Analysts said economic sanctions from the United States and the European Union (EU) designed to punish Russia for its actions in Ukraine were “modest” at best, and could potentially damage business relationships that western oil and gas companies spent years building with OAO Gazprom and OAO Rosneft, Russia’s state-owned gas and oil companies.
Meanwhile, analysts said a bill introduced in the U.S. Congress to expedite exports of liquefied natural gas (LNG) to its allies in Europe was just for show, but they conceded that it was an effort that couldn’t be totally ignored, either.
In a note Tuesday, Societe Generale Group analyst Michael Wittner said the sanctions imposed on Russia were “modest” and a “slap on the wrist” that gave “a sigh of relief” to the world’s oil markets.
“The crisis is far from over,” Wittner said. “Crimea is ‘done,’ and this was already the case two weeks ago. The big question is whether or not [Russian President Vladimir] Putin will start to grab and occupy more majority ethnic Russian territory in eastern Ukraine. In our opinion, Europe and the U.S. would view such a development as a dramatic escalation of the crisis.
“The severity of economic sanctions imposed on Russia would start to increase, and could possibly include more sweeping and widespread sanctions on Russian companies and banks, along the lines of those imposed on Iran. Of course, Russia would retaliate with economic measures of its own.”
Wittner added that, contrary to the disagreement over Iran’s nuclear program, “Europe and Russia have a gun to each other’s head, which should prevent either side from using the oil weapon and stopping oil trade flows.”
According to Wittner, Russia currently exports 3.05 million b/d of crude oil to Europe, or 71% of its total crude oil exports of 4.3 million b/d. Russia also sends Europe 36% (1.02 million b/d) of its refined products exports, which total 2.8 million b/d.
“Europe needs the oil and Russia needs the money,” Wittner said. “So logic and rational reasoning strongly argue that neither the Europeans (backed by the U.S.) nor the Russians should use the oil weapon, because the self-inflicted pain would be as bad as the pain inflicted on the other side.
“Of course, history is full of examples where conflicts escalated because of emotion, miscalculation, and bad intelligence. If necessary, the strategic reserves of all IEA [International Energy Agency] countries would last 12 months at a drawdown rate of 4 million b/d, roughly Europe’s imports from Russia. That is a lot of reserves — but there are also many other potential disruptions out there.”
The House Subcommittee on Energy and Power is scheduled to meet on March 25 to review a bill sponsored by U.S. Rep. Cory Gardner (R-CO) to expedite exports of LNG from the United States to its allies. The subcommittee said Gardner’s bill, HR 6, was introduced in response to Russia’s intervention in Crimea and what it called the “slow” LNG export approval process by the Department of Energy (DOE).
“President Obama…said that ‘we’re going to stand firm in our unwavering support for Ukraine,” Gardner said Monday. “That should include unlocking U.S. natural gas supplies to help free Ukraine and other European nations from Russia’s influence.
“It is going to take more than sanctions to stand up to Putin, and taking action on exports would weaken his grip by sending a clear signal to our allies that they no longer have to be at the mercy of Russian energy supplies.”
In a separate note Tuesday, two senior analysts for Wells Fargo Securities LLC said HR 6 was submitted “merely for headlines,” but said the idea for the DOE to immediately approve all existing LNG applications “probably shouldn’t be written off.
“The volume from the multitude of stakeholders affected is likely to get louder,” said David Tameron and Gordon Douthat. “It’s not debatable that the export wheels have been set in motion, but a quick review of projects suggests that a few may be expecting a faster ramp than probable.”
Tameron and Douthat pointed out Cheniere Energy Inc.’s Sabine Pass facility is expected to begin operations by late 2015, but other LNG export projects “exist in DOE/FERC limbo,” they said referring to the Federal Energy Regulatory Commission.
“There is line of sight on Freeport (1.8 Bcf/d) and Dominion Cove Point (0.8 Bcf/d) as FERC should issue its final EIS [environmental impact statement] in May and June, respectively. But even with a green light, the ever-present risk of project delays will remain a risk for the mix of 2017/2018 targets, in our view.
“Most investors expect the first four or so to secure approval over the course of 2014; the real uncertainty centers on the remainder of the queue which are racing against other regions’ (Canada, Mozambique, Russia, etc.) projects.”
Earlier this month, ambassadors from the Czech Republic, Hungary, Slovakia and Poland urged Congress to help expedite LNG exports to Europe (see Daily GPI, March 10).
In an executive order issued Sunday, President Obama authorized “the Secretary of the Treasury, in consultation with the Secretary of State, to impose sanctions on named officials of the Russian government, any individual or entity that operates in the Russian arms industry, and any designated individual or entity that acts on behalf of, or that provides material or other support to, any senior Russian government official.”
Specifically, the United States imposed travel bans and froze the assets of seven Russian officials — including two advisers to Putin — but not against Putin directly. It also imposed the measures on four Ukrainians, including ousted President Viktor Yanukovych. Meanwhile, the EU leveled similar travel bans and asset freezes on 21 people involved in the crisis. Some individuals were hit by sanctions from both the U.S. and the EU.
U.S. Vice President Joe Biden traveled to Warsaw on Tuesday to begin a two-day mission to reassure allies in Eastern Europe. According to reports, Biden will meet with leaders from Poland, Estonia, Latvia and Lithuania, and will discuss ways to help the region become less dependent on Russian oil and gas.
“Political tension in Ukraine appears to be garnering support for faster non-FTA approval of U.S. LNG export projects,” said Wells Fargo senior analyst Sarah Akers. “While Cameron’s non-FTA permit was already approved, we view the increased political [and] popular support for exports favorably, on the margin.”
According to NGI, Gazprom ranked 24th on the list of top marketers of North American natural gas for 4Q2013 and the full-year 2013 (see Daily GPI, March 14). For the quarter, the company marketed 0.63 Bcf/d, down 25% from 0.84 Bcf/d in the preceding fourth quarter. For the year, Gazprom marketed 0.65 Bcf/d, a figure that was 23% off the 0.84 Bcf/d marketed in 2012.
NGI compiled the rankings using figures contained in reports filed with the U.S. Securities and Exchange Commission (SEC) or, if necessary, signed statements from company executives.
Gazprom launched its marketing operations in the United States in October 2009, after opening its Gazprom Marketing & Trading USA (GMT) office in Houston. The gas giant had planned to market 3-5 Bcf/d of natural gas and supply up to 10% of North American LNG by the year 2020 (see Daily GPI, Oct. 15, 2009; June 10, 2009; May 21, 2009). However, the unconventional resource revolution upended gas import plans.
Other companies, deals could be affected
The Ukrainian crisis also has the potential to negatively impact the business dealings that several Western companies — especially ExxonMobil Corp., ConocoPhillips, Chevron Corp. and Royal Dutch Shell plc — have forged with Gazprom and Rosneft.
ExxonMobil and Rosneft formed a joint venture (JV) in 2011 to share technology and explore and develop projects around the world, including the deepwater Gulf of Mexico (GOM) and U.S. onshore, western Siberia, and offshore blocks in the Arctic Ocean and the Kara and Black seas (see Daily GPI, Aug. 31, 2011). They signed additional agreements in 2012, giving ExxonMobil expanded access in Russia’s offshore fields and Rosneft its first investments in North American oil and gas fields (see Daily GPI, April 17, 2012).
In 2013, in exchange for ExxonMobil’s increased access to Russia’s offshore fields, Rosneft was offered a 25% stake in the natural gas and condensate project at Point Thomson, AK, which ExxonMobil operates (see Daily GPI, Feb. 14, 2013). They also signed a separate memorandum of understanding (MOU) to study the economic viability of LNG development in the Russian Far East. Shortly thereafter, Rosneft bought a 30% stake in 20 deepwater GOM blocks held by ExxonMobil (see Daily GPI, March 11, 2013).
Earlier this month during ExxonMobil’s annual meeting, CEO Rex Tillerson said Russia’s moves into Ukraine wouldn’t jeopardize the company’s relationship with Rosneft, but his statement was predicated on the absence of any sanctions (see Daily GPI, March 5).
“[At] this point, the current situation obviously is early days,” Tillerson said March 5. “[There has been] no impact on any of our plans or activities at this point, nor would we expect there to be any, barring governments taking steps that are beyond our control that we can’t do anything about.
“In terms of our view of country risk — our view of the geopolitical risk, and [our] ability to manage…things like sanctions, which have affected us before — we don’t see any new challenges out of the current situation.”
But according to reports, Rosneft CEO Igor Sechin, a close Putin ally, said Tuesday the sanctions imposed by the United States and the EU were “evidence of powerlessness,” and said he was not afraid of possibly being a target of expanded sanctions. “Russian companies can move their business elsewhere,” away from the United States and Europe.
According to Rosneft, two-thirds (296.8 million bbl) of its total crude oil exports (445 million bbl) went to European countries in 2010, the most recent year where figures were available. Meanwhile, Gazprom reported that its export division supplied 161.5 billion cubic meters (5.7 Bcf) of natural gas to 21 European countries, including Turkey, in 2013.
ConocoPhillips began investing in Russia in 1990 and formed Polar Lights Co., a 50-50 JV with Rosneft, in 1992 to develop the Ardalin oilfield. Production in Ardalin, about 1,000 miles northeast of Moscow, began in 1994. Ten years ago ConocoPhillips and Gazprom signed an MOU to study development of the Shtokman natural gas field in the Barents Sea, and to study then possible LNG imports to the United States (see Daily GPI, Dec. 23, 2004). Two years later, Gazprom decided to develop the field on its own and to send Shtokman gas exclusively to Europe (see Daily GPI, Oct. 10, 2006).
Chevron has made investments in Russia dating back to at least 1994 and currently holds several business contracts in the country. In 2004, predecessor ChevronTexaco and Gazprom signed an MOU for joint project feasibility studies in Russia and the United States (see Daily GPI, Sept. 28, 2004). Chevron is a major investor (15% stake) in the Caspian Pipeline Consortium, with $2.2 billion of the pipeline’s $2.7 billion construction budget spent in Russia. According to Chevron, another $5.4 billion is expected to be spent on the pipeline’s expansion.
Shell acquired Gazprom’s first LNG shipment to the United States, delivered through the Cove Point LNG import terminal, in 2005. Later that year, Gazprom agreed to swap pipeline gas in Europe for additional LNG shipments to the U.S. (see Daily GPI, Nov. 28, 2005; Sept. 6, 2005).
In January, Shell and Gazprom announced that their JV, Salym Petroleum Development, had begun drilling five horizontal test wells targeting the Bazhenov formation in Siberia.
A potential JV between BP plc and Rosneft to jointly explore and develop the Arctic fell apart in 2011 (see Daily GPI, June 13, 2011; Jan. 18, 2011). However, last year BP completed a landmark transaction with Rosneft, giving it a 20% stake in what now is the world’s largest publicly traded oil company (see Daily GPI, March 25, 2013).
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