The impact of Western sanctions on Russia's oil and gas sector

21 August 2014

Russian companies are seeking to increase their presence elsewhere in the Middle East

The growing tit-for-tat trade war between Russia and the West, born out of condemnation of Moscow’s interference in Ukraine, is likely to see Russia looking East for trade and investment.

According to the International Energy Agency (IEA), a third of Russian oil exports have gone to the Asia-Pacific region so far in 2014 – an all-time high – compared with just a fifth of exports in 2012.

A continuation of this trend would allow Asian economies to diversify their oil imports and become less reliant on the largest regional source, the Middle East.

Tensions with Europe has seen Russia look elsewhere for energy partnerships, with new signs of Moscow forging ties with Iran – another country slapped with Western trade sanctions.

Energy ministers from the two countries in August signed a five-year memorandum of understanding (MoU) on an oil-for-goods swap deal, which could allow Iran to export crude without falling foul of sanctions.

Meanwhile, the UK-based Telegraph newspaper reported that Moscow and Tehran had signed a $20bn oil-based trade deal, citing sources from the Russian energy ministry.

Russian oil companies have had a relatively small presence in the Middle East and North Africa (Mena) energy sector until Iraq’s oil industry began to open up to overseas companies following the ousting of Saddam Hussein.

Moscow-based Lukoil won the bid to develop West Qurna-2 field in December of 2009 and this has become one of the largest upstream oil developments in post-war Iraq. The 400,000 barrels-a-day (b/d) capacity first phase started production in March after a two-year construction phase and the company is planning to expand capacity further over the coming years.

Some commentators have warned that Russian oil companies’ overseas operations could be affected by sanctions against the use of Western technology, but Energy Aspects analyst Richard Mallinson believes this will have a limited effect in Iraq.

 “Where Russian firms have international assets these are generally conventional deposits, in part because firms like Rosneft and Lukoil have not yet developed the expertise to operate major unconventional or offshore projects in other regions,” says Mallinson.

“These companies may face some additional challenges with their international projects because of the technology sanctions, but I do not expect this to have a major impact on timelines or production levels. Where Russian companies need outside technology for conventional fields in the Mena region they will generally be able to source this from Asian suppliers if European and American majors are off limits.”

Russian companies are seeking to increase their presence elsewhere in the Middle East. Perhaps the largest available concession in the region is on Abu Dhabi’s onshore fields, where several companies have submitted bids to form a new joint venture.

Russia’s Rosneft is reportedly one of up to 10 companies vying for a stake in a new joint venture, but the emirate’s Supreme Petroleum Council may be reluctant to pair the Russian group with one of its historical onshore partners, which are all based in the US and EU.

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