Russian sanctions; are oil & gas companies going to be the real losers?

01 Jan 1970 1:00 am by Mark Dunn

On July 16, the United States intensified its sanctions against Russia over the Ukrainian crisis, targeting some of Russia’s principal banks, energy companies and individuals tied to President Vladimir Putin.

“On top of the sanctions we have already imposed, we are designating selected sectors of the Russian economy as eligible for sanctions,” Obama told reporters at the White House on July 16. “We are freezing the assets of several Russian defense companies. And we are blocking new financing of some of Russia’s most important banks and energy companies.” Obama said.(1)

European Union leaders rapidly followed, agreeing to expand EU sanctions intending "to hurt Russia more than it hurts us", according to the foreign secretary Philip Hammond.(2)

How will this impact oil companies?

An overview of some of the high-profile EU oil companies reveals the extent of co-operation between Western international oil & gas companies and Russia:

  • BP has a 20% stake in state-owned Rosneft
  • Exxon Mobil Development’s agreement extends an existing Strategic Agreement
  • Statoil and Shell hope to profit from Russia's hydrocarbon riches
  • France's Total and Russia’s Lukoil are upsizing the hydrocracker at their Zeeland refinery

    The likely fallout was soon hitting the press.

The effect of Russia sanctions on the Oil & Gas industry

Nexis Analyser shows a peak of reporting industry concerns at the beginning of August:
oil and gas graphic

Drilling down into the reporting, a consistent message starts to reveal itself:

* Oil giant BP has warned that further international sanctions on Russia could have a "material adverse impact" on the company(3).

* The standoff between Europe and Russia has resulted in its first noticeable problem for Western majors, as Total was forced to admit Wednesday it had stopped investing in Russia's No. 2 gas company, Novatek, one the same day a civilian airliner was shot down over Ukraine.(4)

* Based on a high demand for additional information regarding its business in Russia, Schlumberger Limited (NYSE:SLB) provided the following third-quarter update today […]The sanctions are placing some restrictions on the engagement of certain people and equipment in our Russian operations which in the short term will have an impact on operational efficiency and costs in Russia.(5)

How are the markets responding?

Commerzbank’s Apostolos Bantis says that overall market reaction has been moderate. Investors seem to be taking a wait-and-see approach, especially given the strength seen in US earnings so far.(6)

However, the FT reports that ‘Traders are enduring another jittery session in the markets as heightened Ukraine tensions rattle investor confidence already shaky from uncertainty over the trajectory of US monetary policy.’ (7)

With mixed messages coming from the markets, and the oil & companies, this is a story that will continue to unfold and definitely one to watch.

End notes

(1)Obama's latest sanctions against Russia include oil, gas firms; Oil & Gas Journal, July 28, 2014
(2) EU sanctions: 'This will hurt you more than it hurts us' ; The Guardian (London) - Final Edition, July 30, 2014 Thursday.
(3)BP wary over Russian sanctions; In Brief; Coventry Evening Telegraph, July 30, 2014 Wednesday
Edition 1; National Edition
(4)IOCs in Watershed Moment Over EU Sanctions; International Oil Daily, July 31, 2014 Thursday
(5)Schlumberger Russia Update; Business Wire, August 12, 2014 Tuesday 12:00 PM GMT
(6)Why instability isn't spooking markets; City A.M., July 22, 2014 Tuesday Edition 1; National Edition
(7) Wall St steadies but nerves remain frayed ; BYLINE: Jamie Chisholm, Global Markets Commentator, Wednesday 15:30 BST.