US sanctions not mere ‘trifles’ for Russia’s oil industry

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Gennady Timchenko is grounded. Ever since the Russian billionaire and friend of Vladimir Putin was hit by US sanctions back in March, his private jet has been stuck on the tarmac: Gulfstream will not service it or provide spare parts.

In an interview with the ITAR-TASS news agency this week, Mr Timchenko admitted that the US penalties had caused him “certain difficulties” – but these were “trifles” compared with the task of safeguarding Russia’s national interests.
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Mr Timchenko is one of the most high-profile targets of a sanctions campaign aimed at Russia’s most strategic industry – oil and gas. Last month the US Treasury in effect barred Rosneft and Novatek, in which Mr Timchenko has a 23 per cent stake, from long-term US capital markets.

Yet such sanctions could turn out to be as trifling as Mr Timchenko’s little local difficulties.

Take Rosneft. The Kremlin-controlled oil group took on huge amounts of debt to finance its $55bn acquisition of TNK-BP, BP’s Russian joint-venture, and much of that is short term. It has to repay $20bn of loans by the end of the first quarter of 2015, according to Moody’s.

But the risk to its liquidity is minimal. The company has about $20bn of cash on its books, after receiving upfront payments for oil under long-term contracts from China’s CNPC, Glencore and others. It has said it will use these prepayments to finance the upcoming debt maturities.

Even without them Rosneft would have a lot more flexibility than most other big companies. It generates oodles of foreign currency from the sale of its oil, which no one shows any sign of boycotting. It also has privileged access to financing from state banks. If the worst came to the worst, it could also postpone some of its big projects to reduce the need for new loans. Igor Sechin, chief executive, who like Mr Timchenko has been targeted by personal sanctions, said as much last month.

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Novatek, Russia’s largest independent gas producer, is also sitting pretty. It has a $350m syndicated loan falling due within the next 18 months, but generates enough cash flow to repay it in full if refinancing proves impossible. Like Rosneft it can tweak its capital expenditure programme to conserve cash if it has to.

But access to debt finance is only part of the problem. What could prove more of a headache are the EU and US restrictions on the export of technologies used in Arctic, deepwater or shale oil exploration. That is a smart weapon trained directly at Russia’s future.

Production from the ageing workhorses of the country’s oil industry – the vast conventional oilfields of western Siberia – is dropping off sharply. Moscow is determined to offset that decline by pushing beyond frontiers, such as into the oil-rich Arctic oceans and Siberia’s vast Bazhenov shale, and by investing in multibillion-dollar liquefied natural gas ventures in the Yamal peninsula and Sakhalin island. Such ambitions are crucial for Russia’s economic health, with proceeds from oil sales accounting for 44 per cent of budget revenues. It is a cash cow Moscow cannot do without.

But branching into such areas requires access to western technology, capital and expertise. Russia does not need western kit to produce conventional oil – it has been pumping crude from its onshore fields for more than a hundred years. But it is unclear how it can exploit its shale oil reserves without sophisticated western fracking equipment. And it does not build the kind of offshore platform that will be required in places such as the Kara Sea, where Rosneft and ExxonMobil started drilling their first well on Saturday. (Exxon’s well is unaffected because its rig was contracted before the latest sanctions were announced.)

Russians are nonchalant about the restrictions, saying they can source equipment from Asia instead, as well as tapping domestic producers. But analysts are downgrading their forecasts for Russian oil production growth. Morgan Stanley had assumed Russia would be producing an extra 250,000 barrels a day from its shale deposits and virgin Arctic fields by 2018 – which it says are now at risk. Barclays thinks production will fall in 2015, dragging non-Opec supplies down with it.

Mr Timchenko has responded to the sanctions by relocating to Russia from Switzerland, settling in a big house decorated with Soviet art in the socialist realist style. He has sold his stake in Gunvor, the Russian oil trader he co-founded, ditched Visa and switched to a Chinese credit card.
The west, he says, is a great place to spend money and have a holiday, but he “breathe[s] more easily in Russia”. After the latest sanctions, and despite Russian rhetoric, the same cannot be said for the country’s oil industry.
Guy Chazan is Energy Editor at the FT. John Authers is away.

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