The new energy sanctions imposed by the West could force Russia to turn to other partners or technologies to compensate for the lost potential of Arctic and shale prospecting projects.

Russian President Vladimir Putin, left, listens to CEO of state-controlled Russian oil company Rosneft Igor Sechin during a meeting in the Kremlin, in Moscow. AP Photo / RIA Novosti

On Sept. 12, the EU and U.S. published a new list of energy sanctions, this time targeting Russian state oil companies Rosneft and Gazprom Neft, as well as the privately owned Lukoil and Surgutneftegaz. It also marked energy giant Gazprom’s first appearance in the list, but only in regard to oil projects.

The new sanctions prohibit the West’s largest oil companies, including America’s ExxonMobil, Anglo-Dutch Shell, France’s Total, and Norway’s Statoil, from partnering with Russia in deep-sea and shale prospecting projects, as well as upstream operations in the Arctic. They also mean that Western companies will be forced to halt exports to Russia of high tech equipment used in oil exploration and production.

What projects will be affected by the new sanctions?

The West’s new round of sanctions restricts access to new funding and imposes a ban on exports to Russia of certain kinds of equipment used in the exploration and production of oil and gas. They primarily affect Rosneft, which operates a number of joint projects with Western firms in the Arctic and plans to expand production there.

The ban applies less to traditional methods of “black gold” production and more to knowledge-intensive projects: deep-sea drilling technology and equipment for the exploration and development of shale oil and the Arctic shelf. These companies are difficult to replace as partners, since they not only possess the technology itself, but also the expertise, which is especially important when operating in the Arctic’s pristine and fragile ecosystem.

As a result, the further large-scale development of Arctic deposits will be suspended, although the majority of existing fields will continue to pump oil at present rates. The new embargo does not apply to contracts signed before Sept. 12, 2014. So Norway’s Seadrill, for instance, which entered into a series of offshore agreements with Rosneft before that date, will continue working in Russia, unless, of course, the sanctions are tightened or the company itself pulls out.

How the sanctions will affect foreign companies

Western production and service companies are themselves not enthusiastic to abandon cooperation with Russia completely. Their dependence on Russian partners is also considerable due to the fact that participation in Russia's Arctic projects is a way to hike production and, accordingly, company revenue and share price.

This suggests that they may eventually resort to re-exporting equipment through third countries. The first to take such a step would most likely be ExxonMobil, which of all the companies involved, is the most interested in expanding further cooperation with Russia.

ExxonMobil already has the right to drill in the Kara Sea in the Russian Arctic over an area of ​​more than 46 square kilometers. It is the company’s largest single project with drilling rights outside the U.S. (according to exploration data, the site in the Kara Sea accounts for more than a third of ExxonMobil’s proven fields), and Arctic drilling contracts have been signed with Rosneft.

These projects are set to maintain and likely strengthen both companies’ market positions. Re-exporting supplies is common practice in all countries, and Exxon will not be hard-pressed to make it happen if both sides desire it.

Should we expect to see a drop in Russian oil production?

Norway, Canada, the U.S., Denmark, and Russia are all expanding production in the Arctic in cooperation with foreign companies that possess the technologies to make extraction commercially viable and relatively safe.

However, conditions in Russia look somewhat different. There are alternatives, and one should caution against any heightened sense of optimism that comes from discounting the high cost, complexity, and unpredictability of upstream operations in the Arctic, to which numerous failed projects bear witness.

From this viewpoint, a slowdown in the development of the Arctic may even be of use to Russia. First, the country already has proven reserves of stranded oil on terra firma in Siberia, which, being far easier and quicker to develop than Arctic resources, will help stabilize production. Consequently there will be no decline in production, while cooperation with Asian partners will help bring in the necessary investments and technologies.

Second, Russia has one other attractive option available to it, which has not been tried before due to the prevailing culture as regards subsoil use. It is simply to increase the efficiency of production at existing fields, and represents the only way to boost production even more than Arctic development.

Russia could achieve a greater outcome than by developing projects in the Arctic by increasing the oil recovery factor [the coefficient that is defined as the ratio of the quantity of oil extracted to the quantity originally contained in the bed under similar conditions – Editor’s note] from today’s 0.3 to the worldwide average of 0.5 (even the U.S. in recent years has increased its level to 0.40-0.42, despite having a significantly less favorable structure of reserves).

Russia already has all the technologies it needs for this. Only the culture of deploying them is missing, which in the present circumstances will have to be forcibly instilled.

As a result, over the coming 10-15 years, oil reserves on land could compensate for the temporary lack of technology and expertise required for large-scale production in the Arctic.

No choice but to look for new partners

Imposing sanctions undermines faith in the West, particularly its companies. Whereas before the Ukrainian crisis cooperation with the West was Russia’s priority, today it is looking to expand ties with other BRICS countries and the Shanghai Cooperation Organization (SCO).

Most marked is the turn towards China. Following the signing of a 30-year gas contract with China National Petroleum Corporation (CNPC), Chinese investors were invited to the Vankor field, one of the largest in Eastern Siberia, to secure the investments needed to develop the cluster as a whole (which includes the Lodochnoe and Suzun Tagul fields, whose combined but untapped reserves are comparable to Vankor).

What we are witnessing there cannot be readily replicated inside the Arctic Circle. But perhaps of more importance today is not so much the actual development of the Arctic, but the potential it holds.

The opinion of the author may not necessarily reflect the position of Russia Direct or its staff.