Russia Wraps Its Tentacles Around the Energy Market to Become Unsanctionable

"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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Read/Post Comments (26) | Recommend This Article (35)

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 31, 2014, at 10:20 PM, aleks09 wrote:

    Don't blame Russia for securing strategic locations near its borders and its only warm water port.

    US expected it would overthrow gov't in Ukraine and Russia would stay by idly?

    US should get its tentacles away from Ukraine, b/c Russia would never rest if Ukraine has even small prospects of getting into NATO. All the sanctions would not help.

  • Report this Comment On May 31, 2014, at 10:37 PM, Freddyfreebe1 wrote:

    Oil is a scam and needs to be replace. Maybe this is the door to a better future, with greed and power being the driving force . Big oil would give this country away to make a few extra greedy bucks.

  • Report this Comment On May 31, 2014, at 10:39 PM, kennyhobo wrote:

    Obama and Clinton set the stage for his mess with incompetence and naivete. There is no way the US can do anything to hurt Putin at this point without hurting the US or its allies. It is what is known as a master clusterfck.

  • Report this Comment On May 31, 2014, at 10:45 PM, CrazyDocAl wrote:

    Anyone who actually thinks you can put sanctions on a country that's rich with natural resources is fooling themselves. It's just a matter of time before Russia found a new buyer and I suspect that there are other Asian countries that will be wanting to get Russian gas.

  • Report this Comment On May 31, 2014, at 11:45 PM, gernot wrote:

    Now isn't this a very good reason to develop renewable energy sources as fast as possible?

    Algae from Fuel or Waste to Energy are just two examples how we can develop renewable energy.

    We have several projects shovel ready. For more information please contact us at aaticusa@gmail.com or gernot@aatic.com

  • Report this Comment On May 31, 2014, at 11:53 PM, UkraineAirlft wrote:

    Forgot a bigge. There is an estimated trillions of dollars worth of gas and oil 50 miles off the Crimea Coast (their economic zone). Exxon and Royal Dutch Shell had the $700 billion drilling contract ready to ink with now exiled Ukraine President Yuschenko to sign. This would have radically changed the oil and gas situation not only in Ukraine and Europe but the world.

  • Report this Comment On June 01, 2014, at 12:50 AM, WaffenSS wrote:

    Is it those pesky corporations dictating policy again?

  • Report this Comment On June 01, 2014, at 12:51 AM, WaffenSS wrote:

    ..........................

  • Report this Comment On June 01, 2014, at 1:16 AM, senseandse wrote:

    I hope the western companies who invest in Russia get screwed. The are dealing with an evil government so they are part of the Putin team to suppress human rights, try to control other peoples. Of course these companies have dealt with other dirty leaders like in middle east and africa, so its par for the course. Hope they get hurt bad for getting into bed with Hitler errr Putin,

  • Report this Comment On June 01, 2014, at 4:23 AM, amvet wrote:

    Your statement " 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. " is false.

    We, the USA, did a bloody coup and put in the government chosen my our Ms. Victoria Nuland. This gave, de facto, the US control of 100% of the Ukraine. After that, the Crime jumped into Russia´s lap and we insult Russia.

  • Report this Comment On June 01, 2014, at 4:40 AM, amvet wrote:

    UkraineAirlift,

    These numbers about oil and NG "resources" are statistical guesses and mean very little. Recent example:

    In Poland the guesstimate for the NG was 5.3T cubic meters. After 40 (forty) non producing wells were drilled at enormous cost, the guesstimate is now around 12% of that. The Ukrainian shale is said to be simular to the Polish shale. A field can only be evaluated after many producing wells are drilled and tested.

  • Report this Comment On June 01, 2014, at 7:27 AM, pfbulmer wrote:

    The moral argument for sanctions against Russia in Crimea has been very weak bearing in mind that the case for self determination of a people is more important than lines drawn on a map and sovereignty of a country, as we believe in the UK as with the referendum over Scotland .The US independence and very existence of Texas is based on this principle . This is at the heart of lack of response against Russia by people in Europe.

    .The US government has tended to deal in one dimensional stereotypes and a partisan and self interested foreign policy when dealing with Russia, and their approach that has tended to based on double standards , has been counter productive to make their case for sanctions.

  • Report this Comment On June 01, 2014, at 7:31 AM, fpl1954 wrote:

    I would be surprised if the two issues are related. The Russia oil industry has expanded beyond what they can support internally and they need outside help to maximize returns. The oil field isn't like selling hamburgers. You don't just order another truckload of frozen patties. Much of the equipment used in oil drilling is highly specialized, constantly improving, and there is always more demand than supply. Likewise the personnel who run this equipment aren't burger flippers with a 20 minute training program. The oil field has long been an international industry, and as world demand for oil continues to increase, resources must flow to current needs for us to have a chance to keep up supply. Meanwhile, we need everyone involved in solar and wind to do what they can to replace as much oil demand as possible, or oil prices will go through the roof.

  • Report this Comment On June 01, 2014, at 8:03 AM, FTownBryan wrote:

    Tyler, I believe the intent of Rosneft is to acquire a 50% stake in NADL, not SDRL. A big difference.

  • Report this Comment On June 01, 2014, at 8:03 AM, bobusoroh wrote:

    When will sanction be equated to terrorism?

  • Report this Comment On June 01, 2014, at 10:06 AM, LMA wrote:

    We should get off our high horse and stop pesting bear. So Putin don't want our virsion of democracy so what. His people like him, let it be. He would make a great ally to US...and he did for past few years, till we mess it up. How that benefits us now? Now we writting drama articles, "tentacles" my ass. He did great by his country, and we didn't.

  • Report this Comment On June 01, 2014, at 10:10 AM, VirginIslandMan wrote:

    I am a US Citizen who has lived and worked in the, Hess Oil Refinery of St. Croix, USVI, for over 17yrs. I have experienced the corruption of Oil Tycoons like PDVSA of Venezuela 50% partner of Hess Oil aka, Hovensa LLC of St. Croix, political associate of Fidel Castro, who has political associations with Russia, Putin. John Hess(CEO) of Hovensa, Breached a contract with the governmt of St. Croix, by closing this refinery, putting thousands out of work. The closing was for the sole reason of intimidating, corecing, the VI Govmt into re-negioating the contract, Hess holds the people of St. Croix as hostage to force a new contract in his favor. John Hess also has partnership with Russian Oil Company's and USSR Mafia connections. The true terrorist are people like, John Hess(German National), and his Russian( V. Putin), Cuban(F. Castro), Venezuela partners. U.S. officials have resently recognized this threat to World Freedom and democracy as, China, India, Mongolia, Vietnam, Cuba, Azerbaijan, etc, etc. are all postering themselves for world wide domination.

    Wake up people, the United States Government is attempting to circumvent another revolution by these, Hitlers, Marxist, Gangus Kahn, dictators, the U.S., is trying to stop WWIII.

  • Report this Comment On June 01, 2014, at 4:32 PM, nbfresno wrote:

    The Russians have a history of being tricky and there is no way that any of its so called "partner" can trust them. This is way the article gives no reason to pause. For example - WW 2 began when Nazi Germany AND R U S S I A attacked Poland in September 1939, the United States entered the war after the Japanese bombed the American fleet in Pearl Harbor, Hawaii, on December 7, 1941, a little over 2 years later.

    - Once Russia switched sides in '41, it has pushed the idea that it liberated Europe, despite the fact it annexed half of Europe as pay back, even though it helped Hitler start the war.

    - While the US did not need to help Europe, it did so to aid our friends and allies in Europe including Britain and France. Britain had won the Battle of Britain, but was bankrupt from the valiant endeavor. Our land was never attacked by the Germans. Our ships were only attacked after we entered the war. My 19 year old father was in the Philippine Islands in Dec 1941 when they were attacked by the Japanese and was captured 6 months later. The US chose to help Europe first, rather than fighting the Japanese and freeing my father and others. from 3 1/2 years of slave labor, torture and starvation and for 9 out of 10, death.

    - Russia, on the other hand fought WITH Germany for 2 years.

    - The Soviet Union began World War II allied with Nazi Germany and the Axis Powers.

    - Russia invaded Poland on 17 September 1939 with Germany and it fought a peripheral war with Finland from November 1939 to March 1940.

    - The plan was for Russia and Germany to split Poland.

    - Russia did not switch sides until it shifted to the side of the Allies after being attacked by Germany in June of 1941.

    - On December 11, 1941, the United States Congress declared war upon Germany, in response to that nation's declaration of war following the Japanese attack on Pearl Harbor, and only hours after Germany declared war on the United States.

    - The US fought with Britain and the Allies in North Africa, Sicily, Italy, France and Germany from that time on.

    The truth: the Russians were in WW 2 against the Germans for ONLY 5 months longer than the US and actually fought W I T H the Germans for nearly 2 years!!!!!!

    No one can trust Russia and it has a single commodity economy. Woe to Russia!

  • Report this Comment On June 01, 2014, at 4:33 PM, nbfresno wrote:

    Ever wonder the R E A L reason the US holds off on drilling in Alaska? Just wait and see.

  • Report this Comment On June 01, 2014, at 4:44 PM, mapsguy wrote:

    This is just one more reason why we need to get OFF of fossil fuels, while we are still the marketplace of the world. It also says a lot about American/Western corporations. All they care about is the money.

  • Report this Comment On June 01, 2014, at 4:53 PM, alwynbee wrote:

    Russia have a team of exceptional intellects and in a long term they will succeed with their objectives no matter what the United States will do.Time is running out for the United States as their military has already started to shrink and nowhere the United States has actually was victorious in Irak, Afghanistan, Libya and many more unsuccessful ventures. They lost the

    war in Vietnam and had to flee in the last days of that war. So what makes the United States special today.

    They will never in the future be victorious without the support of its allies. Europe must be careful not to shoot itself in the foot by pleasing United States.It will be s very expensive exercise .

  • Report this Comment On June 01, 2014, at 5:19 PM, jfelano wrote:

    Cool. If they are "unsanctionable", they should be removed from the UN Security Council.

  • Report this Comment On June 02, 2014, at 3:03 AM, amvet wrote:

    Our attitude toward sanctions was revealed by Ms Albright after our sanctions on Iraw caused the deaths of around 500,000 children. She said the deaths were worth it to achieve our objective.

  • Report this Comment On June 02, 2014, at 3:09 AM, amvet wrote:

    More on the US "flood" of oil resources based on statistical estimates..

    Monterey Shale in California.

    After drilling, the estimated oil reserves were changed from 13.3 billion bbls to 600 million bbls. A 95.49 % reduction.

    USA = Saudi Arabia ?? Not quite.

  • Report this Comment On June 02, 2014, at 4:07 AM, Mayvau wrote:

    The "political' West does not need to sanction Russia. The "market" West already is. Oh yes there has been a rebound in Russian stocks as of late but lets face facts.

    Gazprom has a market cap ($93 billion) less than Statoil's (STO) the much smaller Norwegian "national energy company".

    With its assets and market clout Gazprom should rival or beat XOM's market cap of $430 billion.

    The "sanctions" of the West are $330+ billion in market cap. 50% of that amount is Russian government directly.

    Compare Gazprom's 5 year chart to STO and XOM if you don't think Russia is crapping all over its "crown jewel".

    What causes that? One thing in my mind. Russian bullying of Ukraine. If Gazprom had given Ukraine and other former CIS countries cheaper gas over the course of the past decade or so the market cap of Gazprom might very well be equivalent to XOM.

    But Gazprom, in order to get lets say $ 6 billion more each year from Ukraine looses out on $330 in market cap. Charging Ukraine that extra $6 billion will take 55 years to make up the current loss in market cap.

    So offer Ukraine lower prices, no fixed volume amount to buy each year and Ukraine might just wish it had jettisoned and traded Crimea 2 decades ago.

    This does not make Putin the "genius" in my book. It makes him both a bully and an unbelievably bad businessman.

    Finally as for Chornomornaftogaz, the Black Sea energy company Gazprom "stole" for zero cost, here again Russia is being more mafia than slick businessmen.

    Forgiving past Ukraine debts might help "pay" for this bit of theft. And why Russia gave it to Gazprom and not Novatek is again unbelievably short sighted. And not offering a least a portion of Chornomornaftogaz (which relies on transport across Ukraine 100%) to Naftogaz Ukraine is also hard to fathom.

    So fawn all over Putin and the "devious" Russian mind if you want but until Gazprom's market cap even begins to threaten XOM's cap then the real investing world is laughing long and hard at Mother Russia.

    At this rate they have 55 years to go to catch up.

    Meanwhile with this and the China news the real value of Gazprom has taken a huge yawn.

    Sanctions indeed.

  • Report this Comment On June 06, 2014, at 10:30 AM, Heidikitty wrote:

    As long as we have government that is more interested in filling their pockets than doing the job they were hired for the US will not be the country it once was. Need to fire them all and get honest hard working people if that is possible who deeply cares about the US of America.

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