(Repeats Monday column without change)
By John Kemp
LONDON Aug 5 EU sanctions on Russia's oil
sector will not seriously hamper the development of new oil
resources in either the short or the long term, though they
leave open the possibility of further escalation if relations
with Russia deteriorate in future.
Taken as a whole, the restrictions announced on July 31 are
best viewed as a piece of "sanctions theatre" designed to show
the public and Washington that the EU is doing something in
response to the downing of the Malaysian airliner over eastern
Ukraine while keeping the costs to EU energy firms as low as
possible.
Sanctions will be enforced in the form of a "prior
authorisation" requirement before certain oil-related goods and
services can be exported for use in Russia, according to the EU
Official Journal ("Council Regulation 833/2014 concerning
restrictive measures in view of Russia's actions destabilising
the situation in Ukraine" July 31).
Restrictions apply to the "sale, supply, transfer or export"
of certain technologies "suited to the oil industry for use in
deep water exploration and production, Arctic oil exploration
and production, or shale oil projects" (Article 3 paragraphs 1
and 3).
Covered technologies are set out in a list which consists
mostly of steel pipe and casings used for the construction of
pipelines and oil wells, as well as drilling and pressure
pumping equipment, and some floating or semi-submersible
production platforms (Annex 2).
Technical assistance, brokerage services and financing
linked to the same items and technologies are subject to the
same prior authorisation requirement (Article 4 paragraph 3).
Enforcement of the sanctions is left to individual EU member
states, though there are basic information and consultation
requirements.
In theory, member states "shall not" grant authorisation for
any technology transfers or technical assistance related to
deepwater, Arctic and shale projects.
But the ban contains several important exclusions which
should ensure that most if not all existing and future projects
are exempted:
(1) Sanctions apply only to oil production, not gas.
(2) Export authorisation "may" be granted for equipment,
technical advice or financing "arising from a contract or an
agreement" concluded before August 1 (Article 3 paragraph 5
second part).
(3) Sanctions apply only to deepwater, Arctic and shale
developments, not to conventional oil fields.
In combination, these exclusions apply to all current and
announced projects, and cover billions of barrels of potential
oil and gas production over the next few decades.
For example, agreements between Exxon, BP,
Shell, Total and Russian companies to
develop Arctic, offshore and shale formations in Russia are
either exempt because they were concluded before Aug 1, or
because they are principally drilling for gas, or can be
classified as conventional oil production.
The language of the regulation is very permissive. The
concept of a "contract or an agreement" concluded before the
deadline is particularly stretchy since it is not limited to a
final investment agreement but seems to encompass plans which
are still only at the provisional stage.
Most major oil and gas companies, as well as service
companies, should have no difficulty in arguing the provision of
equipment and technical advice is linked to the execution of
existing obligations for contracts or agreements which are
already in place.
In addition, most wells produce a mix of oil, gas and
condensate, in varying proportions. The regulations only
prohibit the export of equipment and advice for oil projects.
Gas projects are clearly allowed. And the regulations are silent
about condensates (otherwise known as natural gas liquids).
It should not be too hard to argue that equipment and advice
is being exported for gas rather than oil. Get ready for a
sudden increase in the number of projects looking for "gas,"
"wet gas" and "condensate" in future.
FLEXIBLE RESPONSE
National authorities have been left to determine precisely
how to apply the sanctions and the generous exemptions.
Everything will depend on how they decide to interpret the
restrictions and exclusions.
In the hands of national governments, the energy sanctions
could be a flexible instrument for escalating or de-escalating
pressure on the Russian government in response to events in
Ukraine.
If the relationship continues to worsen, EU governments can
easily tighten the sanctions by employing a more expansive view
of the sanctions and a more restrictive view of the exclusions,
or take the opposite view if relations improve.
The EU promised "these measures will be kept under review
and may be suspended or withdrawn, or supplemented by other
restrictive measures, in light of developments on the ground."
But access to the Russian oil and gas sector is vital for a
number of large EU energy companies, which will lobby hard
behind the scenes for the most permissive interpretation in
order to safeguard their own supplies and investments.
If a strict interpretation of the sanctions is enforced,
Russia is likely to turn to other suppliers, notably its own
firms and China, for the capital and expertise needed to develop
new oil resources, which would harm western energy companies
without necessarily doing much to reduce Russia's production
potential.
The sanctions are also intended to send a signal about the
political acceptability of doing business with Russia's oil and
gas companies.
For advocates, the hope is that many companies will end or
at least scale back deals even where they would be allowed under
certain readings of the regulations.
"The more this looks like the (U.S.) administration is using
pages from the Iranian financial sanctions playbook, the greater
the likelihood that market players will voluntarily cut their
business ties to stay ahead of potential penalties," Mark
Dubowitz of the Foundation for Defense of Democracies told the
Wall Street Journal ("Recent history suggests tougher Russia
sanctions are needed" July 30).
The Foundation for Defense of Democracies has been a
prominent advocate for sanctions on Iran, and now Russia.
"Sanctions are as much about psychology as legalities,"
Dubowitz told the Journal.
But while it is possible companies will adopt a restrictive
reading of the new regulations, it seems more likely they will
push for a permissive one, and try to continue with business as
usual as much as possible.
Oil and gas companies have lots of experience dealing with
complicated political and legal environments.
As drafted, the export restrictions contain enough
exclusions and ambiguity that most projects should be able to
proceed, at least in the next few years, when much of the
preparatory work will be small scale.
For most deepwater, Arctic and shale developments,
large-scale production was years away, even before the sanctions
announcement.
Oil and gas producers and service companies will hope to
continue with enough work to protect their projects in the short
term, while hoping for a medium-term thaw in political
relations.
(Editing by William Hardy)
