"You're going to sanction me? Not likely." Photo source: Kremlin.ru

We're coming up on 23 years now since the collapse of the Soviet Union and the end of the Cold War, but headlines in the news seem awfully reminiscent of those America-Soviet standoffs. Russia's annexation of the Crimean peninsula followed by the West and Russia putting their respective fingers in the pie that is Ukraine has led to the U.S. and other European nations enforcing some token sanctions on several key players in the Russian government and economy. The bigger fear for Russia, though, is if the U.S. starts to impose more strict sanctions related to its oil and gas business, the heart of its economy.

Instead of imposing its own sanctions, Russia has countered this move by opening access to its resources in an unprecedented way to ExxonMobil (NYSE:XOM), BP (NYSE:BP), Total (NYSE:TOT), and Seadrill (NYSE:SDRL). Let's take a look at how this turns the tables on American sanctions and how it could impact investments in these companies in the future.


World's shale resources as estimated by the US EIA Source: Eia.gov

If I'm going down, you're coming with me
One of the things that makes punishing Russia so challenging is that Europe is incredibly reliant on its oil and gas to survive. If strict sanctions were placed on Russian exports of oil and gas, it would likely hurt the European countries imposing the sanctions as much as -- if not more than -- Russia itself. One method that the West had conceived to put the hurt on Russia was to not allow the export of the technology necessary to access its more challenging oil formations, such as the Bazhenov shale and the Arctic shelf. This would mean that the current operations go on as is, but over time it would make it extremely difficult for Russia to maintain production and give Europe enough of a window to diversify its energy mix away from Russia.

If these sanctions were actually put in place a couple of weeks ago, it would have been easy to implement. Russia's largest oil and gas companies -- Rosneft, Gazprom, Lukoil, and Novatek -- had some partnerships with Western countries, but not enough that they could walk away without inflicting too much pain. But it appears that Russian companies have made a major counter move to make that more difficult. In the past week alone, just about every Russian oil and gas company has signed a major deal that further integrate it with the rest of the world:

  • Rosneft and BP formed a 51% / 49% joint venture to explore in the Domanik shale formation in the Volga River Basin.
  • Lukoil and Total formed a 51% / 49% joint venture to explore the Bazhenov shale in Western Siberia.
  • Rosneft and ExxonMobil expanded their $400 billion exploration plan of the Russian Arctic with agreements on LNG export terminals and expanded exploration licenses.
  • Rosneft intends to build a 50% stake in Seadrill and contract all of North Atlantic Drilling's (NYSE:NADL) fleet for a combined 35 rig years. 
  • Novatek inked a 15 year LNG supply deal with China National Petroleum. This is on top of the Gazprom-CNPC mega-deal that was signed by Vladimir Putin and Xi Jinping earlier this month.
  • Gazprom signed the very first natural gas supply deal with Eni that will use spot prices rather than oil-indexed gas.
  • Rosneft signed supply deals with the national oil companies of Venezuela, Mongolia, Vietnam, India, Cuba, Azerbaijan, and will up its stake in Italian tire maker Pirelli.

Here is what makes these deals so important. The deals with big oil are big and lucrative enough that they will have a major impact on the bottom line for each company. Also, all of them are specifically targeted to work in regions that require technology that the West was planning to export, namely shale extraction and Arctic exploration.

So if the U.S. were to impose these sanctions, it would inflict significant damage to these companies as well. At the same time, deals with China and India are a hedge against sanctions because Russia could simply redirect supplies to these other energy-hungry nations and leave Europe out to dry.

What a Fool believes
For those who may have a financial stake in any of the companies mentioned above, this likely means that the risk of losing potentially lucrative deals with Russia is significantly lower than it was a couple weeks ago. Also, the deals signed by BP and Total look very good on paper. When you include BP's near 20% ownership of Rosneft, that means BP gets 60% of anything that comes from its shale deal. These shale formations could hold as much as 75 billion barrels and Exxon's arctic program with Rosneft could yield even more.

While the first reaction to the Seadrill-Rosneft deal looks very positive, the one thing that could be an issue is if Rosneft starts commanding a "hometown discount" for rigs it contracts with Seadrill. After all, it would be hard to see Rosneft paying that premium for a Seadrill contract if it is just going to get 50% of it back anyway. 

However any of these situations play out, one thing is for certain: The U.S. and Europe will have to take a real hard look at sanctioning Russia now that it has bound itself so tightly to the rest of the world's oil and gas market.

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Tyler Crowe owns shares of Seadrill. You can follow Tyler at Fool.com under the handle TMFDirtyBird, on Google +, or on Twitter,@TylerCroweFool.

The Motley Fool recommends Seadrill and Total (ADR). The Motley Fool owns shares of Seadrill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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