Financial Times: Russia’s oil and gas industry booming BECAUSE of sanctions

The sectoral sanctions the Western powers imposed on Russia in July 2014 because of the conflict in the Donbass continue to have paradoxical results.

The financial sanctions, which effectively prevented Russian companies from borrowing in Western financial markets, instead of causing the Russian economy to implode, have caused it to deleverage at an unprecedented rate, hugely strengthening Russia’s financial sector and the balance sheets of Russia’s companies, setting the scene for a coming investment boom.

The counter-sanctions Russia imposed prohibiting the importation of Western foodstuffs into Russia have led to a huge boom in Russia’s agriculture sector, as even the Financial Times was recently forced to admit, making Russia almost completely self-sufficient in food, and making it a major food exporter.

However perhaps the most paradoxical result of all has been in Russia’s oil and gas industry.

Western sanctions were supposed to cripple this industry – wrongly assumed in the West to be existentially important for Russia’s very existence – by depriving it of the technology it needed to develop the huge untapped oil and gas reserves Russia is known to have in the Arctic, and making development of its huge shale reserves, which are known to dwarf those of the US, impossible.

In the event the Financial Times has now admitted in a lengthy article that within less than three years of the sanctions being imposed the Russian oil and gas industry is in the throes of a technological boom, as Russian companies forge ahead with Arctic drilling, successfully replicating the very same Western technologies which were supposed to be beyond them

………..a drill began its 5,000m journey downwards, in search of oil deposits that the country is banking on to provide more than a quarter of its future output. Perched on the edge of a peninsula deep in the Arctic Circle, Tsentralno- Olginskaya-1 will be Russia’s northernmost oil well. Closer to the North Pole than to any city, it is a feat of engineering that uses equipment shipped 3,600km through icy waters navigable only for two months of the year.

The well is one of the most technologically challenging ever attempted in Russia. With the deposits located beneath the icy, frequently frozen waters of the Laptev Sea, cutting-edge horizontal drilling techniques will be used to reach up to 15,000m from the main site.

But it was also a moment of triumph for Mr Putin, who was beamed in via video conference from St Petersburg as Mr Sechin braved the frigid elements and who celebrated the start of drilling as an act of homegrown ingenuity.

Three years ago, when the US and EU imposed sanctions on the country that restricted companies such as Rosneft from foreign capital and technology, complex wells were exactly the kind of ambitious projects that were supposed to be rendered impossible. Western governments hoped that pressure on Russia’s main energy companies would help change Mr Putin’s political calculations. But as projects like Tsentralno-Olginskaya-1 attest, Russia’s oil and gas majors have found ways to carry on regardless.

“Horizontal drilling is a complex and high-tech operation. This is just the first well. There is much more work ahead,” Mr Putin told Mr Sechin in the heavily scripted conversation.

It seems according to the same article that the Russians are forging ahead with shale technology as well

……..2,000km south-west of Tsentralno-Olginskaya-1 in western Siberia, Gazprom Neft, Russia’s third-largest oil producer, is showing few ill effects. Late last year, it became the first Russian company to demonstrate shale oil fracking expertise with a 1km-long horizontal well 2.3km below ground at a site in the vast Bazhenov field, estimated to be the world’s largest shale oil deposit.

Gazprom Neft was able to use homegrown technology that it was forced to develop after the sanctions prompted its international partners to walk away from the project.

“We are like a snowball,” says Sergey Vakulenko, head of strategy and innovation at the company, a unit of gas giant Gazprom. “The harder you squeeze, the harder we get.” ……

“Sure, in terms of shale technology, we are a little behind the Americans. But in time, and definitely before we absolutely need to, we will get to where we need to be, sanctions or no sanctions,” says Mr Vakulenko.

“We could do it now, but we don’t need to,” he adds, referring to even more complex fracking techniques that will be required to fully exploit the Bazhenov field’s 75bn barrels of estimated reserves. “Why go after the high-hanging fruit when there is lower stuff available right now?”

The point about Russia not needing to go after the high-hanging fruit when there is an abundance of lower-hanging fruit for it to exploit is not bragging or propaganda.  It was made to me a few months ago in person by a Russian scientist who is an expert in hydraulic fracking.

Perhaps even more striking than this news of technological advances is the Financial Times’s admission that the effect of the sanctions has been to make the Russian oil and gas industry financially stronger and more efficient

“In terms of today’s projects, we are not at all affected [by the sanctions],” [Yakulenko] says in an interview at the company’s St Petersburg offices, where engineers use vast computer screens to remotely control drills at more than 600 wells across the country. “At their current configuration, they aren’t and won’t be painful, irrelevant of how long they are in place.”

Between 2013 and 2016, Russian crude oil production rose almost 6 per cent, more than twice as much as the rise in combined output from the Opec group of countries. Revenues at the country’s three largest producers have risen 11 per cent in that period.

The curtailment of foreign cash forced many to restructure their balance sheets with the help of domestic lenders, cut loss-making or costly new projects, and increase their efficiency.

Acquisitions and international expansion projects have followed. “The accepted narrative is that there is only upside risk from sanctions [being lifted] as the majority of the companies affected have shown few ill effects,” says the head of a western bank in Moscow. “In fact, lots of them have been forced to be smarter and have increased their competitiveness.”

Articles such as this one in the Financial Times are still comparatively rare.  The orthodoxy amongst Western governments and in the Western media is that Russia is suffering badly from the sanctions.  That is one reason why there is still so much resistance to any move whether by the Trump administration or by anyone else to lift them.

The truth is that though the sanctions caused the Russian economy genuine difficulties in late 2014, when Russian companies had to repay debts they struggled to finance because of the sanctions and the oil price fall, once Russia got through those initial difficulties the effect of the sanctions on the Russian economy has been entirely beneficial, and is becoming more so.

The West seriously underestimated Russia in 2014.  It failed to realise to what an extent the country had advanced beyond the disastrous times of the 1990s.

Whereas the sort of sanctions the West imposed on Russia in 2014 would have crushed the Russian economy if they had been imposed in say 2000, today Russia is fully capable of developing its economy by drawing on its own financial resources and its own technology, both of which it has in abundance.

What the West did in 2014, by imposing the sanctions at a time when there was an oil price fall, was force the Russians to do this more efficiently and more quickly than they would have done if they had been left alone.

Westerners always seem to cling on to their idea of Russia as a poor, technologically backward, ill-governed, irredeemably corrupt, ‘third world’ country (“Upper Volta with missiles”).  This is what leads them to make foolish decisions, such as the decision to impose sectoral sanctions, which they took in July 2014.

On the subject of Russia being ill-governed, the Financial Times quotes Apurva Sanghi, lead economist for Russia at the World Bank in Moscow, as having this to say

There is a pretty uniform consensus that the oil price shock dwarfed the sanctions.  If you look at what the authorities have done over the past few years for macro stability, it has been pretty outstanding and the results are there to be seen.

On the macro-economic facts, it is impossible to disagree with this assessment, and on the oil and gas industry facts as described in the Financial Times article, it is impossible to say anything different.

On 27th May 2016, when I discussed the West’s failed attempt to stop Russia floating a eurobond, I made this point in relation to how the West’s actions had actually strengthened Russia’s financial system

Truly Western governments when it comes to Russia seem intent on proving Nietzsche’s dictum true: that which does not break us makes us stronger.  Certainly that has been true of Russia’s eurobond sale.  By trying and failing to sabotage it the West has only managed to make Russia stronger.

The same it turns out is true of Russia’s oil and gas industry.