For the past six months, even as Obama and the EU were laying harsher sanctions on the Kremlin, one group of companies had managed to sneak by unscathed and largely avoided being impacted by Russia's isolation by the West: the world's biggest E&P companies, as explained in detail over a month ago in "Exxon Drilling Russian Arctic Shows Sanction Lack Bite."
All that is about to change, because while sanctions until this moment had been largely intended to specifically allow energy companies to continue their status quo in Russia, as of this Friday, it is precisely the E&Ps that are being targeted, as we noted on Friday, and as Reuters follows up today, reporting that some of the world's largest companies, namely Exxon, Anglo-Dutch Royal Dutch Shell, Norway's Statoil and Italian ENI, will have to be put their Russian projects on hold: to wit, the companies will have 14 days to wind-down activities.
Projects now in jeopardy include a landmark drilling program by U.S. giant Exxon Mobil in the Russian Arctic that started in August as part of a joint venture with the Kremlin's oil champion Rosneft.
Now this and dozens of other projects that Rosneft and Gazprom Neft agreed with Exxon, Anglo-Dutch Royal Dutch Shell, Norway's Statoil and Italian ENI will have to be put on hold.
"Cutting off U.S. and E.U. sources of technology and services and goods for those projects makes it impossible, or at least extraordinarily difficult for these projects to continue...There are not ready substitutes elsewhere," a senior U.S. administration official told a briefing on Friday.
The companies will have 14 days to wind-down activities.
And just to make sure that there is once again major Obama administration-induced chaos, and thus yet another collapse in global trade, when it comes to the core covenant of capitalism, namely the sanctity of contracts from government intervention, Reuters cites a US official who said that "there is no contract sanctity."
Valery Nesterov from Russian state bank Sberbank, which was also sanctioned by the EU and the United States, foresaw serious complications. "What is really worrying are sanctions on tight oil. Russian companies haven't invested enough in research and technology. They were heavily relying on Western technologies and now it is simply too late," he said.
That may well be, but at the end of the day, Russia still has all the leverage in the long-run: "key among Russian tight oil reserves are the Bazhenov formations, which are located beneath existing mature west Siberian fields. They are estimated to contain as much as a trillion barrels of oil - four times the reserves of Saudi Arabia. Rosneft and Gazprom Neft are working on Bazhenov with Exxon and Shell.
"When we learnt about the first sanctions we decided to speed up work on all fronts to minimize the damage to the company," said a Rosneft source. Rosneft's chief Igor Sechin, a close ally of Putin, said earlier this month the company had approved a program to replace all Western technology in the medium-term.
But while expansion may or may not be hindered, and China certainly will have something to say about the expansion of Russian oil fields in the coming months - and bring its checkbook and smartest heads when it does - one thing that will certainly happen is that once again the West will prove too smart for its own good.
Enter Tony Hayward, the infamous former CEO of BP (and current Chairman of Glencore) who may have been disgraced by his handling of the Macondo spill but his comments on how the Russian sanctions will play out, are spot on.
As the FT reported moments ago, "US and EU sanctions against Moscow are in danger of turning round and biting the west by constraining global oil supply and pushing up prices in coming years, the former chief executive of BP has warned."
Tony Hayward said that cutting off capital markets from Russia’s energy groups, which would eventually lead to less investment in Russian oil production, was likely to damage long-term supply. He said the US shale boom had obscured the growing risks to the world’s supply picture, but its effect would wear off, leaving the global economy dangerously exposed to potential disruptions in the flow of oil.
“The world has been lulled into a false sense of security because of what’s going on in the US,” Mr Hayward said in an interview with the Financial Times, referring to the shale boom that has driven a 60 per cent increase in US crude output since 2008. But he asked: “When US supply peaks, where will the new supply come from?”
But why worry: after all surely nobody in the Obama administration can possibly conceive that the 8000+ producing wells in the Bakken shale alone, up from 1000 in 2008, could possibly go dry at some/any point in the future...