The tightening of the sanctions will not have a critical impact but further adaptation will be required

4 august 2017

The Analytical Center has published the 50th anniversary issue of its Energy Bulletin. A key topic of the issue is the sanctions. The authors conclude that the policy of putting pressure on the Russian fuel and energy sector has been given a new impetus. The bulletin talks about why the fact that the new sanctions reach beyond the Russian jurisdiction poses risks for the fuel and energy sector at the international level and how Russian oil and gas companies have partially adapted to existing sanctions by using the flexibility of EU law, through partnership with the Asia Pacific region and thanks to some state policy measures. The problem of lagging behind in technology still looms big.

 

The new law passed in the US calls for a significant expansion of restrictions for American citizens and organizations when it comes to cooperating with Russian partners, including in the fuel and energy sector. While the original sanctions only imposed restrictions on projects that a number of Russian companies such as Gazprom, Gazprom Oil, Lukoil, Rosneft, Surgutneftegaz participated in, the new sanctions apply to all projects these companies are involved in. The new US law makes special note of countering the construction of the Nord Stream 2 gas pipeline.

However, the expert notes that the new law still has some loopholes that can allow American technologies to be deployed in Russia: projects, in which the restricted companies have a stake of less than 33 %, including projects being implemented in the territory of Russia, are exempt from the new sanctions.

The Russian oil and gas sector has now been operating under the sanctions imposed by the US, the EU and other countries for three years. A lot of projects that were being jointly implemented with western companies have been put on hold. However, some projects are still continuing: these include some projects in the Sakhalin and Arctic shelves, in Western Siberia and in the Black Sea.

The Arctic shelf projects are the most vulnerable to sanctions as Russian companies don't have enough competencies to drill and operate extraction systems in the Arctic shelf, so none of those projects can be carried off without the help of foreign partners. The authors quote the Russian Energy Minister Alexander Novak as saying that Russia will not be able to replace all the foreign equipment with domestically manufactured counterparts until at least 2020. And yet, despite these problems efforts to explore the Arctic shelf continue wherever possible. In addition, cooperation with Asian countries has been expanding against a backdrop of the western sanctions and this includes procurement of equipment manufactured in Asia as well as the raising of additional financing there, the experts write.

Thus, in a number of areas Russian oil and gas companies have been able to adapt to the sanctions. However, a number of fundamental vulnerabilities persist, specifically, the lack of technologies for exploring the arctic shelf. Low oil prices, excess supply of oil in the global market and rising domestic oil production mask these problems and the new round of sanctions does not look critical. However, what it does clearly show is that it's too early to expect for international tensions to subside just yet and efforts to adapt to the difficult conditions must continue.

For more see the bulletin Expanding the Anti-Russian Sanctions and the Global Fuel and Energy Sector.

You can find the other energy bulletins in Publications.