EU sanctions on Russia’s oil sector will not seriously hamper the development of new oil resources in either the short or the long term, though they leave open the possibility of further escalation if relations with Russia deteriorate in future.
Taken as a whole, the restrictions announced on July 31 are best viewed as a piece of “sanctions theatre” designed to show the public and Washington that the EU is doing something in response to the downing of the Malaysian airliner over eastern Ukraine while keeping the costs to EU energy firms as low as possible.
Sanctions will be enforced in the form of a “prior authorisation” requirement before certain oil-related goods and services can be exported for use in Russia, according to the EU Official Journal (“Council Regulation 833/2014 concerning restrictive measures in view of Russia’s actions destabilising the situation in Ukraine” July 31).
Restrictions apply to the “sale, supply, transfer or export” of certain technologies “suited to the oil industry for use in deep water exploration and production, Arctic oil exploration and production, or shale oil projects” (Article 3 paragraphs 1 and 3).
Covered technologies are set out in a list which consists mostly of steel pipe and casings used for the construction of pipelines and oil wells, as well as drilling and pressure pumping equipment, and some floating or semi-submersible production platforms (Annex 2).
Technical assistance, brokerage services and financing linked to the same items and technologies are subject to the same prior authorisation requirement (Article 4 paragraph 3).
Enforcement of the sanctions is left to individual EU member states, though there are basic information and consultation requirements.
In theory, member states “shall not” grant authorisation for any technology transfers or technical assistance related to deepwater, Arctic and shale projects.
But the ban contains several important exclusions which should ensure that most if not all existing and future projects are exempted:
Sanctions apply only to oil production, not gas.
Export authorisation “may” be granted for equipment, technical advice or financing “arising from a contract or an agreement” concluded before August 1 (Article 3 paragraph 5 second part).
Sanctions apply only to deepwater, Arctic and shale developments, not to conventional oil fields.
In combination, these exclusions apply to all current and announced projects, and cover billions of barrels of potential oil and gas production over the next few decades.
For example, agreements between Exxon, BP, Shell, Total and Russian companies to develop Arctic, offshore and shale formations in Russia are either exempt because they were concluded before Aug 1, or because they are principally drilling for gas, or can be classified as conventional oil production.
The language of the regulation is very permissive. The concept of a “contract or an agreement” concluded before the deadline is particularly stretchy since it is not limited to a final investment agreement but seems to encompass plans which are still only at the provisional stage.
Most major oil and gas companies, as well as service companies, should have no difficulty in arguing the provision of equipment and technical advice is linked to the execution of existing obligations for contracts or agreements which are already in place.
In addition, most wells produce a mix of oil, gas and condensate, in varying proportions. The regulations only prohibit the export of equipment and advice for oil projects. Gas projects are clearly allowed.