Russian oil and gas withstands Western sanctions


The oil and gas-rich Sakhalin shelf in northern Russia.

Western sanctions affected only new projects that require huge investments

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ASTANA – Unlike the Iranian scenario, western sanctions against Russia have not had the expected negative effect, Russian experts have said.

It will be two years this April since some Western and US countries decided to impose sanctions against Russia. Despite earlier optimistic statements by US Secretary of State John Kerry and some French politicians, recently it became known the White House has decided to extend further sanctions against Moscow.

Commenting on how sanctions have affected the Russian oil and gas sector in the past two years, Russian National Energy Security Fund General Director Konstantin Simonov said during an international video conference that the impact of Western sanctions on the current situation in the oil and gas sector in Russia is greatly exaggerated.

According to him, the sanctions affected only new projects that require huge investments.If we are still in a situation of low oil prices, we must be mad to talk, for example, about the development of Arctic shelf, where the cost of oil production cannot be still precisely calculated. At low oil prices, it is difficult to talk about the big breakthrough investments in such complex projects,” Simonov said.

He recalled that at the beginning of the year, many Russian oil and gas companies stated the reduction of their investments in development of new fields, which is quite logical. For example, Russian oil giant as LUKoil announced reduction in investments for the current year.

Oil is one of Russia’s main export products, which provides the lion’s share of profits to the state budget.It’s a question of low oil prices. Now the government is in search of money (for the budget), and the oil companies are trying to save their money. It is understandable. As soon as the companies present their plans for investment, they will immediately have to replenish the treasury,” the expert explained.

According to him, today the main problem of Russian oil and gas industry is not the sanctions of the West, but the tax burden put by the state. This year it will increase seriously.

According to the most conservative estimates, this year the Russian oil and gas companies will pay additional taxes of $320-350 billion rubles due to the decision to freeze the export customs duty and increases in taxes on gas and condensate. Therefore, if the money is withdrawn, it will be difficult to hope that new investments will be made,” Simonov said.

He noted that even if the West decides to lift the sanctions, the situation in the oil and gas sector would not improve much.

Simonov recalled that two years ago, when the sanctions were only taken, there were fears that the service business in the oil and gas sector in Russia would completely fall out because of major Western suppliers’ leaving.

But that did not happen. No one left the Russian market. Over against, many Western companies have retained an interest in their work in Russia, and some even expanded their presence.

As for fears that Russian oil companies would be turned down for loans during the sanctions, there were no problems. Such companies, as Russian gas monopoly Gazprom were not hit by Europe’s sanctions list.

Some Russian oil and gas companies are finding other schemes of loans from French banks. In addition, today China is willing to give loans.

The head of the Center for International Energy Markets Studies, Energy Research Institute of the Russian Academy of Sciences (RAS), Vyacheslav Kulagin, said Russian oil companies have managed to adapt in terms of sanctions.

When sanctions have earned, we calculated their influence on the oil and gas industry, and received an unexpected result. Oil and gas complex showed that it was working more steadily, as the expensive projects ‘fell out’. We did not go to where it was a bit early. Everything has its time,” Kulagin said.

As an example, he cited the projects for development of the Arctic shelf. There are a lot of hydrocarbon resources in Russia, he said. However, they are frozen due to low oil prices waiting for better times, Kulagin said.

He added that the Russian oil and gas sector has been able to adapt to the sanctions, also because of import substitution policies.We have seen that using import substitution, we avoided the catastrophic effects of sanctions on oil and gas sector. In addition, we have been more stable at low oil prices,” Kulagin added.

The cost of oil production in Western Siberia – the main oil-producing region of Russia – including all capital costs, transportation from Primorsk to the seaport of Rotterdam is $15-18 per barrel. It is the cost excluding tax.

Kazakh Institute of Oil and Gas Deputy General Director Akbar Tukayev agreed.Those Western countries that have decided to take sanctions against Russia, relied on their experience against Iran. In this country, after the adoption of sanctions, oil production sharply fell down. But what worked against Iran, has not worked against Russia,” Tukaev said.

According to Simonov, at the end of last year in Russian oil production rose to 534 million, an increase of 1.5%.

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