prices have hindered shale projects,” according to the EIA. Related: The Birth Of An LNG Superpower

In 2015, the U.S. imposed sanctions on the Yuzhno-Kirinskoye Field in the Sea of Okhotsk, because the field is reported to contain substantial reserves of oil apart from significant gas reserves. Two years later, owner Gazprom pushed out the potential commercial development of the field to 2023 from 2021.

France’s Total withdrew in 2015 from the Shtokmanovskoye, or Shtokman, gas and condensate field in Russia’s Barents Sea in Arctic waters. This left Gazprom to figure out how it would develop the huge resource in the Arctic offshore. The Russian gas giant has shut down its unit Shtokman Development AG, which had to be the operator of the field’s first phase, Russian media reported in June this year.

Russia’s own natural resources ministry admitted last year that the sanctions had hampered natural gas project developments in the country. In a report about Russia’s oil and gas resources and their development for the period 2016-2017, the ministry said that sanctions against Russian oil and gas companies that limit the flow of foreign investment, new technologies, and equipment for the sector complicate the development of new projects in Russia, especially in offshore areas and in hard-to-extract resources. 

The Arctic is key to Russia’s ambitions to become a global LNG leader, while new oil and resources need to be developed if Russia wants to replace maturing deposits and avoid peak oil production as early as in 2021.

By Tsvetana Paraskova for Oilprice.com

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  • Mamdouh Salameh on November 13 2019 said:
    The Russian economy hasn’t only survived US sanctions since 2014 but has been growing and so is Russia’s Arctic oil and gas boom.

    Russia is reported to have more than $8 trillion worth of untapped oil and gas in its sector of the Arctic. It could, in a few years, add more than 1.5 million barrels of oil a day (mbd) to its current oil production of 11.2 mbd thus consolidating Russia’s position as the top oil producer in the world.

    In a gesture of defiance against US sanctions, President Putin urged Russian oil and gas companies to develop the huge oil and gas reserves in the Arctic. Companies such as Rosneft and its oil-producing rivals Lukoil and Gazprom Neft, have broadly restructured to operate with few ill effects, having replaced foreign credit with local funding and Chinese investments and developed state-of-the-art in-house technology to replace foreign expertise.

    As a result, US oil giant ExxonMobil has been a prominent loser. In the run-up to 2014 sanctions, US oil giant ExxonMobil led by its then CEO Mr Rex Tillerson, and Russia’s oil giant Rosneft invested $3.2 billion in a project for drilling for oil in the Kara Sea in the Russian sector of the Arctic — a region that Rosneft estimated it could have more oil than the entire Gulf of Mexico. But the sanctions forced Exxon Mobil to halt drilling.

    Rosneft, Russia’s primary oil operator in the Arctic, resumed its activities by drilling the Central-Olginskaya offshore well in the Laptev Sea and also in the Barents Sea and the Kara Sea on orders from President Putin. In so doing, Russia and President Putin have demonstrated that US sanctions did not succeed in putting a crimp in Russia’s oil and gas sector.

    Moreover, Russia is racing towards the world’s top spot in LNG production from its Arctic gas reserves with help from China which is providing both major investments and a ready market for Russian LNG exports.

    And despite US threat of sanctions, the Nord Stream 2 gas pipeline which will be transporting Russian natural gas under the Baltic Sea to Germany and the European Union (EU) is unstoppable and nearing completion by the end of this year.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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