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Russian oil sector at risk from new sanctions

By Nadia Rodova, Dina Khrennikova, Rosemary Griffin, Stuart Elliott

July 31, 2014 - Fresh sanctions against Moscow announced by the European Union and the United States in late July will heap further pressure on Russia's economy and undermine the sentiment of investors toward a country facing growing isolation from the Western community over its role in the Ukraine crisis.

While any detailed analysis of the impact of the measures on the oil and gas sector will become possible only after more details are made available, it is already clear that their consequences for the Russian economy will be significant, analysts believe.

"Russia is likely to see a major negative impact from constantly broadening sanctions, with a growing flight of capital and a further slowdown in economic growth," Moscow-based analysts at Investcafe said in a note, adding that any immediate effect on the oil and gas sector remains uncertain.

But the hardening Western stance toward Moscow has already prompted French major Total to suspend its plan to boost its holding in Russian independent gas producer Novatek, its partner in the Yamal LNG project, to 19.4%.

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Total said July 30 that its stake had reached 18% on June 30 and it had stopped buying more shares in Novatek after the July 17 downing of a Malaysian passenger jet in eastern Ukraine -- allegedly by pro-Russian separatists using a Russian-made missile.

And Shell CEO Ben van Beurden said July 31 that the recent events around the Ukraine crisis, including the crash of flight MH17 and the subsequent US and EU sanctions against Moscow, were a "game-changer" from an international political, economic and trade point of view.

Van Beurden said though it was too early to know exactly what the impact of the latest international sanctions against Russia would be for Shell. "As a company we are not as exposed to Russia as some of our competitors," he said.

"But it is a bit of a game changer from a political, economic and trade and investment perspective," he said.

"There are new developments all the time and it will go on for a little while before it will settle down. We are monitoring all this intently, but it is too early to see how it will play out and what response we will need to have," he said.

Analysts at VTB Capital said the key source of concern was the threat of further sanctions.

The new EU sanctions against Russia include a ban on transferring technologies for deepwater oil drilling, oil drilling in the Arctic, and shale oil drilling, among others.

The US also said it would impose similar sanctions as part of efforts to force Russia to de-escalate the ongoing conflict in eastern Ukraine.

Any immediate impact on the oil sector is considered unlikely, but in the longer term Russia could face difficulties in sourcing much-needed upstream technology.

Analysts believe Russia will focus more attention on already partly-developed projects and conventional onshore deposits.

"As a result of the sanctions, Russia's oil companies will likely focus more strongly on their brownfield projects, traditional greenfields and greenfields in East Siberia because, from what we see now, the sanctions will only affect new projects," said Alexander Kornilov, analyst at Moscow-based Alfa Bank.

"We have, however, yet to see what exactly is meant by 'new projects'," he added.

The EU was to publish details of the sanctions late July 31.

International cooperation It also remains unclear how the sanctions might affect strategic cooperation between Russian companies and international majors, but the chairman of Rosneft's board, Alexander Nekipelov, said it was possible that ExxonMobil could suspend its participation in joint projects with Rosneft.

"I'll speak as an expert and a scientist, not the chairman of the board. I think that there is a possibility that ExxonMobil will suspend its participation, if it has no other options, but I think it will return as soon as the situation changes," he told Russia's independent Dozhd TV channel.

The possible suspension of Rosneft/ExxonMobil joint projects would be negative for both parties as the US company has already invested significant funds into the joint work, Nekipelov said.

Rosneft is developing a number of major projects, including in the Arctic, that require cutting-edge technology scarce in Russia.

But despite sanctions announcement on July 29, North Atlantic Drilling Ltd (NADL), a leading offshore harsh environment drilling company, signed a six-year drilling agreement with Rosneft. NADL is majority owned by Norway- and US-listed Seadrill.

NADL chief executive Alf Ragnar Lovdal said the contracts were in line with a timetable agreed earlier this year.

"Entering into long-term offshore drilling agreements will allow Rosneft to ensure implementation of exploration and development of its harsh environment offshore license areas," Rosneft Chief Executive Igor Sechin said.

Many international companies working in Russia have said they would remain committed to investments in the country unless legislation enacted by their home countries forced them to curb operations.

If service companies moved to limit their operations or withdraw from the Russian market, this could pose serious issues for developments.

"Foreign companies account for some 70% of the Russian oil service market, and if pressure on them increases and they make such decisions, it will mean very serious problems for the Russian oil segment," Kornilov said.

A Halliburton representative told Platts July 29 that the company continued to operate in Russia, "and does so while complying fully with all laws applicable to our operations, including relevant trade restrictions." The company declined to comment on whether it has already scaled back its operations in Russia, or is planning to do so, in light of sanctions introduced by the EU and US.

It remains unclear what impact the sanctions could have on near-term projects with foreign participation, and in particular, Rosneft and ExxonMobil's plans to start drilling in Arctic waters in mid-August.

During the week ended July 25, Rosneft's vice-president Zeljko Runje said that a drilling rig had crossed the Norwegian-Russian border and was being transported to the drilling spot in the Kara Sea.

Rosneft's Sechin did not rule out the possibility of the company moving some projects due to the sanctions.

"We are working in different conditions and are prepared for volatility linked to these sanctions," he told reporters July 29 during a trip to Caracas.

The US has already banned Rosneft and Novatek from access to US financing for periods longer than 90 days, making it more difficult for companies to raise funds for their massive investment projects.

Next article: Ukraine says reverse gas flows from Europe have fallen on Gazprom threats

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