Some of the world’s biggest energy companies could see billions in revenue disappear amid new sanctions that shut them off from the Russian energy frontier.
As violence escalates in eastern Ukraine between government and separatist forces, the European Union today sought to punish Russia for its involvement by restricting exports of deep-sea drilling and shale-fracturing technologies. The U.S. followed suit, with President Barack Obama announcing a block on specific goods and technologies exported to the Russian energy sector.
“Because we’re closely coordinating our actions with Europe, the sanctions we’re announcing today will have an even bigger bite,” Obama told reporters today at the White House. “Russia’s energy, financial and defense sectors are feeling the pain.”
The new restrictions, which Obama described as the region’s most significant to date, “will make it more difficult for Russia to develop its oil resources over the long term,” he said.
Russia relies on companies including Exxon Mobil Corp.,(NYSE:XOM) BP Plc, Halliburton Co.(NYSE:HAL) and Schlumberger Ltd.(NYSE:SLB) for the latest technology and expertise it needs to develop an estimated $7.58 trillion in oil and natural gas resources that sprawl across nine time zones. Exploration and production companies like Exxon were expected to spend $51.7 billion in Russia this year, according to estimates from Barclays Capital Inc. -- much of which would go to service and equipment companies such as Schlumberger and Halliburton.
The U.S. and EU are restricting the transfer of certain oilfield technologies into Russia that are needed to develop its oil and gas fields in shale rock formations, deep water offshore and in the Arctic. That will include horizontal drilling and hydraulic fracturing, which has helped boost North American crude production and set the U.S. on a course toward energy independence.
Russia is the second-largest market for fracking services outside North America, after China. Russia’s demand for rock- crushing gear was forecast to double by 2018, according to research by PacWest Consulting Partners.
Oilfield service companies Halliburton, Baker Hughes Inc. and Weatherford International Plc each generate 4 percent to 5 percent of their global sales from Russia, while Schlumberger gets 5 percent to 6 percent, according to RBC Capital Markets. The increased sanctions aren’t expected to drive the service companies out of Russia, Kurt Hallead, an analyst at RBC Capital Markets in Austin, said in a phone interview.
“It hurts from an earnings standpoint,” Hallead said. “They basically have to eat a lot of fixed costs if their revenue goes away.”
Halliburton continues to operate in Russia while complying fully with all laws, Susie McMichael, a spokeswoman at Houston- based Halliburton, said today in an e-mailed statement. A spokeswoman for Baker Hughes declined comment, and Weatherford representatives couldn’t be reached. Schlumberger wasn’t able to comment on the future impact of the sanctions, according to Stephen Harris, a spokesman.
“We are assessing the impact of the sanctions,” Alan Jeffers, an Exxon spokesman, said in an e-mailed statement.
“Production at many of the country’s older oil fields is being maintained only with the help of Western technology, such as horizontal drilling,” Philipp Chladek, an analyst at Bloomberg Intelligence, said in a July 29 note. Sanctions targeting exploration and production technology in Russia “may stymie output,” he said, in a country that produces one of every eight barrels of crude oil worldwide.
Sideways drilling and hydraulic fracturing developed by western energy firms have been a boon to Russian drillers. Oil wells that use those techniques are more than three times as productive as traditional vertical wells that are fracked, Chladek said, citing a presentation by OAO Rosneft, the state- controlled company and Russia’s biggest oil producer.
The latest round of sanctions isn’t expected to disrupt sales or operations for U.S. aerospace and defense manufacturers, although the potential impact “depends on how far the Europeans are really willing to go,” Joel Johnson, executive director, international, of the Teal Group, said in an e-mail. “I think the real problems are likely to involve financial sanctions and under what circumstances U.S. companies and banks can do business with Russian banks.”
Boeing Co.,(NYSE:BA) the world’s largest planemaker, might see manufacturing costs rise if the imbroglio disrupts its access to titanium, a light-weight metal favored for jet aircraft such as its 787 Dreamliner. VSMPO-AVISMA, a Russian titanium producer, provided 35 percent of the supply used by Boeing’s commercial airplanes unit as of March, according to Boeing’s website.
“We are watching developments closely to determine what impact, if any, there may be to our ongoing business and partnerships in the region,” John Dern, a spokesman for Chicago-based Boeing, said in an e-mail. “We won’t speculate on the potential impact of sanctions or any other potential government actions.”
Exxon, the world’s largest oil company by market value, is “under pressure” to shun Russia’s biggest crude producer, Rosneft, and may be forced to quit offshore Arctic and Siberian shale projects budgeted to cost as much as $1 billion, Alexander Nekipelov, Rosneft’s chairman, said in an interview in Moscow today. Russia is Exxon’s biggest exploration prospect outside of its home country.
BP, the U.K. oil company that has a 20 percent stake in Rosneft and is the single-biggest foreign investor in Russia, warned that additional sanctions against the country could hurt its production, its earnings and its reputation, according to the company’s earnings statement.
Technip SA lowered its outlook for profit margins on some types of projects this week because of uncertainty about how Russia sanctions would affect progress on the giant Yamal LNG installation in Arctic waters. A spokeswoman for Technip couldn’t be reached for comment today.
CGG, a French seismic surveyor, could also be affected by the sanctions because its technology is used to map oil and natural gas reserves. The company has data on the Russian Arctic, according to its website.
Copyright 2014 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.