Sanctions and the Future of
Russian Oil and Gas
James Henderson
December 2014
Sanctions on Russian oil and gas companies
Transneft
Gazprom
GazpromNeft
LUKOIL
Novatek
Rosneft
Surgutneftegaz
US Treasury EO
US Treasury EO
13662 Directive 2 13662 Directive 4
(Financing)
(Technology)
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
US Commerce
Dept. Export
Controls
Yes
Yes
Yes
Yes
Yes
EU Finance
Restrictions
EU Technology
Restirctions
Yes
Yes
Yes
Yes
Yes
Yes
• US and EU sanctions ban transfer of technology for use in Arctic, deep water
offshore (>500 feet) and for shale oil development
• Financial restrictions on access to capital markets – 90 day debt maturity in
US, 30 days in EU
• Rosneft and GazpromNeft the main overlap. No financial restrictions on
Gazprom, Novatek hit hard by inclusion on US list
• Russian banks also targeted with 30 day debt maturity rule in both areas
• Importantly Australia, Canada, Japan and Norway have also introduced
sanctions
Future of Russian oil production – key drivers
Black Sea and
Barents Sea
14
Arctic
offshore
Prodction (mmbpd)
12
10
8
Enhanced
recovery at
existing fields
6
East Siberia
4
Tight Oil
2
0
2010
2013
General Scheme (High)
2015
2020
2025
General Scheme (Low)
2030
EIA
Source: Ministry of Energy, General Scheme of Development of Oil industry to 2020, EIA International Energy Outlook 2013
• Maintaining oil production above 10mmbpd is becoming a key challenge
• Slow growth from current levels (10.6mmbpd) had been expected
• This now seems unlikely as new fields are postponed
• Long-term challenge to enhance existing fields and develop new regions
using advanced technology and international experience
Russian GDP, oil production and the oil price
kbpd
US$/bbl
2013
0
2010
0
2007
20
2004
2
2001
40
1998
4
1995
60
1992
6
1989
80
1986
8
1983
100
1980
10
1977
120
1974
12
1971
140
1968
14
1965
mmbpd
Oil price and Russian oil output
Oil Price (US$2013)
Tight correlation
between oil price,
economic growth and oil
production
Oil price and Russian Real GDP
Development of Russian Arctic now in serious doubt
Russia has largest share of Arctic resources
Partnership with Exxon has been key focus
Other , 53.2
Greenland, 51.7
West Siberia,
147.9
Alaska, 77.9
Other Russia,
120.6
• Arctic development a prestige political project for Russia as well as a longterm production solution
• Opportunity to develop world-leading technology in partnership with IOCs
and establish important presence in emerging new region
• Rosneft will not be able to move forward with plans without IOC support,
both financial and technical
Tight oil in Russia will be delayed despite continued
enthusiasm
Bazhenov shale extensive in
West Siberia
Production potential up to 1.5mmbpd
1800
1600
1400
kbpd
1200
1000
800
600
400
200
0
2015
2020
Rosnedra
2025
2030
RF MoE
Source: Rosnedra, RF MoE
• Russia has the largest shale oil resources in the world
• Bazhenov shale has been know about for years, but foreign partnership
needed to exploit it successfully
• Shell, Exxon, Statoil, Total and BP have all formed JVs, now on hold
• Russian service companies cannot offer adequate equipment
Brownfield recovery through EOR is still possible,
but western service companies are needed
Russia’s oil is getting more difficult
Reserves
•
Difficult to recover reserves account
for 62% of Russian total
•
IEA estimates that EOR could account
for 500kbpd of output by 2030
•
Tertiary methods gradually being
introduced as tax incentives increase
•
International techniques brought by
IOCs and service companies
Production
–
Source: E&Y
•
Confusion over exact impact of
sanctions here
–
7
95% of horizontal wells drilled by
international service companies
Clarity still being sought concerning
equipment with dual uses
Rosneft faces testing financial issues
Rosneft Debt Profile…
…and Repayment Schedule
• Rosneft has $66 billion of outstanding debt, of which half needs to be repaid
inside two years
• Ministry of Economic Development believes that access to capital markets
could occur in 2016/17 at the earliest
• Rosneft has applied to National Wealth Fund for more than 2 trillion RUR
(c.$44bn)
• Company is already being forced to re-prioritise projects and seek new
partners
Previous gas market developments – rise of Novatek and
Rosneft
Gazprom output in long term decline…
…due in part to increasing domestic competition
30.0%
Non-Gazprom Share of Output
650
600
bcm
550
500
450
25.0%
20.0%
15.0%
10.0%
5.0%
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014E
400
0.0%
20002001200220032004200520062007200820092010201120122013
• Gazprom has struggled over the past decade, with output hitting a post-Soviet
low in 2014
• Increasing competition in all the company’s core markets has combined with
the economic crisis, US shale gas, low coal prices and increased support for
renewables to undermine sales
• Independent producers in Russia have also been producing more, leaving
Gazprom with a significant supply bubble
• Outlook in Europe and FSU markets related to politics as well as economics
Gazprom faces an uncertain future in Europe – but
continued significant gas sales seem inevitable
Russia offers the cheapest gas supply
Environment
12.00
Europe’s
Trilemma
US$/mmbtu
10.00
What is
Russia’s
role?
Energy
Security
8.00
6.00
4.00
2.00
Energy
Cost
0.00
Yamal Full Cost
Capex
Lifting Cost
Marginal
Gazprom Supply
MET
2013 Russia
Export Price
Domestic Transport
NBP 2014
Export Transport
US LNG (HH at
$5)
Export Tax
• Ukraine situation creates a clear security of supply risk for Europe this
winter
• In the long-term, does the risk concern Russian supply or Ukraine transit?
• The EU appears split over the desirable place for Russian gas as a source of
imports – the South Stream debate has highlighted the dilemma
• Russia’s competitive commercial position is very strong – it has excess gas
at a low cost of supply
Total
Russia has called Europe’s bluff and re-focussed on Turkey
?
?
• South Stream project cancelled as EU not supportive
• Alternative pipeline to Turkey proposed
• Ukraine transit risk left with EU; Russia targets Europe’s only
11 growing gas market, but is this the optimal route?
Russia wants to balance exports between Europe and Asia
Crude oil export strategy
Possible outlook for gas exports
200
180
160
140
bcm
120
100
80
60
40
20
0
Europe 80% ToP
Power of Siberia
Altai
• Expansion into Asia has always been a sensible strategy for Russia, with action
catalysed by the current political situation
• China offers a huge growth market, but also a dependency risk
• China has been ambiguous in its support of Russia in 2014, and its gas
consumption plans remain unclear
• Despite the bold talk, the Russian shift East offers little real threat to Europe,
as all parties need a balanced supply and demand picture
The switch to Asia triggered a move to LNG, but this has
now reverted to a pipeline export strategy
Shtokman
- 15mmtpa in
Phase 1?
Yamal LNG – 16.5mmt
CNPC - 3mmtpa
Negotiations with European
and Asian traders
Sakhalin 1 – 5mmt
SODECO – 1mmtpa
Marubeni – 1.25mmtpa
Vitol – 2.75mmtpa
Pechora LNG
– 2.6mmtpa ?
Sakhalin 2 – 10mmt
Various Asian buyers
Potential for 5mmt
expansion
Chayanda
Leningrad LNG
– 10mmtpa ?
Altai
Pipeline
S-K-V
Kovykta
30bcma
to China?
38bcma
to China
Gazprom
Novatek
20-30bcma
to China
Vladivostok LNG
– 10-15mmt
Rosneft
• LNG expansion posed a threat to Gazprom via Novatek and Rosneft
• Projects now delayed or postponed due to lack of finance, customer
commitment and certainty over technology
• Pipeline strategy suits Gazprom and Russian budget
• Possibility of new lines to Korea and Japan could extend political reach
Russian gas is competitive in Asia, and volumes could
grow rapidly by 2030
Possible scenario for Russian gas in Asia
Cost of supply of alternative gas to Shanghai
140
20.00
18.00
120
16.00
100
US$/mmbtu
14.00
80
60
40
12.00
10.00
8.00
6.00
4.00
20
2.00
0
0.00
2010
2015
2020
2025
Sakhalin 2
Power of Siberia
Altai Pipe
SKV to China
Sakhalin 2 Expansion
Yamal LNG
2030
• Yamal LNG is likely to proceed, but behind schedule, with expansion of
Sakhalin 2 another possibility
• Three pipelines to China are feasible over time, with two already under
discussion / agreement
• Russian gas can be competitive in China / NE Asia, albeit at very modest
returns for Gazprom
Consolidation of state control in the oil and gas sector is
an ever increasing theme
• Rosneft and Igor Sechin remain very
influential, especially in the oil sector
• Competition between domestic
companies is being discouraged;
reform is not on the agenda
• Rosneft and Gazprom remain at war,
but have bee constrained by sanctions
and Russian “fortress” mentality
• Budget revenues under threat from
lower oil price, meaning that pipeline
gas exports need to become more
important over time
12000
10000
Oil Production (kbpd)
• Bashneft example demonstrates that
loyalty to the current administration is
paramount
State control of Russian oil production
8000
Private
6000
State-Influenced
State-Owned
4000
2000
0
2000
2013
Russia sits at the heart of the global energy economy – there is growing
competition but it has plentiful relatively low cost resources
Yamal
Barents
Sea
N. Sea
E. Siberia
W.
Siberia
W. Canada shale
Sakhalin
Europe
Caspian
US shale
E. Med.
China
Asia Gas
Shale
Impact of North
American markets on
price formation
Middle
East
N. Africa
W. Africa
E. Africa
Offshore
SE
Asia
N. / N.W.
Australia
Russia’s potential eastern gas exports
Queensland
CBM
Brazil
pre-salt
Argentina
shale
Legend
Established gas export province / flows
Emerging gas export province / flows
N. Sea
Gas export / import province name
Gas import province
• Will politics undermine commercial advantages?
• Will lack of finance cause a lack of investment?
• Can Russia move forward without IOC support?