How sanctions will affect the West’s $35bn invested in Russian oil

New stage three sanctions won’t immediately slash
Russian oil production, which at 10.55 million barrels per day is
the world’s largest, but could derail future foreign investment
in Russia’s oil industry. Russia is home to the largest combined
oil and gas reserves in the world.

The US and the 28 EU countries hope to influence Moscow’s foreign
policy in eastern Ukraine.

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MORE: EU and US impose new round of sanctions on Russia over
Ukraine

New restrictions “will make it more difficult for Russia to
develop its oil resources over the long term,” President
Barack Obama said as he unveiled the new tough regime.

The sanctions will hit the heart of Russia’s economy- oil, but
not touch the gas sector. Together, the two make up more than 50
percent of revenues for the Russian state. Russia has an
estimated $7.5 trillion in oil and gas resources, many of which
require Western oil technology to extract.

Obama said he wanted the sanctions “to bite.”

The sanctions won’t only bite at Russia, but Western oil
companies like BP and ExxonMobil, and equipment suppliers may
fall victim to the oil technology ban.

Introduction of EU sanctions against the Russian energy sector
will drive up European energy prices, the Russian Foreign
Ministry warned on Wednesday.

BP

BP is one of the most exposed to the Russian market, after the
UK-based company bought a 19.75 percent stake in the state oil
company Rosneft, a company already on Obama’s sanctions list.

Previously, BP insisted it was “business as usual” with Russia, but
the sectorial sanctions could derail the company’s strategy in
Russia, where it sources nearly one-third of its global oil
production.

“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,” BP said on Wednesday, before the
heavy-handed sanctions were announced.

The same day, the British energy company reported a big bump in second quarter
profits, which rose 25.3 percent to $3.23 billion.

In June, Rosneft agreed to supply BP with up to 12 million tons
of oil and oil products over 5 years. The deal assumes a
prepayment of at least $1.5 billion.

ExxonMobil

ExxonMobil has been present in the Russian market for over 20
years. In partnership with Rosneft, the Texas-based oil major has
many projects in Russia underway- including the $500 billion
exploration of the Bazhenov oil field in Western Siberia, and a
$15 billion liquefied natural gas terminal in Russia’s Far East.

If forced to quit Russia, Exxon could pull out as much as $1
billion in funds intended to go to offshore Arctic and fracking
projects in Siberia, Bloomberg News reported.

After the sanctions were announced, Rosneft Chairman Alexander
Nekipelov said ExxonMobil may suspend cooperation with Rosneft,
but only in an extreme situation.

“As far as we know, Exxon does not have plans to stop
cooperation with Rosneft, and we hope the situation will not go
that far,” Nekipelov said.

“We are assessing the impact of the sanctions,” Alan
Jeffers, an Exxon spokesman, told Bloomberg News via email.

Nekipelov said the American company doesn’t want to give up its
joint projects with Rosneft- it has already invested too much.

In May, the two companies agreed on four Arctic exploration projects.
Additionally, ExxonMobil and Rosneft will operate a new joint
offshore drilling rig in the Kara Sea, where the two companies
have rights to over 11.3 million acres of Russia’s Pacific Ocean
waters. The company also has a substantial stake in the Far East
Sakhalin oil project, which covers 85,000 acres.

Exxon CEO Rex Tillerson hasn’t made any official comment on the
new sanctions.

Total

France’ oil major and largest company, Total, has huge operations
in Russia, its fourth largest market. The morning after the
sanctions, the group’s stock dipped 2.66 percent in Paris. On
Wednesday, the company reported an estimated second quarter net
profit drop of 12 percent

Total owns about 18 percent of Novatek, Russia’s second largest
gas producer, which was affected in the previous round of US
sanctions.

“We stopped buying shares in Novatek the day of the airplane
accident after considering all the uncertainty that it
created,” the French company’s CEO said in the earnings call
on Wednesday.

Novatek leads the $27 billion Yamal LNG project with Total, along
with China’s CNPC. The South-Tambeyskoye field has an estimated
492 billion cubic meters of proven gas reserves.

Russia is “a great oil and gas country and we’ll have to wait
and see the nature of these new sanctions first,” the CEO
said on Wednesday, adding it was a “crucial” market.

The project is highly dependent on US technology and will
experience serious difficulties if sanctions are imposed.

Total expects its hydrocarbon production in Russia to rise to
400,000 barrels a day from 207,000 barrels in 2013.

Halliburton and Schlumberger

Blocking the exports of specific goods and technology to Russia
is going to squeeze the world’s largest oil service and equipment
companies- both US-based- which depend on Russia for sales.

Halliburton relies on Russia for 4-5 percent of global sales, and
Schlumberger generates 5-6 percent, according to an estimate by
RBC Capital Markets.

Both oilfield service groups, which provide Russia with
horizontal drilling and hydraulic fracturing technology, could
lose sales because of sanctions, but they won’t be driven out all
together.

The stock price has dropped for both companies after the
sanctions were announced- Halliburton is down 1.95 percent, and
Schlumberger dipped 0.70 percent.

Dick Cheney, former US Vice President, and avid Russia critic,
served as Halliburton’s CEO through 2000.

Article source: http://rt.com/business/176760-sanctions-russia-bp-exxon/