US sanctions hit the strategic partners of Gazprom

Gazprom, which has been hardly touched by Western sanctions until now, has for the first time come under attack: the United States included its South-Kirinskoye gas condensate field on the shelf of Sakhalin Island into its blacklist. American companies are not allowed to supply equipment for the project, which calls into question not only its destiny. If the development of the South-Kirinskoye field stops and gas from it doesn’t go to LNG plant Sakhalin-2, the realization of this project and the strategic cooperation of Gazprom with the Anglo-Dutch Shell will be able to be threatened.

The American Official Gazette Federal Register has announced the expansion of the US sanctions against Russia. This time, a specific field – South-Kirinskoye gas condensate field on the shelf of the Sea of ??Okhotsk (owned by Gazprom and included into the number of blocks of the Sakhalin-3project) was included into the sanctions list for the first time. Until now, only production of scavenger oil, oil in the Arctic and on shelf at the depth of over 150 meters (depth of the South-Kirinskoye field is 30-320 meters) were under sanctions. The USA explained the extension of the sanctions with the fact that, ‘as reported, there are significant reserves of oil’. ‘Export, re-export and transfer of all items that are subject to export control for the field, according to the US government, contain risks of violations of the sanctions without first obtaining a license from the Bureau of Industry and Security (BIS),’ – the Federal Register reported.

There are no ‘significant’ proven oil reserves at the South-Kirinskoye field: according to the State Commission on reserves, there are only 6 million tons of C1 and C2 oil with 636 billion cubic meters of C1 and C2 gas and 97 million tons of gas condensate. The formal reason for the US Government could be the statement of the Russian Minister of Energy Alexander Novak, made in April. Then he announced that the C1+C2 oil reserves of the South-Kirinskoye field were 464 million tons, but the next day the head of the Ministry of Natural Resources Sergei Donskoy specified that the rate of oil recovery from the field was 0.1%, so there was no an issue of the large-scale production.

However, in fact the target of the new sanctions is not the oil, but the gas industry. The sanctions apply to ‘end users’, thus the gas sector and Gazprom as a buyer of equipment for the development of the South-Kirinskoye field were under attack for the first time. Before that measures were introduced against Novatek (on July 16th of 2014, US Treasury prohibited to provide the company with financing for a period of more than 90 days), but it was a question of financial constraints, not of supply of equipment. According to the Kommersant, the European countries when discussed the sanctions with Washington very much insisted that the gas sector wasn’t affected, because they feared that it might cause a response from Moscow. Now that line has been crossed (even against the field, from with the deliveries to Europe have never been planned).

Unlike Novatek, the lack of Western credits wouldn’t be a significant problem for Gazprom. But the US’ ban to sell equipment for underwater drilling, which has no analogues in Russia, threatens to stop the development of the South-Kirinskoye field. The deposit was planned to be launched in 2019 with the reaching the peak gas production in the volume of 16 billion cubic meters in 2023-2024. For a while, six exploration wells were drilled there, in the future it was supposed to develop it, using subsea production systems both because of the great depth, and because of difficult ice conditions. Tender for the selection of a supplier of equipment wasn’t carried out, but, according to the Kommersant’s information, it could become American FMC Technologies, which already works at the nearby gas Kirinskoye field. Similar equipment is also produced by US Cameron and GE Subsea and the Norwegian Aker.

The targeted sanctions against the South-Kirinskoye field also threaten the strategic cooperation of Gazprom with the Anglo-Dutch oil company Shell, which announced in early August that it discussed its entry into the Sakhalin-3 project (four offshore blocks in the Sea of ??Okhotsk – the Kirinskiy, Veninsky , Aiyashskaya and East-Odoptinsky). The stopping of the development of the South-Kirinskoye field calls into question the implementation of the ambitious project of Gazprom on increase of the LNG plant of the Sakhalin-2 project by 5 million tons. Sakhalin-3 was to become a resource base for this stage of the plant, and Gazprom has already agreed on joining Shell to the project, on June 18th, the companied signed a memorandum. At the same time the parties agreed on the participation of Shell in extremely important project for Gazprom – the gas export pipeline Nord Stream-2 and the global exchange of assets. The entry of Shell in the project is the key thing for Nord Stream-2, and the pipeline itself will allow Gazprom to reject the transit of gas through the Ukraine, because of which Washington and Brussels are unhappy.

The company did not comment on if they will now change their plans and parameters of the deal or not. Shell only noted that it ‘interacts with the relevant public authorities to act in accordance with all of the trade measures and sanctions’. ‘We continue to do business in Russia and value our relationship with our Russian business partners,’ – it said.

Gazprom didn’t make any statements.

Sources of the Kommersant in the industry note that the monopoly will need at least one to two weeks to assess the damage from the situation, to hold meetings and get legal advice. But it is now clear that without imported equipment the development of the South-Kirinskoye field is impossible, they say. According to the Kommersant’s interlocutors, the expansion of the LNG plant of the Sakhalin-2 project at the expense of other sites of Sakhalin-3 is unreal, their development is at the stage that is ‘close to zero’. At the same time, the Kremlin remains optimistic. According to the President’s press secretary Dmitry Peskov, ‘we can’y say that the sanctions have no effect, but we can’t also say that the sanctions can somehow impact on various sectors of the Russian economy as a whole’. ‘We don’t find the US actions successful, legitimate, and most importantly – far-sighted,’ – he added.

Valery Nesterov of Sberbank Investment Research recognizes that the South-Kirinskoye field was a major factor in determining the implementation of the Sakhalin-2 project expansion. At the same time, the expert thinks, there are other possibilities for this: the South-Kirinskoye field can be included in Sakhalin-2 or, for example, to agree on procurement of raw materials from the Sakhalin-1 project (the PSA project of American ExxonMobil, Rosneft, Japanese Sodeco and India’s ONGC, the negotiations have lasted for many years, but haven’t yet led to any results). According to Mr. Nesterov, the project to develop the South-Kirinskoye field was initially strongly vulnerable because of the use of only Western equipment, ‘so the United States quickly groped its weak spot’. If Gazprom can’t find gas for the third stage of Sakhalin-2 and refuses to implement it, the USA will get rid of a competitor on the LNG markets in countries of the Asia Pacific region. However, the expert says, the sanctions hit not only Russian companies, but also ‘must cause irritation’ among foreign partners of Russia as they harm their strategic plans.

https://www.oilvoice.com/n/US-sanctions-hit-the-strategic-partners-of-Gazprom/3255c52870a3.aspx