Press play to listen to this article
For a man fixated on Russian grandeur, President Vladimir Putin is doing his best to sabotage the only economic sector that gives Moscow any claim to superpower status and that helps bankroll his war in Ukraine: oil and gas.
His invasion puts all that at risk.
Sanctions restrict Russia’s access to crucial Western technology and finance needed to help it drill oil from drawn-down, remote and inhospitable Siberian and Arctic fields. The departure of Western companies also cripples its ability to produce ultra-lucrative liquefied natural gas for the coming decade.
Russia may also have to find new places to sell. The European Union is talking of moving against oil in its sixth sanctions package this week. Countries are already setting near-term goals to end their dependency on Russian oil and gas.
That leaves Putin with a headache.
“We need to proceed on the basis that in the foreseeable future, supplies of energy to the West will be reduced,” the Russian president said earlier this month, vowing to “increase energy resources to other regions of the world.”
But that involves building pipelines and LNG terminals to redirect exports to Asia, and Russia lacks both the cash and the technology to rapidly complete such a shift. China simply can’t suck up all the vast volumes of energy consumed in Europe to help the Kremlin. Already the biggest buyer of Moscow’s crude, Beijing has its own strategic goals in keeping diverse suppliers.
Bleak prospects for black gold
Headlines have focused on the retreat of energy majors like Shell, BP and ExxonMobil from Russia, but it is the oil service companies — led by the trio of Halliburton, Schlumberger and Baker Hughes — that will ultimately prove far more consequential.
That’s because after a gushing heyday in the 1980s and 1990s, many of Russia’s heartland oil fields in western Siberia are in decline.
Techniques developed and perfected by the Texas pros — like using remote-piloted robots to drill rock horizontally for miles, guided by state-of-the-art imaging software to locate and push out those last drops of oil — rely on technology that has now been sanctioned.
“These technologies are a product of market-driven innovation and technology progress, primarily originating in the U.S.,” said Vladimir Milov, a former Russian deputy energy minister and now a political opposition figure. “Soviet oil industry lacked them, and Russian private oil industry simply bought them, because why develop something on your own when you can simply hire Halliburton and Schlumberger?”
The service companies have said they would not take on new work in Russia, and Halliburton said it plans to wind down its existing operations in the country. The three declined to detail the scale and time left on existing contracts.
Upstream analysts at Rystad Energy said the result will be a decline in Russian oil production of between 4 percent and 7 percent a year.
If the firms withdraw completely, that “could bring Russian output down by 10, 15 percent, I don’t think that’s an exaggeration,” Milov said.
Run-of-the-mill “drilling of wells, production, exploration, all these can be done by Russian service companies as well as service divisions of the largest oil producers like Rosneft and Surgutneftegaz,” said senior upstream Rystad analyst Daria Melnik.
But doing so will be increasingly expensive, as the search for new supply forces exploration deeper underground or farther out into places like the Arctic.
“You’re fighting a rearguard battle, trying to maintain the old production fields as long as you can, retreating step by step, drilling all the while … pleading with the Russian government for more funds in the form of cheap loans, and will you build us a port please, and by the way we’ll need a new pipeline,” said Thane Gustafson, professor of Russian politics at Georgetown University in Washington. “It’s many billions of rubles that are needed for the state’s helping out with this next chapter of Russian oil.”
Natural gas is a different story.
“For the majority of the Russian gas industry they really are not dependent on Western companies, except potentially for finance,” said Jonathan Stern, founder of the gas program at the Oxford Institute for Energy Studies.
Russia is also more secure when it comes to gas rather than oil sales. For now the EU is ruling out sanctions against natural gas — much of which comes to the bloc via pipelines — thanks to strong opposition from countries like Germany and Hungary.
While the EU weighs its options on gas, Putin doesn’t have the ability to rapidly move it to other markets. Rather than focus on liquefied natural gas technology for global export by ship, Russia’s gas strategy has been to build pricey pipelines west that would earn their investment back over the long term — Blue Stream, Yamal Europe, TurkStream, Nord Stream and the recently frozen Nord Stream 2.
Putin does have one gas export pipeline to China up and running, with talks ongoing for two more.
But what’s lacking are the crucial pipelines within Russia that would allow state-backed Gazprom to divert gas from fields in the country’s west to new Asian buyers.
Building those “will take time, probably most of this decade,” said Stern.
Putin had hoped that by 2035 Russia could diversify away from Europe and grab a fifth of the global LNG market. Experts say that without Western technology and cash he can kiss those dreams goodbye.
“LNG will face the largest delays,” said Melnik. “We don’t have our own technology, we don’t have our own equipment, we don’t even have gas turbines or LNG tankers.”
South Korean shipyards building ice-breaking LNG carriers for Russian companies already face worries about getting paid due to financial sanctions levied against Russia.
Russia’s Zvezda shipyard, meant to build the country’s next-generation LNG fleet, relies on French liquefaction technology also out of reach under EU sanctions.
“Projects like Rosneft’s Far East LNG, Gazprom’s Baltic LNG — those are pretty much dead in the water,” Stern said.
However, unlike oil wells, which can be damaged if they are shut down — something that could happen if sanctions mean Russia can’t easily sell its crude — natural gas wells are easier to turn off and then back on.
“You can turn the tap down in gas and keep it in the field without killing your field, so it’s flexible,” said Thierry Bros, professor at Sciences Po Paris. “The risk is having too little sales.”
On its own
Although Russia is increasingly isolated from the finance and technology of the rest of the world, it’s not completely helpless.
“You cannot say Gazprom is a Soviet company — it may have to obey Vladimir Putin under some strict orders, but otherwise it’s a company that has a lot of young, educated people, they’ve been traveling to Europe, they understand,” Bros said. “When you look at the results and the ability to produce, in some ways it’s less bureaucratic than Shell or BP.”
However, the Western pullout “could leave some of the Russian installations in trouble, not because they’re incapable of running them themselves, because they’ve learned a great deal in the last 20 years, but it’s more the spare parts issues, the questions of maintaining equipment on a timely basis,” Stern said.
Proponents of Fortress Russia point out that the government has plenty of ways to try and lessen the sting.
“Several weeks ago we heard that Russia allowed non-payment of royalties to foreign license-holders of technology,” Melnik said. Given that departing companies are unlikely to haul back equipment and sanctioned technology already on the ground, Russia could “just steal technologies and replicate them.”
But “if we are in a situation where sanctions will be there for a really long time, then technologies that have been useful in 2022 will not be useful In 2032,” said Margarita Balmaceda, professor of diplomacy and international relations at Seton Hall University in the U.S.
Russia has also seen an exodus of IT specialists and other tech experts, potentially hobbling those reverse engineering plans.
“Russian authorities will try to do their best to keep those people here in Russia by proposing high salaries, different subsidies, other incentives because this is our very very weak point,” Melnik said.
Sofya Donets, a Moscow-based economist and Russia director with Renaissance Capital, said despite the economic blow that will hit Russia, the oil and gas sector would likely receive strong financial support from the Kremlin while the industry works to reorient itself toward Asian markets.
But there could also be long-term consequences darkening the outlook, including the ostracizing of Russia by global financial markets.
“That’s the kind of stigma,” Donets said. “Even if sanctions will be removed at some point, I don’t expect like any investors to be back to this market any time soon.”
This article is part of POLITICO Pro
The one-stop-shop solution for policy professionals fusing the depth of POLITICO journalism with the power of technology
Exclusive, breaking scoops and insights
Customized policy intelligence platform
A high-level public affairs network
Soruce : https://www.politico.eu/article/putin-war-ukraine-russia-energy-cash-cow/