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How sanctions against Russian energy firms endanger Western businesses

20th November 2014

Sanctions against Russian energy firms are hurting Russia’s economy and may convince its government to alter foreign policy; but these sanction don’t just damage Russia – Yuri Shafranik, president of the Union of Russian Oil and Gas Producers and chairman of SoyuzNefteGaz, explains to Oil & Gas Technology the lasting change that may come from continued disruption between Western and Russian oil and gas companies

How sanctions against Russian energy firms endanger Western businesses
Russia needs premium equipment to unlock new frontiers through innovation – the most obvious being the Arctic

Russia has the world’s largest proven reserves of natural gas and over 18 billion tons of discovered oil reserves. This hydrocarbon reserve will provide the world with energy for many decades and its exploitation is not dependent on friendly diplomatic relations between Russia and the West.

“According to BP, the Russian Federation occupies eighth place in the world in terms of proven oil reserves and second in terms of proven gas reserves,” Yuri Shafranik, president of the Union of Russian Oil and Gas Producers and chairman of SoyuzNefteGaz, explained to Oil & Gas Technology.

Energy consumption is a critical measure of wealth and economic development. Energy enables advances in society and indicates quality of life similarly to increased levels of food production and consumption. Unfortunately, the oil and gas industry is often labelled as insidious and greedy by many people ignorant of its positive effect on world development, but the physical effects of energy poverty are as devastating as any other, only harder to see.

“The world needs Russian energy, and all those interested in the growth of the world economy and the welfare of its population will cooperate with us in the development of our reserves,” Shafranik comments.

Curtailing the development and implementation of technology that could boost production at some of the world’s most prospective plays is a harmful and short-sighted diplomatic tactic. Western oil and gas majors, service providers and equipment suppliers provide the best partnership option for maximising output at both mature and pioneer fields, but others will fill their space if a gap in the market is created.

“At our current level of oil and gas industry development it is impossible for us to do everything on our own and so cooperation with international partners remains vital,” Shafranik says.

Take international politics out of the equation and both sides want to continue working together in Russia, with their policies still showing an underlying trust that this synergy will continue indefinitely.

“I am absolutely confident about long-term collaboration between Russian and non-Russian oil and gas companies. It is impossible that sanctions could disrupt everything that has been created on the basis of mutual interest over the course of decades,” Shafranik explains.

The energy industry is the planet’s most globalised industrial sector, with three oil and gas-focused firms positioned within the top ten of Forbes’ list of the world’s biggest public companies – ExxonMobil, GE and PetroChina.

It’s a market that scorns national borders.

“Our relationship with Western companies can only be strengthened through the implementation of joint projects. The more joint projects we see, the better and stronger our partnership becomes,” Shafranik says.

A manager or engineer at ExxonMobil could find themself working anywhere in the world as the company attempts to find, drill, pump, pipe and sell oil and gas in a global marketplace. Working well with local players is vital for these international oil and gas companies, resulting in complex joint-venture agreements that lead to lasting business relationships.

“I can give you two important figures that show the value of the Russian oil and gas industry to Western investors. In 2013, the share of foreign companies in the Russian oilfield service market amounted to 10 per cent in monetary terms, but by 2012 this had risen to 23 per cent.

“So you can see that working in the Russian market must be quite profitable.”

Russia is probably the best example of a symbiotic partnership between those with access to a resource and those with access to the technology and expertise to exploit it. Two mighty and opposing alliances exist, one comprising Shell and Gazprom, the other ExxonMobil and Rosneft. These two camps are sweeping away Soviet-era assumptions and hostilities as they drive technological progress deep into the uncharted realms of arctic exploration and LNG development. These innovations will access ever greater stores of energy that could provide larger sections of the world’s population with invaluable energy.

And in the wake of the big boys come the smaller technology providers – the sort of independent inventors and creators that only the West has truly bred.

Russia often appears to be an intimidating and byzantine market to smaller businesses that lack the political and big-business clout of their larger compatriots.

And unfortunately there are some real impediments to operating in Russia due to a business infrastructure that could be labelled as protectionist.

“The main barriers to operating in Russia for foreign companies are the lack of favourable tax laws and high credit cost,” Shafranik explains.

But managing to crack the Russian market and negotiate its complicated business system can lead to a multitude of opportunities.

Russian energy is in high demand form both East and West.

In May this year China and Russia’s state entities, CNPC (China National Petroleum Corporation) and Gazprom, signed a massive natural gas trade agreement worth USD 400bn that will see 38 billion cubic metres of gas shipped via pipelines from Russia to China.

This pipeline system, known as the “Power of Siberia”, began construction in September with a pipe christening ceremony attended by Russia’s president Putin. And now a second new transmission route agreement via the more westerly Altai Mountains, called the “Western Route”, is set to be signed by the end of the year.

This is great news for western manufacturers that operate in Russia, but unfortunately they may be beaten to the post. China wants more that just gas imports, it wants to achieve a secure supply of energy through direct involvement in exploration and production – which means China wants Russia to use Chinese equipment.

“There are other areas of the world where Russia can source its equipment and technology, with Chinese suppliers of drilling rigs immediately coming to mind,” Shafranik says.

Western technology and service providers need to up their game in showcasing the superiority of their products for the Russian markets.

Russia needs premium equipment because there are new frontiers that require innovation to unlock – the most obvious being the Arctic.

So far, ExxonMobil and Rosneft have spearheaded Russia’s push into the far north, where the world’s largest oil reserves are thought to be found.

“But the main issue is that some stocks are currently inaccessible, such as arctic development, without the technology that only the industry leaders possess. But this is just a matter of time,” Shafranik explains.

“Judging by the experience of the Soviet Union, in the modern world any technological problem can be solved as long as you focus the necessary amount of resources.

“I believe that international cooperation is an integral feature of the modern globalised economy. The most difficult challenges for our industry are the unique climatic and geological conditions presented in arctic exploration and production.

“Therefore, collaborating to find solutions to these problems would be of benefit to the entire global industry, and should be regarded as an opportunity for companies to show leadership in technological progress.”

But the adventure into the ice has stalled due to recent diplomatic sabre rattling over Ukraine, with ExxonMobil halting operations at the Kara Sea platform jointly operated with Rosneft.

“Major joint ventures between Russian and non-Russian companies will continue. Shell-Gazprom and ExxonMobil-Rosneft – collaboration like this is not going to end in the near future. However, we will of course need to be cautious moving forward, and we must take into account the duration of the sanctions and the effect they are having on operations,” Shafranik warns.

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