Putin’s War Empire and Russia’s Energy Cash Cow – POLITICO

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For a man obsessed with Russian greatness, President Vladimir Putin is doing his best to sabotage the one economic sector that allows Moscow to claim superpower status and helps fund its war in Ukraine: oil and gas.

His invasion puts all of that at risk.

The sanctions restrict Russia’s access to crucial Western technology and funding needed to help it drill for oil in depleted, remote and inhospitable Siberian and Arctic fields. The departure of Western companies is also crippling its ability to produce ultra-lucrative liquefied natural gas for the decade to come.

Russia may also need to find new places to sell. The European Union is talking about taking action on oil in its sixth sanctions package this week. Countries are already setting short-term goals to end their dependence on Russian oil and gas.

This leaves Putin with a headache.

“We must assume that for the foreseeable future the energy supply to the West will be reduced,” the Russian president said earlier this month, pledging to “increase energy resources to other regions of the world”.

But that means building pipelines and LNG terminals to redirect exports to Asia, and Russia lacks both the money and the technology to quickly effect such a change. China simply cannot suck up all the vast volumes of energy consumed in Europe to help the Kremlin. Already Moscow’s biggest buyer of crude, Beijing has its own strategic goals in keeping various suppliers.

Dark prospects for black gold

Headlines have focused on the withdrawal of energy majors like Shell, BP and ExxonMobil from Russia, but it’s the oil services companies – led by the trio of Halliburton, Schlumberger and Baker Hughes – that will ultimately prove much more substantial.

Indeed, after a boom in the 1980s and 1990s, many of the oil fields in central Russia in western Siberia are in decline.

The techniques developed and perfected by the professionals in Texas – such as using remote-controlled robots to drill the rock horizontally for miles, guided by cutting-edge imaging software to locate and expel those last drops of oil – rely on a technology that has now been sanctioned.

“These technologies are the product of market-driven innovation and technological progress, originating mainly in the United States,” said Vladimir Milov, Russia’s former deputy energy minister and now political opposition figure. “The Soviet oil industry lacked them, and the Russian private oil industry just bought them, because why develop something on your own when you can just hire Halliburton and Schlumberger? »

Service companies said they would not accept new work in Russia, and Halliburton said it planned to end its existing operations in the country. The three declined to detail the scale and time remaining on existing contracts.

Upstream analysts at Rystad Energy said the result would be a decline in Russian oil production of 4-7% per year.

If the companies pull out completely, it “could lower Russian production by 10, 15%, I don’t think that’s an exaggeration,” Milov said.

“Well drilling, production, exploration, all of this can be done by Russian service companies as well as service divisions of the biggest oil producers like Rosneft and Surgutneftegaz,” said senior analyst Daria Melnik. upstream of Rystad.

But it will cost more and more, as the search for new supplies forces exploration deeper underground or further afield in places like the Arctic.

“You are fighting a rearguard battle, trying to maintain old production fields as long as you can, stepping back, drilling all the time… begging the Russian government for more funds in the form of cheap loans , and will you build us a port, please, and by the way, we will need a new pipeline,” said Thane Gustafson, professor of Russian politics at Georgetown University in Washington. “It is several billion rubles that are needed for the state to help with this next chapter of Russian oil. »

Unnecessary pipelines

Natural gas is another story.

“For the majority of the Russian gas industry, they really don’t depend on western companies, except potentially for funding,” said Jonathan Stern, founder of the gas program at the Oxford Institute for Energy Studies.

Russia is also safer when it comes to gas sales rather than oil. For now, the EU is ruling out sanctions on natural gas – much of which comes into the bloc via pipelines – thanks to strong opposition from countries like Germany and Hungary.

As the EU weighs its options on gas, Putin lacks the ability to quickly move it to other markets. Rather than focusing on liquefied natural gas technology for global export by ship, Russia’s gas strategy has been to build expensive pipelines to the west that would pay off their long-term investment – ​​Blue Stream, Yamal Europe , TurkStream, Nord Stream and the recently frozen Nord Stream 2.

Putin has one gas export pipeline to China in operation, and talks are underway for two more.

But what is missing are crucial pipelines in Russia that would allow state-backed Gazprom to divert gas from fields in the west of the country to new Asian buyers.

Building them “will take time, probably most of this decade,” Stern said.

Putin had hoped that by 2035 Russia could diversify outside of Europe and grab a fifth of the global LNG market. Experts say that without Western technology and money, he can say goodbye to those dreams.

“LNG will face the biggest delays,” Melnik said. “We don’t have our own technology, we don’t have our own equipment, we don’t even have gas turbines or LNG carriers. »

South Korean shipyards building ice-breaking LNG carriers for Russian companies are already facing worries about getting paid due to financial sanctions imposed on Russia.

The Russian shipyard Zvezda, intended to build the country’s next-generation LNG fleet, relies on French liquefaction technology, also beyond the reach of European sanctions.

“Projects like Rosneft’s Far East LNG, Gazprom’s Baltic LNG – those are pretty much dead in the water,” Stern said.

However, unlike oil wells, which can be damaged if shut down – which could happen if sanctions prevent Russia from easily selling its crude – natural gas wells are easier to extinguish and then re-ignite.

“You can turn off the gas valve and keep it in the field without killing your field, so it’s flexible,” said Thierry Bros, professor at Sciences Po Paris. “The risk is having too few sales. »

All alone

Although Russia is increasingly isolated from the rest of the world’s finance and technology, it is not completely powerless.

“You can’t say that Gazprom is a Soviet company – it may have to obey Vladimir Putin under strict orders, but otherwise it’s a company with a lot of educated young people, they have traveled to Europe, they understand,” said Bros. mentioned. “When you look at results and production capacity, in some ways it’s less bureaucratic than Shell or BP. »

However, Western withdrawal “could leave some Russian facilities struggling, not because they are unable to operate them themselves, because they have learned a lot over the past 20 years, but rather it is the spare parts issues, timely equipment maintenance issues,” Stern said.

Fortress Russia supporters point out that the government has many ways to try to lessen the sting.

“We heard several weeks ago that Russia was allowing non-payment of royalties to foreign holders of technology licenses,” Melnik said. Since departing companies are unlikely to bring back sanctioned equipment and technology already on the ground, Russia could “just steal technology and replicate it.”

But “if we are in a situation where the sanctions will be there for a very long time, then the technologies that were useful in 2022 will not be useful in 2032,” said Margarita Balmaceda, professor of diplomacy and international relations at the university. Seton Hall of the United States

Russia has also seen an exodus of IT specialists and other tech experts, which could hamper such reverse engineering plans.

“The Russian authorities will try to do their best to keep these people here in Russia by offering high salaries, different subsidies, other incentives because this is our very, very weak point,” Melnik said.

Sofya Donets, a Moscow-based economist and Russia director at Renaissance Capital, said that despite the economic blow that will hit Russia, the oil and gas sector is likely to receive significant financial support from the Kremlin as the industry strives to refocus on Asian markets.

But there could also be long-term consequences clouding the outlook, including the ostracism of Russia by global financial markets.

“That’s the kind of stigma,” Donets said. “Although the sanctions will be lifted at some point, I, like all investors, do not expect to return to this market anytime soon. »

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