Russian sanctions response hits energy cooperation: Fuel for Thought

Russia seems to be entering a new stage of sanctions adaptation, building on its growing technological capabilities in energy, as well as access to alternative sources of financing to become less dependent on cooperation deals with Western companies.

The collapse of two major deals between Russian and western oil companies in 2019 may indicate that Moscow is now looking to reduce its exposure to Western financing and technology as it braces itself for expected tougher sanctions.

Initial sanctions, imposed on Russia in 2014, forced western majors to leave some promising projects to meet requirements of the US and EU legislators, while the Russian authorities continued to welcome the expansion of cooperation with its traditional partners within unsanctioned projects.

The so-called sectoral sanctions banned transferring of money and technology to development of shale oil reserves and those located in deepwater and offshore Arctic.

Russia calls time on two deals

But in the most recent cases, it has been Russia breaking off deals with western companies amid concerns that new US sanctions may impact Russia ’s entire energy sector.

These involved the purchase by the world’s biggest oil service provider Schlumberger into Russia ’s biggest drilling company Eurasia Drilling (EDC) and long-discussed cooperation between Gazprom and its strategic partner Shell on the Baltic LNG near Ust-Luga.

“It seems the Russians are holding back on expanding cooperation, even though it’s hard to say what exactly was behind the latest decision [by Gazprom],” a market source said.

In late March, Gazprom surprisingly announced it had agreed with its Russian partner RusGazDobycha on the final configuration for the large-scale gas processing and 13 million mt/year LNG plant near Ust-Luga on the Baltic coast. Days after, Shell said it was withdrawing from the project.

RusGazDobycha is associated with the sanctioned businessman Arkady Rottenberg, a close associate of Russian President Vladimir Putin.

Analysts expect the development to complicate Gazprom’s progress on the project, which has already been slow.

“The withdrawal of Shell might potentially hinder the process of attracting project financing and put an additional financing burden on Gazprom,” analysts at VTB Capital said in a note.

This Shell/Gazprom deal failure followed Schlumberger’s January decision to cancel its bid for purchasing up to 49% stake in EDC after four years of fruitless negotiations with the Russian authorities.

Moscow was reluctant to approve a deal that could significantly strengthen Russian dependence on western oil technologies in the strategic oil service sector amid sanctions and is now focusing on strengthening cooperation with Asian and Middle Eastern partners.

Looming sanctions

Market sources said earlier that authorities intended to use the deal with Schlumberger as a showcase to attract foreign investment and technology. But sanctions concerns apparently outweighed the pluses from the deal.

The risk of further sanctions have stopped the plan even though Schlumberger agreed to all the conditions proposed by Russian authorities, including transferring key technologies to EDC and also selling the EDC stake back to Russia (at market price) if US sanctions against Russia are strengthened.

Likewise, Shell was ready to move its LNG technology to Russia and adapt it to Russian conditions as part of the Baltic LNG project, but this did not help it to clinch a final agreement with Gazprom.

It may be too early to interpret these two failed cooperation bids as a sign that Western companies have missed the boat on expanding their portfolios in Russia, however.

Although Russia is increasingly focusing on developing its own technology and diversifying its financial and energy markets, opportunities still remain.

Total, for example, is expanding cooperation with its strategic partner Novatek , with the final investment decision on their Arctic LNG-2 project expected later this year. The French company bought a 10% stake in the project in March, following the successful launch of Yamal LNG in 2017-2018, in a consortium with Chinese companies.

Total also plans to take part in construction of LNG terminals in Russia to strengthen LNG export infrastructure for projects in the northern Yamal and Gydan peninsulas, and has an agreement to acquire some 10%-15% interest in Novatek ’s future LNG projects in the region.

Western companies have also held onto their stakes in many producing projects in Russia, despite the uncertainty of the investment climate over the last four years, indicating that both sides are happy to continue to do business.