Ban on sales of shale and deep water hydrocarbon extraction equipment to hurt Russias future output
As President Barack Obama unveiled the latest round of coordinated sanctions against Russia on 29 July he warned that the new restrictions would make it more difficult for Russia to develop its oil resources, sparking concerns that the sanctions will exert upward pressure on global oil prices over the long term.
A key element of the new assault on Russias economy is a ban on supplying the country with a range of oil and gas technology that takes aim at President Vladimir Putins ability to develop unconventional hydrocarbon deposits.
Russia is both the worlds largest exporter of natural gas and one of the worlds largest oil producers, but many of its biggest conventional reserves are in decline and the country is relying on its expansive unconventional reserves of gas and oil to help it sustain its output.
As well as being home to the worlds biggest reserves of technically recoverable shale oil, Russia is also the worlds ninth biggest reserves of technically recoverable shale gas, according to a January 2014 report by the US Energy Information Administration.
On top of the shale resources, out of the 61 large oil and natural gas fields that have been discovered so far within the Arctic Circle, 43 are in Russia, and the country has significant deep water reserves offshore.
Moscow was planning to ramp up production from both its shale and deep water assets, as well as reserves in the Arctic over the next decade, but these plans are now likely to see major delays.
While both Russia and China are well versed in conventional oil and gas recovery, the EU and the US have a near-monopoly on the technologies needed to unlock the hydrocarbons Russia sees as its future.
Before the crisis in Ukraine, American financial services company Morgan Stanley had predicted that Russia would be seeing an extra 250,000 barrels a day from virgin Arctic fields and shale deposits by by 2018, but it now says this extra production is at risk.
Energy consultancy FGE agrees, and says delays in production with lower output over the long term are inevitable if there is no resolution to the Ukraine crisis and sanctions remain in place.
Russia is looking to China to help procure oil technology, but it wont be able to help much with unconventional assets. Putin has also said that Russia would like to develop its own capabilities. This is possible but it will take time, says a spokesperson for FGE.
One of the schemes likely to be hit hard by the technology sanctions is a plan to develop shale oil deposits form the gargantuan Bazhenov shale in Western Siberia. The Bazhenov formation is more than 80 times bigger than Americas Bakken shale, which lies under parts of Montana, North Dakota, Saskatchewan, and Manitoba, and has seen oil output ramped up to more than 500,000 barrels a day (b/d).
Under a deal signed in February 2014, US oil field services company Schlumberger agreed to provide technical assistance to help Russian oil producer Gazprom Neft develop the Bazhenov shale but now the new sanctions mean the future of this is unclear.
A similar deal between Gazprom and UK/Dutch Shell also has an uncertain future. Salym Petroleum Development, a joint venture between the two companies, was due to build five horizontal appraisal wells using multistage hydraulic fracturing technology over 2014 and 2015.
As production declines from Russias big conventional deposits and sanctions eat away at Russias ability to develop its vast shale resources, Putin is going to have to think fast to maintain output levels over the next decade.
According to the EUs Official Journal under the new tier three sanctions:
The sale, supply, transfer or export of certain sensitive goods and technologies should be prohibited when they are destined for deep water oil exploration and production, Arctic oil exploration and production or shale oil projects.
Under the new regulation prior approval is needed to import a wide range of materials and machines. These include:
- Line pipe
- Drill pipe
- Casing of a kind used in drilling for oil and gas
- Rock-drilling tools
- Earth-boring tools
- Specialist pumps for liquids, fuels and lubricants
- Mobile drilling derricks
- Floating or submersible drilling or production platforms
- Sea-going light vessels, fire-floats, floating cranes and other specialist vessels used by the oil industry
- Parts for any of the above machines
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