Russian oil industry would weather U.S. 'bill from hell'
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[August 17, 2018]
By Oksana Kobzeva and Dmitry Zhdannikov
MOSCOW (Reuters) - Stiff new U.S. sanctions
against Russia would only have a limited impact on its oil industry
because it has drastically reduced its reliance on Western funding and
foreign partnerships and is lessening its dependence on imported
technology.
Western sanctions imposed in 2014 over Russia's annexation of Crimea
have already made it extremely hard for many state oil firms such as
Rosneft <ROSN.MM> to borrow abroad or use Western technology to develop
shale, offshore and Arctic deposits.
While those measures have slowed down a number of challenging oil
projects, they have done little to halt the Russian industry's growth
with production near a record high of 11.2 million barrels per day in
July - and set to climb further.
Since 2014, the Russian oil industry has effectively halted borrowing
from Western institutions, instead relying on its own cash flow and
lending from state-owned banks while developing technology to replace
services once supplied by Western firms.
Analysts say this is partly why Russian oil stocks have been relatively
unscathed since U.S. senators introduced legislation to impose new
sanctions on Russia over its interference in U.S. elections and its
activities in Syria and Ukraine.
The measures introduced on Aug. 2, dubbed by the senators as the "bill
from hell", include potential curbs on the operations of state-owned
Russian banks, restrictions on holding Russian sovereign debt as well as
measures against Western involvement in Russian oil and gas projects.
While the ruble has fallen more than 10 percent and Russian banking
stocks have slumped 20 percent since the legislation was introduced,
shares in Russian oil firms have climbed 2 percent, leaving them 27
percent higher so far in 2018 <.TRXFLDRUPOILI>.
"The main driver of the Russian oil industry's profitability is the oil
price denominated in roubles and it is currently posting new records as
the rouble is getting weaker. Hence the sanction noise often even has a
positive impact on Russian oil stocks," said Dmitry Marinchenko at Fitch
Ratings.
MAJOR DEPARTURE
The prospects for the latest U.S. sanctions bill are not immediately
clear. It would have to pass both the Senate and House of
Representatives and then be signed into law by President Donald Trump.
To be sure, Washington could really hurt the Russian oil industry if it
introduced Iran-like measures forbidding oil purchases from the country.
But given Russia produces more than 11 percent of global crude, such a
measure would lead to a major spike in oil prices and hit the United
States itself hard as it is the world's largest oil consumer.
Russian gas exporting monopoly Gazprom <GAZP.MM>, for example, has
maintained its output since 2014 and actually increased exports to
Europe to an all-time high in 2017, securing a 34 percent share of EU
markets amid rising demand.
But of all Russian oil and gas companies, it is the only one to have
borrowed significant sums from the West - about $5 billion in 2017 and
$3 billion in 2018 so far - using Eurobonds and syndicated loans.
What's more, those amounts are only equivalent to a small proportion of
Gazprom's annual capital spending of $22 billion. The rest of the
Russian oil industry invests a similar amount each year as well, mostly
without Western funding.
That represents a major departure from the years prior to the sanctions
when the lion's share of Russian oil industry's borrowing came from
Western banks or export-backed facilities with trading houses and major
oil companies.
In 2013, for example, a year before the first Western sanctions, Rosneft
alone borrowed more than $35 billion from Western institutions to buy
smaller rival TNK-BP and to fund its capital spending.
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A worker at an oil field
owned by Bashneft, Bashkortostan, Russia, January 28, 2015. REUTERS/Sergei
Karpukhin/File Photo
CHINESE MONEY
There has been a similar shift in joint ventures between Russian and Western
companies.
A decade ago, dozens of projects were planned but the number has shrunk to just
a few ventures, which are important but not critical to help Russia maintain its
output growth.
U.S. oil giant Exxon Mobil <XOM.N> and Italy's Eni <ENI.MI>, for example, have
dropped plans to help Russia develop offshore fields and U.S. company
ConocoPhillips <COP.N> sold out from Russia's biggest private oil firm Lukoil <LKOH.MM>.
The key remaining ventures involving Western companies are three projects
between BP <BP.L> and Rosneft in East and West Siberia and a gas venture between
Rosneft and Exxon Mobil on Sakhalin island.
Also on the gas front, Royal Dutch Shell <RDSa.L> and France's Total <TOTF.PA>
have been considering new liquefied natural gas projects with Gazprom and
Novatek <NVTK.MM>, as well as a new pipeline to Europe under the Baltic Sea.
But to put the projects in perspective, the combined cost of all of them is
about $50 billion - less than a 10th of the Russian oil industry's investment
program for the next decade.
And if Western institutions are wary of lending to Russia, other countries such
as China have been prepared to step in. Novatek and Total, for example, launched
the $27 billion Yamal LNG plant this year with Beijing's financial support.
WEAKEST LINK
The weakest link in the Russian oil industry in the face of sanctions has
traditionally been high-end Western technology such as complex drilling,
hydraulic fracturing or IT, said Denis Borisov, director of EY's oil and gas
center in Moscow.
Russia's drilling and oil servicing market is worth about $20 billion a year and
the share of the market held by Western service companies has remained fairly
steady over the last few years and at about a fifth.
"But the process of replacing foreign equipment with local production has
gathered pace," said Borisov.
Rosneft, which produces 40 percent of Russian oil, has recently tested its own
simulated hydraulic fracturing technology - the extraction technique that
spurred the boom in U.S. shale oil production.
The technology first came to Russia mainly via major Western oil services firms
such as Schlumberger <SLB.N> and Halliburton <HAL.N>.
Companies such as Schlumberger are still doing a lot of complex drilling work in
the Caspian Sea and West Siberia for Lukoil, as well as working on the world's
longest extended reach well for Exxon and Rosneft off the Sakhalin island.
But Fitch's Marinchenko said the reliance of Russian oil firms on Western
technology has declined since 2014 thanks to imports from China and local
production of drilling equipment.
Since 2014, Rosneft's own drilling subsidiary has doubled its market share to 25
percent, meaning the company has become almost self sufficient.
"It is clear that new wide-scale sanctions on technology will not become the
start of an end for the Russian oil industry, especially if Europe doesn't join
them," said Marinchenko. "But it will complicate the development of hard to
extract or depleted deposits."
(Additional reporting by Vladimir Soldatkin; writing by Dmitry Zhdannikov;
editing by David Clarke)
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