Russia’s Oil Field Actions to Take Edge Off U.S. Sanctions

(Bloomberg – bloomberg.com – Stephen Bierman, Elena Mazneva – October 10, 2014)

U.S. and European Union moves to pressure Russia by threatening its oil output overlook one detail: a mass of conventional resources across Siberia, according to Natural Resources Minister Sergei Donskoi.

Russia will distribute more oil and gas deposits found in traditional areas during the Soviet era, dulling the sting of U.S. and EU sanctions that aim to keep new provinces locked in layers of shale or under Arctic waters, according to Donskoi.

Dependence on oil revenue is rising with Russia’s economy on the brink of recession and investors selling assets as the U.S. and the EU accuse President Vladimir Putin of supporting insurgents in Ukraine. The measures, which set a clock ticking under Russia’s main budget earner, have halted Exxon Mobil Corp. (XOM) and state-run OAO Rosneft’s Kara Sea project and led Schlumberger Inc. to move out U.S. and EU employees.

“Sanctions won’t effect current output for the near term: sanctions specifically,” Donskoi said in an interview in Moscow on Oct. 3. “Right now, companies have the resources to support current output.”

Russian oil producers have the equipment and money needed to continue developing reserves that fall outside of U.S. and EU restrictions, Donskoi said. The government will add to the available stock, with the world’s largest energy exporting nation offering four such fields at auction by the end of this year, he said.

Borrowing Limits

The U.S. and EU targeted Russia’s energy, banking and defense industries last month in the most recent wave of sanctions. They forbid service providers from carrying out work at deep-water, offshore Arctic and shale oil fields, which Russia is turning to as it seeks to replace barrels from aging fields. The measures have also squeezed Russian companies’ ability to borrow abroad.

The ministry plans to meet executives to gather information on what effect the bans may have on future oil production and discuss approaches, Donskoi said.

Financing restrictions will make it harder to find alternatives. Replacing technologies developed by companies such as Schlumberger would require “colossal funds,” Vagit Alekperov, the head of OAO Lukoil, Russia’s second-biggest crude producer, said Sept. 19 in the Black Sea city of Sochi.

Deep Layers

While fields that are already in production are unaffected so far, Russia may immediately lose at least 10 million metric tons a year, or about 2 percent of total output, if sanctions are expanded to include such widespread techniques as hydraulic fracturing, said Alexander Kornilov, an analyst at Alfa Bank in Moscow. Fracking, as it’s known, is used in producing about 25 percent of Russia’s oil, Alekperov said last month.

Under Putin, oil output has rebounded from a post-Soviet low of about 6.1 million barrels a day in 1996 and reached 10.6 million barrels a day last month. Most comes from mature deposits in West Siberia. Only the first steps have been made in the Arctic Seas, where state-run Rosneft said last week it found a potential billion-barrel oil reservoir with Exxon.

“Right now in Russia, basically, the resources that don’t need technology are the ones that get developed, because there are still enough of these resources,” Donskoi said. “The whole system is built on this.”

Distributing development rights won’t necessarily bump up output. Donskoi estimated that companies aren’t exploiting as much as 40 percent of the resources that have been distributed, including deep layers at brownfields.

Falling Prices

As falling oil prices make projects less profitable, producers are reviewing their plans. “Some have already delayed plans, and some haven’t started and won’t,” Donskoi said, without giving details.

Brent crude fell to $88.11 a barrel today in London, the lowest since December 2010 on an intraday basis. Urals, the nation’s main export blend, has declined more than $20 since this year’s peak in June, trading at about $89 a barrel yesterday, said Finance Ministry adviser Alexander Sakovich. Russia needs a price of $104 to balance its budget in 2015, according Sberbank estimates.

The state has smaller deposits to allocate, after selling the rights to those with more than 100 million tons of resources, Donskoi said. Still, the fields offered this quarter will probably draw bids from Russia’s largest producers — Rosneft, Lukoil, OAO Surgutneftegas and OAO Gazprom Neft, he said.

Reserve Bidding

“They will fight for these reserves, which don’t require a risky investment,” Donskoi said. The bidding should be reminiscent of the last contests for significant onshore resources, held more than 18 months ago, he said.

In 2012, Lukoil won the Imilor group of deposits with resources of 193 million tons for $1.67 billion. The same year Surgutneftegas won the rights to the Shpilman field with a $1.5 billion bid.

The deposits offered this year are in regions with developed infrastructure, Donskoi said. In the Orenburg region, the Vorontsovskoye field has 19.2 million tons of oil and Mogutovskoye holds 21.7 million tons. In West Siberia, Gavrikovskoye holds 37.1 million tons and Nazymskoye holds 43 million tons.

Looming Deficit

The Natural Resources Ministry is considering additional measures to support production, Donskoi said. They include simplifying the licensing process and encouraging the development of overlooked areas between license blocks or at the edges of fields in Siberia, which no one has the rights to now, he said.

The bulk of production work is carried out by domestic companies, Donskoi said. Foreign providers account for as much as 30 percent to 40 percent, based on outside estimates, and international companies such as Schlumberger, Halliburton Co. (HAL) and Baker Hughes Inc. (BHI) occupy the high-technology niche, he said.

Schlumberger is withdrawing about 20 employees who are citizens of the U.S. and the EU from Russia amid the sanctions, two people with knowledge of the situation said last month.

“When there is a certain share of the market taken by some companies and if they leave, there will, of course, be a gap,” Donskoi said. “And that niche needs to be filled.”

Donskoi wouldn’t estimate the time needed to recover from disruptions or develop domestic services should sanctions cause companies to depart, while remaining optimistic that Russia would find a solution.

All may not be as dire as it seems, with the wording of the sanctions possibly leaving some wiggle room. “Oil always finds a hole,” Donskoi said.

Article ©2014 Bloomberg L.P. All Rights Reserved. Article also appeared at bloomberg.com/news/2014-10-09/russia-to-use-oil-field-auctions-to-take-edge-off-u-s-sanctions.html

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