Russia's oil industry woes also from within: Petrodollars

Russia's oil and natural gas industry is feeling the impact of low prices and financial and technological sanctions, but disagreements within the country's own energy sector are also proving a hurdle to development, as Rosemary Griffin details in this week's Oilgram News(opens in a new tab) column, Petrodollars.

Russian authorities and leading domestic oil and gas producers are allowing ongoing legal disputes to further poison the business climate, showing that it’s not just external factors holding back the oil industry.

While these spats are having a less profoundly negative impact on Russian oil and gas producers than Western sanctions and low oil prices, and in many cases pre-date them, the increasingly uncertain environment only strengthens the rationale for resolving these seemingly petty home turf squabbles.

Two feuds that have cropped up involve Russia’s largest crude producer Rosneft. The first relates to claims from Rosneft that Lukoil — its closest rival in terms of crude production in Russia — was illegally awarded a license for the Vostochno-Taimyrskoye oil and gas field.

In August, however, the government granted Lukoil a license for the onshore section of that field.

But Rosneft claimed there were violations in the license-granting procedure and filed a claim with the Moscow Arbitration Court to invalidate the results. Rosneft’s forthright press secretary Mikhail Leontyev added fuel to the fire by accusing the company’s competitor of orchestrating a negative PR campaign over the license.

Lukoil responded by threatening to sue Rosneft for damaging its business reputation and stating that it acted in strict accordance with the law.

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As the case works its way through the court system, it’s not yet clear whether the license will be rescinded and, if so, who will end up controlling the reserves. Rosnedra, a department of the natural resources ministry that issues hydrocarbons exploration and production licenses, as well as the Energy Ministry have indicated that they back Lukoil in the dispute.

There seems to be little business logic in Rosneft seeking to revoke the decision, when one takes into account Rosneft already has a vast portfolio of existing reserves that it is not currently in position to develop.

Rosneft, along with gas giant Gazprom, control the rights to explore and develop large amounts of Russia’s reserves, assets they cannot feasibly manage to develop single-handedly in the near, or even mid-term future. Analysts have long questioned the reasoning behind handing such a significant amount of the country’s reserves to Gazprom and Rosneft exclusively, when experienced private companies, led by Lukoil, are chomping at the bit to access promising new projects.

Russia’s recent economic problems have exacerbated the situation, with companies reevaluating capex and prioritizing projects to cope with the current industry downturn.

Rosneft said recently it will focus on existing production when it comes to capex, and with new fields subject to hard-to-come-by third-party financing, it’s unclear how Rosneft would finance production at Vostochno-Taimyrskoye were the license to be taken away from Lukoil and granted to Rosneft.

The Vostochno-Taimyrskoye dispute comes at a time when Rosneft is pursuing another legal challenge against Russia’s other energy giant — Gazprom. Rosneft is suing to use pipeline capacity owned by the Gazprom-led consortium Sakhalin Energy to ship gas from its Sakhalin 1 project to the site of a planned 5 million mt/year LNG plant on the Russian Far East island.

A compromise whereby Rosneft provides Gazprom with gas from Sakhalin 1 to be used as feedstock for the third train of its Sakhalin 2 LNG plant would be best for the sector overall, cutting out the need for major investment in new projects and taking advantage of existing infrastructure.

Analysts have consistently pointed to expansion of Sakhalin 2 as the most logical of Russia’s planned projects to increase LNG capacity, and such a scheme would likely be the quickest way to get sufficient additional feedstock for Sakhalin 2.

After failing to reach a compromise, Rosneft announced plans to develop an LNG plant on the island with one of its Sakhalin 1 consortium partners ExxonMobil. Access to Gazprom’s existing Sakhalin Energy pipeline infrastructure would improve the economic attractiveness of the project, which analysts have expressed doubts over.

The latest court ruling, made by a local arbitration court in the Russian Far East, went in Rosneft’s favor, obliging Sakhalin Energy to provide access to the pipeline, should it have spare capacity. But this may be appealed in the Supreme Court in coming months.

The ongoing disagreements couldn’t come at a worse time for the Russian sector, which is struggling to cope with a drop in revenue and financial and technological sanctions.

The last thing it needs are long-running disputes that further stall progress on new production capabilities. — Rosemary Griffin