Stricter Sanctions May Pose a Threat to the Global Fuel and Energy Sector

1 september 2015

Falling oil prices, inaction of the oil cartel, technological progress in fuel and energy, politicization of the energy section, sanctions against Russia: all these factors are having far reaching consequences for many sectors of the economy. In the new issue of the Analytical Center’s Energy Bulletin the Center’s experts look at the impact the sectoral sanctions are having on the energy sector in Russia and the world one year after they went into effect.

According to the Bulletin, it has now been a year since sanctions were imposed on the oil and gas industry in Russia and yet assessing their impact still remains a difficult task. On the one hand, one clearly observable direct effect of the sanctions is the freezing of projects with foreign interest aimed at exploring hard-to-extract oil and oil deposits in the Arctic and deep-water shelf, which can have a long-term effect on the industry.  On the other hand, these same sanctions have spurred import substitution efforts in Russia: action plans to promote import substitution have been adopted in the oil and natural gas equipment manufacturing sector, energy mechanical engineering, petrochemical industry and in oil refining. The work in this area has only just begun and no tangible results have been achieved at this stage, however, if the goals of the import substitution projects are achieved,  the Russian oil and gas industry will become much less import dependent and the range of locally sourced equipment and services will be expended in this sector, the experts prognosticate.

The Bulletin notes that the sanctions have hit western companies operating in Russia: and this negative impact is not limited to current losses but also extends to negative contribution to global GDP growth.  The sanctions led to a spike in political risks in every business area and especially in energy investments.  Previously investors only had to buy insurance against standard risks but now they also have to pay for insurance against political uncertainty, the experts write. This can be seen in the electricity sales market where Russia has huge opportunities but there is a need for investments in infrastructure, stability in political relations and coordination of plans between producers and consumers. 

As far as countries-key exporters of oil and gas in the Persian Gulf are concerned, they too are having problems with modernization of their economies.  The experts consider that their current strategies have failed to play a major role. ‘Today everyone understands that diversification is needed but you cannot achieve diversification through money and political will alone, you need skilled labor, effective management etc.,’ the experts write.

The consequences of the sectoral sanctions against the Russian oil and gas sector for the EU and the US are rather limited and have not resulted in any critical problems because the conditions in the commodity markets currently favor the buyers, the experts believe. Nevertheless, some negative effects are being felt. The experts note that foreign oil and gas companies view projects in Russia as high risk while their total losses may exceed USD 5 billion. Besides, if sanctions were to be tightened even further it could pose a threat to the entire global oil and gas sector, according to the experts.

The Bulletin titled ‘Sectoral Sanctions: One Year In’ also looks at the prospects of exports of Russian electricity and the diversification strategy pursued by the Persian Gulf countries.

For other issues of the Energy Bulletin see the Publications section.