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West Faces Jeopardy From New Sanctions Targeting Russian Oil Industry

West Faces Jeopardy From New Sanctions Targeting Russian Oil Industry

Previous European and U.S. economic sanctions against Russia have focused primarily on the defense and banking sectors, and new measures announced July 29 ramp up pressure on its oil industry, the core of the country’s wealth. But this shift could mean bad news for the West, as well.

The new sanctions would limit Russia’s access to Western technology at a time when it’s moving to exploit oil reserves in the Arctic, under deep seas and in shale, all of which are difficult to extract with the country’s current technology. Production now is centered on Siberian deposits, which already are becoming depleted.

In the two decades since the breakup of the Soviet Union, Russia has gained wealth and global influence in large part because of its growing energy industry, which has at its disposal the world’s largest combined oil and gas reserves. It is now among one of the largest producers of oil, extracting about 10.5 million barrels a day.

So far, when Russia has needed help, it has turned to Beijing, which, for example, has the resources to finance a pipeline to ship Russian gas to China. But China can’t help Russia sidestep the current sanctions, according to Michael A. Levi, who studies energy issues at the Council on Foreign Relations, an American think tank.

“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,” Levi told The New York Times. “Chinese companies … can provide capital; they can provide people. They can’t fill in on the technology front.”

Related Article: Yukos Ruling, New Sanctions Tighten Financial Screws on Russia

Still, Russia’s new oil initiatives already have Western partners. In May, for example, BP agreed to a joint venture with Rosneft, Russia’s largest oil company, to explore the Volga-Urals region for shale oil. BP also owns nearly 20 percent of shares in Rosneft. ExxonMobil, meanwhile, also plans to work closely with Rosneft to develop oil in the Arctic; drilling in the Kara Sea is expected to begin soon.

BP’s case is an especially good example of the perils for Western interests from the new sanctions. The day the sanctions were announced, BP announced higher profits for the second quarter of 2014, yet its stock fell 3 percent on world markets.

In its second-quarter report, the company said that “any future erosion of our relationship with Rosneft, or the impact of further economic sanctions, could adversely impact our business and strategic objectives in Russia, the level of our income, production and reserves, our investment in Rosneft and our reputation.”

Tellingly, while the new sanctions focus on Russia’s energy industry, they ignore its gas sector. The European Union has been reluctant to impose tough measures on Moscow because it gets one-third of its gas from Russia.

But there’s no guarantee that Russia would forgo some profits and retaliate by limiting the gas flow to Europe or cutting it off altogether.

By Andy Tully of Oilprice.com




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