Sanctions Threaten Russia’s Next Huge Oil Field
By Georgi Kantchev, July 5, 2022, WSJ

These are boom times for the Russian oil-and-gas industry. High energy prices are keeping the country’s economy afloat and funding the war in Ukraine. How long it lasts will depend in part on a massive Arctic oil project that Russia promised would save
the world from an energy crunch.

Vostok Oil, a vast oil patch spread across inhospitable terrain in Russia’s far north, is supposed to produce a premium, easier-to-refine type of crude that would account for as much as 2% of daily global output at the end of the decade. Last month,
the head of Rosneft Oil Co. , Russia’s state-aligned oil major, compared it to Noah’s Ark because it would save humanity.

But the development relies on Western cash and imported technology. At least two important Western financial backers are planning to pull out of the $180 billion project, while sanctions have delayed or restricted everything from drilling equipment and
software to ice-class tankers, according to people familiar with the matter, companies involved in the project and energy consultants.

“Right now Russia is benefiting enormously from high prices, but that is short-term gain versus a long-term loss,” said Daniel Yergin, the energy historian and vice chairman of S&P Global.

Because of the Western sanctions, consulting firm Rystad Energy now expects Vostok Oil’s key asset, known as the Payyakhskoye field, to be launched by 2029 compared with Rosneft’s plan for 2024.

“Any delays in one part of the huge supply chain involved in the project will lead to the delay of the whole project,” said Daria Melnik, senior analyst at Rystad Energy. Rosneft has said that the project is on track but that there are challenges.

The European Union, meanwhile, has banned Russian oil imports, removing a key market for the project’s output. A delay of the project—and a decline in Russia’s overall oil production due to the sanctions—could hobble the country’s economy and
its geopolitical standing in the long run.

One of the world’s largest oil producers but with an economy smaller than Italy’s, Russia has long relied on its energy riches to influence world politics and pressure other countries, most recently by slashing gas deliveries to Europe. The economic
stakes are high: Russia’s oil-and-gas sector makes up around 40% of its budget revenue and employs some 1.5 million people.

Analysts say the sanctions will hit the oil-and-gas industry over time.

Western energy majors such as BP PLC and Exxon Mobil Corp. as well as the world’s largest oil-services companies, Halliburton Co. , Baker Hughes Co. and Schlumberger Ltd. , have all to various degrees curtailed operations in Russia—and with that,
Russia’s access to Western technology and know-how. While domestic players provide most of the basic drilling, international firms dominate the market for advanced exploration, well-treatment techniques and software.

On the demand side, a drop-off in European oil purchases will hurt the industry’s viability. Most of Russia’s 200,000 active oil wells are old and located in harsh climates, so if they are shut down because of lack of demand, they might not be able
to start again, due to frozen, cracked pipes and economic factors.

Russia had aimed to reach a 20% global market share in liquefied natural gas by the next decade, relying on international companies to develop its fields. Now Western sanctions have banned the delivery of equipment and technologies required for
liquefaction, leading to project delays. Novatek PJSC, the largest independent natural-gas producer in Russia, recently said it needs state support to produce the equipment domestically.

“Overall, Russia’s energy industry is facing a loss of market, a loss of funding and a loss of technology,” Mr. Yergin said.

Russia’s government has said that the country would diversify its export destinations and continue to develop its energy industry, including by producing the missing equipment at home. India and China are buying more Russian oil, though at big
discounts.

Moscow appears to be making moves to boost its income from energy production. On Friday, Russia took control of the international consortium behind the giant Sakhalin-2 oil-and-natural-gas project. The day before, state-controlled Gazprom PJSC said it
wouldn’t pay its annual dividend to investors. A bill to boost Gazprom’s taxes is moving through Russia’s legislature.

Vostok Oil has been the Kremlin’s big hope to boost production. A cluster of fields near Russia’s Arctic coast in the central region of Krasnoyarsk Krai, the project is important to Russian President Vladimir Putin, who wants to improve
infrastructure in the remote region and develop the Northern Sea shipping route to Asian markets.

The project would deliver a highly desirable grade of light crude that is easier to refine and would compete with some U.S. and Middle Eastern grades. Russia’s flagship Urals blend typically has a higher sulfur content, which makes it more technically
challenging for refiners to handle.

In August 2020, Igor Sechin, the Rosneft head, presented Mr. Putin with a glass bottle of crude oil from the project. The men agreed that the oil was better than that from the Middle East.

Since Russia invaded Ukraine in February, some of Rosneft’s partners and suppliers in the project have been heading for the exits. Commodities trader Trafigura Group Pte. Ltd., which in 2020 took a 10% stake in the project, said in June that it had
frozen its investments in Russia and intended to exit Vostok. Another global commodities trader, Vitol Group, which is part of a consortium that has a 5% share in the project, intends to exit its investment, according to a person familiar with the matter.

Beyond funding, Vostok Oil is dependent on Western equipment and technology.

Take downhole logging, which is used to identify and map the core structures of oil reservoirs and to locate the best areas for drilling. That is essential for Vostok because its remote location means it needs to produce as efficiently as possible. In
Russia, the most sophisticated software to do this has been largely supplied by Western service companies, according to James Henderson, a Russia expert at the Oxford Institute for Energy Studies.

“So it doesn’t mean you can’t drill the wells, but the software is crucial to get the most economic bang for your buck,” he said.

Rosneft has signed a deal with Samsung Heavy Industries Co. , one of the largest shipbuilders in the world, to work on a fleet of new ice-class tankers to shuttle the cargo. But Samsung Heavy Industries said that sanctions against Russia have affected
the supply of equipment and components for the shipbuilding project. The company wouldn’t comment further.

Mr. Sechin said in June that Vostok Oil is being developed as planned, though he acknowledged that there are challenges.

“Inevitable difficulties are being overcome, but we have full confidence that all tasks will be completed,” he said.

https://www.wsj.com/articles/sanctions-threaten-russias-next-huge-oil-field-11657018190

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