New Russia Sanctions: Latest EU Moves On Russian Oil Sector Would Hinder Drilling In Arctic Ocean And Shale Fields

A European export ban on advanced oil technologies to Russia could hinder Moscow’s attempts to drill in the Arctic Ocean. It could also harm the businesses of global energy firms that are angling to help Russia tap its offshore reserves, analysts say.

The embargo is one of a slate of economic sanctions that European Union and United States leaders agreed on this week. Europe’s measures, approved on Tuesday, target Russia’s energy, financial and military sectors and follow more modest sanctions from last week, which included visa bans and asset freezes for Russian individuals considered responsible for the country’s escalating intervention in Ukraine.

European officials had previously shied away from stringent sanctions that would damage the Russian economy, worried that a fallout with Moscow would lead to soaring natural gas costs and batter European economies. But the July 17 downing of Malaysia Airlines Flight MH17 over territory held by pro-Russian separatists -- and Vladimir Putin’s refusal to scale back support for rebels -- has elevated the international pressure to take action.

The oil technology ban targets the two sectors Russia wants to develop most: deep-water and artic drilling, and shale exploration. Both areas are crucial for replacing declining output at Siberia’s on-land oilfields and ensuring the government a steady stream of cash. (Russia gets about half of its fiscal revenues from oil and gas.) Yet both methods are far more expensive and technically challenging than conventional oil drilling, and the Russian energy industry relies heavily on Western aid and expertise to carry out projects.

The sanctions restrict sales of oil exploration and production technology related to offshore and shale deposits, but not technology for natural gas. Other energy technologies would require specific prior authorization. This could stunt Russia’s hunt for more challenging oil deposits, Stephen Blank, a senior fellow at the American Foreign Policy Council in Washington, D.C., said.

“It’s well-known that the Arctic is prohibitively expensive to develop [for Russia] – they don’t really have the technology or capital know-how,” he told International Business Times. “If you block the transfer of technology or the sale of services to [Russia], you’ve made it very difficult for them to proceed with what is a high government priority.”

A scale-back on Russian drilling projects will likely hammer the global oil and gas companies that are invested in the region. London-based BP (NYSE: BP) warned in an earnings call Tuesday before the EU announcement that further Western sanctions could harm its business in Russia and its relationship with Russian state energy company Rosneft – of which BP owns one-fifth. BP made $1.6 billion from Rosneft in the first six months of 2014, an 80 percent rise from the same period last year.

The United States recently limited Rosneft’s long-term borrowing as part of a sweep of Ukraine-related sanctions. Igor Sechin, the chairman of Rosneft and a close friend of Putin, has been on the U.S. sanctions list since April.

"Further economic sanctions could adversely impact our business and strategic objectives in Russia, the level of our income, production and reserves, our investment in Rosneft and our reputation," BP said, according to media reports.

ExxonMobil (NYSE: XOM) has similarly objected to further sanctions against Russia’s energy sector. The Texas-based company is assisting Rosneft this summer in exploring the Kara Sea, a part of the Arctic north of Siberia. The companies have committed to invest $3.2 billion in the exploration phase of the venture. It is unclear how or if Exxon could recoup its costs if sanctions on Rosneft are broadened, the New York Times reported last week.

The latest EU sanctions against Russia do not target the country’s natural gas sector or its state-owned Gazprom. That’s because about one-third of Europe’s gas supplies come from Russia, and Germany in particular is heavily invested in the Russian gas sector. In the past, concerns that Gazprom might cut off gas exports in retaliation have made some European countries reluctant to impose harsher sanctions against the Russian economy.

Sergei Lavrov, the Russian foreign minister, said at a news conference that Russia had no plans to “act tit for tat” in response to the new measures. But even if it did, blocking Europe’s gas supplies is an unlikely option, Michael Geary, a global Europe fellow at the Wilson Center in Washington, said by phone from Switzerland.

“I don’t see Russia turning off the taps, and I think if there was any risk of that happening, countries like Bulgaria and Italy would not be endorsing the sanctions because of their reliance [on Russian gas],” he said. “The whole economy of Russia is based on oil and gas revenues, and reducing those would be counterproductive for them.”