International oil companies (IOCs) will likely try to navigate around US and EU sanctions on Russia to continue developing oil projects in the country, GTR understands.
In an exclusive conversation with GTR, CEO of Delta Economics, Rebecca Harding, says that because of the potential value of new projects in areas like eastern Siberia and the Kara Sea, IOCs will continue their involvement through non-aligned partners.
“The amount that IOCs stand to lose as a result of sanctions is so huge that they can’t afford not to continue development work in Russia,” she says. “They may decide to overtly be seen to be slowing things down, but the reality is that they’ll find other ways of continuing these business streams because otherwise their balance sheets will suffer greatly.”
The latest US and EU sanctions specifically target Russia’s ability to develop new oil projects by banning the export of specialist oil technology and equipment to the country. Western IOCs involved in developing new projects alongside Russian oil producers face the decision of whether to continue operations.
ExxonMobil has this week commenced exploratory drilling in the Kara Sea (Russian-owned water in the Arctic circle) as part of a partnership with Rosneft, however France’s Total has suspended buying shares in Novatek, Russia’s largest independent oil producer, as a result of the sanctions.
According to Harding, oil supply chains will circumvent the regulations, and a slowing-down of direct investment into Russia from the west may only have a limited impact on the Russian economy.
“Direct investment will definitely suffer,” she says. “But on an individual business level, it’s likely there’ll be various ways business can get around the sanctions.”
In terms of the technology needed to pursue new projects, the sanctions may limit progress in the near-term, but expertise and machinery can be sourced from other markets.
“Oil and gas technology is a global business, and these projects are highly technologically specific, put together by international teams,” says Harding.
“Turkey is one market Russia could exploit for its technology. It isn’t aligned with the EU on sanctions and Turkish firms have significant innovative capacity in mining and drilling.”
Harding predicts that China will increasingly become a key oil partner for Russia, particularly when it comes to financing. So far in 2014, Delta has seen trade finance from China to Russia increase by 5%, with a marked increase in November/December last year, when trade finance grew 8% month-on-month.
Gazprom’s recent decision to price oil trade with China in roubles or yuan, rather than US dollars, is demonstrative of China’s growing importance in the global oil trade, and a sign that Russia wants to exclude the US and EU from the conversation.
“The general flow of trade finance into Russia is definitely slowing,” says Harding. “However, what isn’t slowing is China-Russia trade, especially in sectors one expects Russia to need trade finance going forward, namely oil and agriculture.”