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23-26 April 2019 • Moscow • Crocus Expo

Mythbusting: Sanctions & the Russian oil & gas industry

It’s no secret that the Russian oil & gas industry is under the cosh of international sanctions. But what effect are they actually having?
Mythbusting: Sanctions & the Russian oil & gas industry
MIOGE is here to blow some of the current myths surrounding the industry wide open. After all, the Russian character is one of resilience, and its hydrocarbons industry represents this in full. 
Read on to find out the real state of oil & gas in Russia.

Sanctions have handicapped Russian hydrocarbons production – false

Gas production facility in Arctic Russia
If international sanctions purpose was to restrict Russian production, they have failed so far. During the period 2012-2016, during a global oil price crisis and the first sanctions round, oil & gas output rose 6%.
Since the start of 2018, oil output has been at a steady 11.2m barrels per day – in excess of Saudi Arabia’s 10.42m. This was boosted further by a deal cut with OPEC to ease output caps. The Russian rouble also recovered alongside the surging global oil price, so Russia is feeling particularly confident in the face of international opposition.
Across 2017, gas production came to a total of 635.6bn cubic metres. That’s a 7.6% increase against 2016’s levels, according to levels recorded in the 2018 BP Statistical Energy Review.
As it stands, energy production will remain high in Russia – particularly if the oil price continues its upward trajectory. While it is still beholden to OPEC agreements, the aforementioned easing of caps means Russia is raring to bump up its output of petroleum and gas products into the next decade and beyond.
Planned projects represent billions in spending, so the Russian majors are quietly confident of their ability to keep production volumes stable.

Russian oil & gas projects halt under sanctions – false

Arctic LNG equipment
Instead of grinding to a complete halt, Russian oil & gas projects are set to thrive from now until at least 2025. From the present until then, 29 new developments will be started if all goes to plan.
The level of capex at play here is staggering. Gazprom alone is spending $160bn on new plays into the next decade – the highest individual spending level of any energy company worldwide. All Russian majors are breaking fresh ground or investing heavily in E&P activity, with many projects tied in with foreign companies.
For instance, Novatek, Russia’s number two gas firm, is spending at least $25.5bn on a second Arctic LNG production facility. Total owns a 20% stake in this project, as does CNPC. China’s Silk Road Fund also owns a 9.9% share.
The idea is to create a liquid natural gas complex to rival those in the US, UAE and Australia – only drawing from the largest pool of untapped gas resources the world has to offer. When the project comes online in 2025, it will substantially increase Russian gas productivity considerably.
This is only a miniscule segment of both the activity and spending planned into the 2020s and beyond. However, there is one big snag: restricted access to imported oil & gas equipment.
90% of project equipment used at Russian oil & gas projects is imported. Given the US is a major source market for such products, as well as countries in EU, Norway and Australia, project progress could be hampered.
However, there are plenty of ways these are being circumvented. For starters, not every country joined the international response against Russia. 
China and India especially are playing a different geopolitical game to the US and its allies. Russia has taken an eastward pivot in recent years and is welcoming closer collaboration with its East and South Asian partners. Manufacturers in these territories are well positioned to pounce on the vacated market share left by US suppliers.
Even if these companies are headquartered in the States, that doesn’t make them any less multi-national. To circumvent issues like import substitution policies and global sanctions, they often rely on localised manufacturing to keep vital equipment flowing to project sites.
Schlumberger, for instance, owns and operates several Russian production facilities, covering everything from IT services to heavy drilling equipment. Other companies like National Oilwell Varco and General Electric have similar tie-ins or wholly-owned factories churning out heavy machinery.
Localisation is the perfect route the Russian market. It gives products unique “Made in Russia” status, and thus preference in government-mandated tenders, as well as providing a local supply base for cheaper, more efficient freight logistics.

Russian exports slump in the new landscape – false

Oil tanker in Russian Pacific port
In the same way that production is defiantly expanding in Russia, so too are Russia’s exports. 
In gas, its exports to the EU, the largest territory for exported Russian gas, Russia holds a 37% share of the entire market.  
In 2017, volumes grew 8.1% reaching a total of 193.9bn cubic metres. With plans afoot for a second Nord Stream pipeline, the project broke ground in German waters earlier in 2018, an additional 55 billion cubic metres to European gas supplies when it comes online in 2019.
Crucially, Russia isn’t relying on the West to buy its petroleum products either. Since the turn of the 20th century, the nation has gradually been pivoting eastward, a trend which can be seen its increasing oil exports to China.
China’s thirst for oil and petrol goods is legendarily thirsty, and Russia’s exports there have been growing steadily since 2002. At the start of the century, under 100,000 barrels of Russian crude were being imported by Chinese companies daily. Flash forward to 2016, and that figure has grown by more than 10 times to over 1.1m barrels a day.
Russia borders China – a major advantage in the transportation stakes. Russian ESPO-grade crude from its Pacific ports like Kozmino reaches China’s heavily populated East Coast at a much faster rate than products from the Middle East.
It’s not just oil China is buying from oil. Gazprom inked a deal with CNPC in 2017, guaranteeing delivery of $400bn worth of gas supplies over the next 30 years. Transmission is started to begin in 2019, or as soon as the Power of Siberia pipeline comes online.
So, as long as China remains a huge market with an extensive industrial sector and energy consumption habits, Russian exports are only going to keep increasing.

Hydrocarbon project funding removed from Russia - false

Flare gas at Russian gas site
Prior to sanctions, many Russian oil companies relied on Western banks and financial institutions for project financing. This is no longer the case; partly because of sanctions – but mainly for domestic institutions picking up the slack.
One Russian oil trader told Reuters that it was “business as usual”, as Russian oil stocks currently appear unaffected by the negative measures. 
For instance, state oil company Zarubezhneft was seeking a buyer for 1.8m tonnes of Ural crude during July 2017 for a period extending to December 2018. Its buyer? VTB Trading – a subsidiary of Russian state lender VTB. No foreign firms were party to the deal.
Shares in oil companies have actually risen 2% recently, which means their value in 2018 is 27% higher than in the previous year. 
Strong liquidity and increased profits at Russian majors means they are now more self-reliant. External shocks and influences should therefore have less impact on their day-to-day and future operations moving forward.
For example, Rosneft, Russia’s largest oil company, saw its fourth quarter profits double year-on-year in 2017, displaying the strong financial fundamentals behind Russia’s behemoth of an energy industry.

Sanctions can’t slow Russia’s oil & gas industry

The key takeaway from this article is the fact that, sanctions or no sanctions, Russia’s oil & gas industry is not going anywhere. Opportunities remain for internationals to enter the market; whether in localised manufacturing, oil and gas field services, or financial investment.
You can find these at MIOGE 2019.

MIOGE 2019: Russia’s no.1 international oil & gas trade exhibition

The Moscow International Oil & Gas Exhibition is the meeting place for the international community and Russia’s oil & gas industry. Over 560 companies trust the show to let them meet and do business with representatives from across the value chain.
Here, you’ll meet the players behind the Russian oil & gas projects listed above, as well as getting details on Russia’s project landscape from to 2025 and beyond. 
Find procurement, engineering and purchasing specialists exclusively at MIOGE.
Russian majors, including Gazprom, Tatneft, Rosneft and Lukoil, attend the show every year. Why? To meet new partners and suppliers of in-demand oil & gas equipment and technology.
To reserve a stand, click here.
Want more information on how MIOGE can help grow your business in Russia’s enormous oil & gas industry? Contact our team today.