Russia’s Energy Sector Struggles as Western Oil Companies Abandon Projects

Source: Thinkstock

As sanctions force Western companies to abandon joint projects in Russia, the country’s energy minister says it’s time for Moscow to replace them with partners that are allowed to follow through with joint ventures.

“If companies in the long-term perspective decide not to participate in the investment projects, we will attract investors from those countries that have not imposed sanctions targeting our oil and gas companies,” Russia’s Minister of Energy Alexander Novak said November 22 at a student energy forum in Moscow.

Already, the U.S. oil company ExxonMobil, France’s Total, and the Anglo-Dutch Royal Dutch Shell have withdrawn from joint ventures with Russian oil companies in the Arctic and Siberia. The Western energy giants cited the U.S. and European Union sanctions imposed over Russia’s suspected role in the fighting in Ukraine.

Novak said such withdrawals point to a kind of uncertainty for Russia’s energy sector, because the Western companies joined in the projects willingly and ended their work only because of the sanctions. The measures deprive Russian oil projects of oil technology and equipment as well as Western financing for energy initiatives.

“On the one hand [Western] companies would like to continue their work [in Russia], on the other hand, their regulators do not allow them to do so,” he told the forum. “This uncertainty should be overcome.” Novak added. “If [Western] companies decide for themselves not to take part in organizing investment projects in the long term, we will invite investors from countries which have not imposed sanctions against us and our oil and gas companies.”

As part of this effort, Alexei Ulyukayev, Russia’s economic development minister, said that three of his country’s largest energy companies, Rosneft, Lukoil, and Gazprom, may list their stock shares in Asian currencies on the Hong Kong Stock exchange to encourage financial support from the East.

Some Western energy companies are still working in Russia. Rosneft, for example, is working with Norway’s state-owned Statoil in the Sea of Okhotsk off eastern Russia and in the Barents Sea off western Russia. They’ve also begun projects for heavy oil in the region of Samara in Western Russia. And Gazprom is working with Shell in the Priobskoye and Palyanovskaya fields in western Siberia.

Nevertheless, the Western sanctions have hit Russia hard. It is the world’s largest exporter of oil and natural gas, and relies on this income for about half of Moscow’s budget. One way to protect the budget would be to reduce oil production in an effort to boost prices. Novak said Nov. 21 that a production cut was being considered, but there’s been no final decision.

But reducing production would be difficult if not harmful to Russia’s oil sector, in large part because the climate in most of the country’s oil fields is so cold that stopping production at some wells would freeze them up. And Russia can’t keep harvesting oil, then storing it to keep it off the market, because it has very little storage capacity.

Originally written for OilPrice.com, a website that focuses on news and analysis on the topics of alternative energy, geopolitics, and oil and gas. OilPrice.com is written for an educated audience that includes investors, fund managers, resource bankers, traders, and energy market professionals around the world.

More from Business Cheat Sheet