How Big Oil Companies Are Undermining U.S. Sanctions Against Russia

Following Russia's annexation of Crimea and its aggressive tactics in eastern Ukraine, the U.S. imposed sanctions on several government officials and Russian companies with close ties to the Kremlin. If Russian President Vladimir Putin attempts to disrupt Ukraine's presidential elections today, the U.S. and its leading European allies have threatened another round of crippling sanctions targeting specific sectors of the Russian economy.

Yet even as Western sanctions have made Russia a global pariah and led to massive capital outflows from the country, big Western oil companies remain undeterred. Not only are they standing by their existing Russian investments, but many are actually expanding their presence in the country, effectively undermining U.S. and European diplomatic pressures.

Big Oil's Russian ties stronger than ever
ExxonMobil (NYSE: XOM  ) , for instance, recently strengthened its partnership with Kremlin-controlled Rosneft. The company signed an agreement with Rosneft CEO Igor Sechin in St. Petersburg on Friday that extends the two companies' existing partnership to explore for oil in the Russian Arctic and Western Siberia, as well as to collaborate on an export-oriented liquefied natural gas, or LNG, project.

Exxon, which has the greatest exposure to Russia of all the U.S. oil majors, commands 85,000 net acres off the northeastern coast of Sakhalin Island in the Russian Far East and an additional 11.3 million net acres in the Kara and Black seas through its partnership with Rosneft. The two companies plan to drill an exploration well in the Kara Sea later this year and are also working on an LNG project in the country's far east that's expected to start up in 2018-2019.

French oil major Total SA (NYSE: TOT  ) is also unperturbed by the threat of additional sanctions. It, too, signed a deal on Friday with Russia's Lukoil to develop the Bazhenov oil formation in western Siberia, a massive shale play believed to contain even more recoverable oil than North Dakota's prolific Bakken shale.

Total also maintains a 16% stake in OAO Novatek, Russia's second-largest gas producer after Gazprom, and has a 20% stake in Yamal LNG, a proposed Arctic liquefied natural gas project currently being developed by Novatek, Total, and China's CNPC. The partners said the $27 billion project is on track to start up as planned in 2017, despite the threat of additional sanctions.

BP (NYSE: BP  ) also inked an agreement on Saturday with Rosneft, in which it maintains a 19.75% stake, to explore for oil in the Volga-Urals region of central Russia, while Royal Dutch Shell (NYSE: RDS-A  ) also says it remains committed to its operations in the country and actually plans to expand its Sakhalin-2 LNG project, a massive gas project offshore Russia that produces 10 million tons of LNG per year.

An offshore semi-submersible drilling rig. Photo Credit: Wikimedia Commons.

Why Western majors aren't backing out of Russia
As these examples illustrate, the Western oil majors appear to be completely undeterred by the threat of additional sanctions, even as international banks and other firms have signaled their reluctance to invest in the country. But there are good reasons behind their continued commitment to Russia.

After all, Exxon, Total, BP, and Shell have all struggled to grow their oil and gas production over the past few years and are desperate for new sources of production. Locked out of other energy-rich countries because of fervent resource nationalism, Russia is one of the last few remaining options for these companies.

They've also spent years building up close ties with Russia and sunk billions of dollars of capital into new projects. U.S. and European energy firms have equity stakes in Russia's energy sector that are worth at least $30 billion, according to Alexander Nazarov, an analyst at Gazprombank in Moscow. Obviously, they don't want these investments to go to waste.

Some Western majors also depend heavily on Russia to support their current production. BP, for instance, relies on Russia for about a third of its production and nearly a third of its reserves. In the first quarter, Rosneft accounted for about 10% of the company's profit. Similarly, Exxon relies on Russia for about 6% of its production, a significant share for a company that has operations in nearly 200 countries and territories.

Threat of energy sector sanctions
In other words, these companies can't really afford to leave Russia. So while their actions appear to be undermining the U.S. and Europe's diplomatic pressures on Russia, they're motivated largely by business considerations, including their extensive investments in the country and by the promise of future opportunities.

However, while these companies claim that its "business as usual" for them in Russia, there is one major threat to their operations in the country -- new sanctions targeting Russia's energy sector, including a potential ban on the export of oil and gas drilling technology for new projects undertaken by Kremlin-controlled firms such as Rosneft and Gazprom.

If such sanctions are imposed, they could potentially hamper Western oil majors' new projects that require oil and gas equipment to be imported from abroad, potentially delaying the development of western Siberian oilfields and exploratory projects in the Russian Arctic. Investors would be wise to keep these risks in mind.

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Read/Post Comments (8) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 25, 2014, at 9:47 PM, cruzn59 wrote:

    Author says the major oil companies "can't afford" to leave Russia. Poor babies! The decision is driven by business? What else would be driving it? Our president is making it optional to participate in sanctions. Another political joke that Russia must be laughing at. The truth is the dollar is the reserve currency for oil and the US is close to losing that luxury. This will force our dollar value way down to its true value compared to other currencies.

  • Report this Comment On May 25, 2014, at 9:54 PM, peterwolf wrote:

    OH PLEASE !!! There are no sanctions against Russia !! The Europeans ( especially the Germans) have NO intention of halting business with Russia. They'll lose too much money. The 'sanctions' are dead on arrival. If we can't sustain them against Iran ( a country where little business is conducted with the outside world) then how successful will they be against a country that Europe is totally dependent on for its fuel??

  • Report this Comment On May 26, 2014, at 4:00 AM, ndungaa wrote:

    May be, we may ask again. Who is in control of the world? Multinationals or Politicians?

  • Report this Comment On May 26, 2014, at 5:49 AM, F4antom wrote:

    Amerika is largest terorist country on the planet.....

  • Report this Comment On May 26, 2014, at 10:05 AM, lm1b2 wrote:

    AS usual Big business,US Companies follow there Number one rule : Anything For A Dollar,why should they care about World peace,they know we have the best Government you can buy ! If we were serious about sanctions we would have a blanket Trade Embargo against Russia,but no we have Obama talking about "serious sanctions" and a Congress doing nothing LOL!

  • Report this Comment On May 26, 2014, at 12:18 PM, kennyhobo wrote:

    We live under Obama. Incompetence, corruption and lies run all policies. Everyone knows that. That's why no country trusts Obama. The US is being run by the Chicago Way. That ain't good. Chicago is bankrupt. Illinois is bankrupt. Chicago is the most politically corrupt city in the nation and Obama is its top politician. Illinois looks to Obama and Durbin. The Chicago Way wins and Illinois has the 2nd highest unemployment in the nation. The PROBLEM is OBAMA and CORRUPT DEMOCRATS.

  • Report this Comment On May 26, 2014, at 12:32 PM, TMFBlacknGold wrote:

    Arjun,

    A great book explaining the background on U.S. oil companies attempting to foster relations with Russia and Gazprom and Putin's strategy for energy is Petrostate:

    http://www.amazon.com/Petrostate-Putin-Power-New-Russia/dp/0...

    Maxxwell

  • Report this Comment On May 26, 2014, at 4:47 PM, quasimodo007 wrote:

    Evil czar putin/SATAN knew that that GREED rules.

    Evil czar putin/SATAN has had a VERY DEEP HATRED for the USA ever since the Fall of EVIL corrupt ussr. It's Pay back time from EVIL czar putin/SATAN.

    EVIL czar putin/SATAN since he STOLE Crimea Ukraine now control all of Europe Gas and Oil land and sea.

    Evil czar putin/SATAN is singing his favorite Beatles song " BACK IN THE USSR" as he Surround all of Weak Europe and Waffling GB.

    Evil czar putin/SATAN is CZAR of all evil russia For LIFE. he has Lots of MONEY and TIME.

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