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Analysts: Russia’s Oil Industry Won’t Crumble Under U.S. ‘Bill From Hell’

The ‘bill from hell’ of hard-hitting sanctions against Russia that U.S. Senators introduced earlier this month is unlikely to have a wide-ranging impact on Russia’s oil industry, analysts and economists tell Reuters.

Since the United States slapped sanctions on Russia in 2014 over the Crimea annexation, Russian oil firms have drastically cut their exposure to Western bank funding, but this simply increased Russia’s reliance on domestic drilling and Moscow-derived oil field technology in its attempt to reduce Moscow’s dependence on imported technology.

The latest bill that U.S. Senators from both parties introduced on August 2 contains proposals for wide-ranging sanctions, including on goods, services, technology, financing, and support that currently directly and significantly contributes to Russia’s ability to develop crude oil resources located in the Russian Federation.

According to Russia-based analysts who spoke to Reuters, the oil industry would only see limited impact if those sanctions are approved, signed into law, and enacted, because Russian oil and gas firms now rely almost entirely on domestic and Chinese banks for funding, and have lessened their dependence on Western drilling technology.

This is one of the reasons why Russian stocks weren’t hit by the news that U.S. Senators were seeking harsher sanctions on Moscow, according to the analysts. Reuters has estimated that since the legislation was introduced, the Russian ruble has lost 10 percent in value, and banking stocks have plunged 20 percent. But oil stocks gave gained 2 percent and have risen by 27 percent year to date.

Related: Gulf Coast Refineries Process Record Volume Of Crude

“The main driver of the Russian oil industry’s profitability is the oil price denominated in roubles and it is currently posting new records as the rouble is getting weaker. Hence the sanction noise often even has a positive impact on Russian oil stocks,” Dmitry Marinchenko at Fitch Ratings told Reuters.

Russia’s oil industry would mostly feel the pinch in the access to high-end Western drilling technology if the ‘bill from hell’ is enacted. Yet, in recent years, Moscow has been looking to develop its own solutions to replace imported technology, and that process has been gathering pace, Denis Borisov, director of EY’s oil and gas center in Moscow, told Reuters.

By Tsvetana Paraskova for Oilprice.com

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  • Tony Sherman on August 18 2018 said:
    Importing spare parts won't be easy without credit and dollars. Every Russian industry will fall apart.

    Crimea and Donbass are scorched earth. Russia adopted two welfare basket cases, a million refugees, and crippled their economy.
  • Mamdouh G Salameh on August 18 2018 said:
    You are absolutely right that Russia’s oil & gas industry won’t crumble under US sanctions. The reason is that US sanctions on Russia have no bite.

    The target of the new sanctions like the previous ones is Russia’s oil and gas industry with the sole purpose of undermining Russia’s emergence as an energy superpower.

    Since the United States slapped sanctions on Russia in 2014 over the Crimea annexation, the Russian economy has diversified extensively and Russian oil companies have drastically cut their exposure to Western bank funding and have resorted to home-grown drilling technology to develop their oil and gas resources rather than depend on imported technology. Moreover, as a result of diversification, the Russian economy can now live for ever with an oil price of $40 or less.

    Russian oil and gas companies now rely almost entirely on domestic and Chinese banks for funding. A case in point is that China has just received the first ever LNG cargo from Russian gas producer Novatek’s $27-bn Yamal project which is the world’s largest Arctic LNG project and which was mostly financed by China under its “Belt and Road” initiative. That is why Russian stocks weren’t hit by the proposed harsher sanctions on Russia. In fact, oil stocks have risen by 27% to date. Moreover, Russia’s oil industry is currently posting record profits as a result of the fact that Russian oil is priced in ruble and the ruble has been declining in value against the dollar.

    Moreover, Russia’s grip on the European Union’s (EU) gas market will tighten further with the projected completion of the Nord Stream 2 and the Turk Stream gas pipelines by the end of 2019.

    President Putin’s meeting with German Chancellor Angela Merkel in Berlin today Saturday the 18th of August 2018 confirms two things. One is that the Nord Stream 2 gas pipeline is unstoppable despite US sanctions on Russia. The other is that by inviting President Putin to Berlin a week after the US Congress enacted the latest mandatory sanctions against Russia, Mrs Merkel has indicated her opposition to these sanctions.

    Furthermore, Russia has now emerged as the world’s largest supplier of oil and gas to China. It is already supplying more than 12% of China's oi imports. It also has a contract to provide 38 billion cubic metres a year (bcm/y) of Russian natural gas to China for the next 30 years. This could be increased to 61bcm/y if Putin decides to cut the shipment of natural gas to Europe in favour of China. Also on 19 July, China received the first ever Russian LNG cargo from Russia’s Yamal project in the Arctic.

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

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