Blazing a Trail to Recovery and Long-Term Sustainable Development.

30 September - 1 October 2020

“Stolitsa” Business Centre, Yuzhno-Sakhalinsk

Western sanctions and their impact on Russian oil and gas projects

Published on 2 September 2019 by Vladislav Sebyakin

By Sergei Lazarev, Managing Partner, Russin & Vecchi LLP

and 

Sergey Parinov, Partner, Russin & Vecchi LLP


1  1

 

 

 

 

1. General.

 

The sanctions being considered are a set of restrictive measures of political and economic nature introduced against the Russian Federation – Russian officials, nationals and companies. The sanctions were first introduced by the United States which were supported by the European Union and, then, a number of other states (Canada, Australia, Japan). 

As far as the reason for introducing the current (*this is not the first time in history – for example, sanctions were introduced against the USSR in 1980 (grain embargo) and, even earlier, trade restrictions covering, among others, the USSR were introduced by the Jackson-Vanik Amendment in 1974) sanctions is concerned, the first portion of the restricting measures was introduced in response to Russia’s position on results of the Crimean referendum, declaration of independence by Crimea and Sevastopol and their subsequent reintegration into Russia, as well as on resolution of a crisis in Eastern Ukraine. Occasions for introducing additional sanctions included events of various geopolitical magnitude – the US and European legislative acts referred to Russia’s political leadership’s position on a wide range of issues, including cybersecurity (e.g., Russian hackers’ interference in the US presidential elections), corruption and violation of human rights, freedom of mass media, Russian influence on politics in Europe and in the whole Eurasian region, energy security in Europe, arms sales in Syria, chemical weapons proliferation, etc., as the reason for introducing the respective sanctions.    

The first restrictive measures were introduced in March 2014 and, then, were extended on a step-by-step basis, covering not only particular persons (by applying visa bans and asset freezes on the territories of the United States and European Union) but also particular sectors of Russian economy (by introducing restrictions and, then, bans on business operations with Russian counterparties in the defense and energy spheres as well as in the financial sector).   

 

2. US and European sanctions legislation. Structure of restrictive measures.

 

Sanctions legislation

The United States sanctions were initially introduced and extended by the U.S. President’s orders. Additional measures were introduced and existing measures were clarified and extended by the respective acts and regulations issued by the U.S. government agencies, such as the Office of Foreign Asset Control of the U.S. Department of the Treasury (OFAC), the Bureau of Industry and Security (BIS) of the U.S. Department of Commerce, the Directorate of Defense Trade Controls (DDTC).  

Subsequently, after the 2017 Countering America's Adversaries Through Sanctions Act (H.R.3364) has been passed, the U.S. lawmakers took the first step towards codification of the anti-Russia sanctions. In this connection the already introduced sanctions became open-ended, i.e., the necessity for an annual renewal of the sanctions has been eliminated. 

After the adoption of the named Act, a whole range of similar bills (Defending Elections from Threats by Establishing Redlines Act, Stand with UK against Russia Violations Act, Secure America from Russian Interference Act, Defending American Security from Kremlin Aggression Act) were introduced.

The European sanctions were introduced on a centralized basis and were (and are still) enacted by the Council of the European Union. 

 

Structure of U.S. sanctions:

1. Diplomatic restrictions:

- suspension of bilateral cooperation/negotiations on various matters, from military projects, bilateral meetings and conferences to trade and investment cooperation.

 

2. Visa bans and asset freezes covering persons (nationals and companies) included on the sanctions lists (Russian nationals, usually, officials and businessmen and companies controlled by those officials and businessmen):

- travel ban;

- bank account freeze;

- freeze and seizure of assets located on the U.S. territory;

- business operations restrictions.  

 

3. Sectoral sanctions:

- financial sector (ban on the provision of financing to major Russian financial institutions and organizations);

- energy sector (ban on the provision of financing to major Russian oil and gas companies; prohibiting the provision, exportation, or reexportation, directly or indirectly, of goods, services, or technology in support of exploration or production for new deepwater, Arctic offshore, or shale projects that have the potential to produce oil; prohibiting the provision of financing and goods, services and technology for the purpose of the Russian export pipeline construction, etc.);

- defense industry (ban on the provision of financing to Russian defense industrial companies).

 

Structure of European sanctions:

1. Diplomatic restrictions:

- suspension of bilateral negotiations on various matters;

- cancelation of joint events, conferences and summits.

 

2. Visa bans and asset freezes covering persons (nationals and companies) included on sanctions lists:

- travel ban;

- bank account freeze;

- freeze and seizure of assets located on the territory of the European Union;

- business operations restrictions. 

 

3. Economic sanctions:

- limitation of access to the European capital markets for major Russian financial institutions and oil and gas and defense corporations;

- prohibiting the provision of technology for oil exploration and production for deepwater, Arctic offshore and shale projects;

- ban on the provision of services and performance of works connected with drilling, well testing, provision of specialized vessels for deepwater, Arctic offshore and shale projects;  

- prohibiting the provision of dual-use goods and technology;

- ban on the arms sales (including provision of relevant services, financing, etc.).

 

3. Impact of sanctions on Russian oil and gas projects.

 

1

 

Though various experts’ assessment of impact of the sanctions on the oil and gas projects differs quite often (some experts argue that problems in the Russian energy sector are mostly caused by the poor condition of the global energy sector, while others give priority to the restrictions introduced by the sanctions legislation), we believe the restrictive measures, which create or may create complications for implementation of particular projects, shall not be underestimated. 

 

As recent experience shows, a number of oil and gas projects with the participation of the major Russian and foreign players in the energy markets have been frozen at the early stages due to the sanctions introduced by the United States and European Union. For example, ExxonMobil has frozen its shale projects in the Arctic Region and in the Black Sea. Earlier, the Lukoil and Total project (for exploration of hard-to-recover oil reserves in the Western Siberia (Bazhenov formation)) and the Shell and Gazprom Neft project (shale oil exploration and production in Yugra carried out though a joint venture Khanty Mansiysk Petroleum Alliance) have been canceled. 

 

Factors affecting oil and gas projects include the following:

First, any project in the energy sector is expensive and requires incurring significant expenses and provision of substantial investments. Taking into account that the access to foreign sourced financing has been suspended for the major Russian oil and gas corporations, this cannot but affect both the already started and future projects;

Second, development of oil and gas projects requires modern technology which, quite often, is provided by foreign partners, and in this connection the projects planned for implementation with the use of foreign technology are under a direct threat due to the introduction of the respective restrictions;

Third, the existing U.S. and European sanctions legislation provides for the possibility of extension of the restrictive measures (in the context of terms, structure and spheres of application). Furthermore, the restrictions may both be aimed at a particular project or oilfield (as it happened with the Yuzhno-Kirinskoye oilfield which was included on the sanctions list in August 2015, which means that export of goods originated from the United States to this oilfield requires a license issued by the U.S. Department of Commerce) and impose a general ban on the provision of this or that technology (equipment) used in the development of oil and gas projects. All this creates significant complications for planning and development of long-term energy projects.

 

In general, we shall admit that the introduced restrictive measures create difficulties for both the implementation of the existing projects and development of new projects. In the first case, the nature of the sanctions and frequency of their introduction and expansion pose a threat to and cause uncertainty as to successful completion of the existing projects. In the second case, being guided by negative expectations as to the future sanctions and duration of the existing sanctions, potential investors have to suspend the development of new projects.

Please log in to leave a comment

There are no comments yet