Fitch Sees New Russia Sanctions Hitting Oil Development, not Liquidity

New European Union (EU) and US sanctions may undermine Russian oil companies’ efforts to develop tight oil and offshore Arctic deposits, reports Fitch Ratings – although the Fitch-rated oil and gas companies’ strong liquidity means the sanctions will not have a short-term impact on their credit profiles.

The credit ratings agency (CRA) said that Gazprom, Gazprom Neft and Lukoil were included in the US sanctions list issued 12 September. Gazprom’s main exposure to sanctions is through Gazprom Neft, whose ambitious plans for tight oil and the Arctic shelf may suffer from the new sanctions in the medium term.

The company aims to increase its proved and probable oil reserves by about 65% or 10.1bn barrels, mainly by developing hard-to-recover, tight and Bazhenov shale deposits. This would require a successful application of technologies and the use of specialised equipment that may be unavailable now.

The sanctions’ effect on Gazprom Neft’s existing Arctic production is limited because it already has the equipment and expertise there. However, further Arctic development may be at risk because most of the technology and equipment used for exploration is imported from the West and the company would have to look for alternative suppliers.

Gazprom Neft also has a joint venture, Salym Petroleum Development (SPD), with Shell in Western Siberia and a technology cooperation agreement with Schlumberger. These ventures could be hampered by the new sanctions, as they aim at developing hard-to-extract shale oil reserves, mainly from Bazhenov deposits.

The new sanctions should have a limited impact on Gazprom Neft’s liquidity as it had 56.3bn roubles (RUB) – equivalent to US$1.48bn/£910m – in short-term debt and RUB130.3bn in cash and cash equivalents plus RUB22.7bn in short-term deposits.

Gazprom’s consolidated liquidity, including Gazprom Neft, is also strong. At 31 March 2014 it had RUB957bn in cash and cash equivalents plus RUB26bn in short-term investments and only RUB266bn of short-term debt. However it is exposed to further depreciation of the rouble, with over 90% of Gazprom’s borrowings denominated in US dollars and euros.

Fitch believes that Lukoil is probably the least affected by the US sanctions. It has ambitious long-term tight oil plans but little current exposure to tight oil or the Arctic shelf. It has good liquidity – on 30 June 2014 it had US$2.3bn in cash and cash equivalents, and US$2.8bn in short-term debt. Fitch does not rate Rosneft or Transneft.

The list of sanctions published by the EU and US on 12 September includes restrictions on sale, supply, transfer or export, directly or indirectly, of certain goods, services and technologies for the oil industry and prohibits the provision of services for deep water oil exploration and production, Arctic oil exploration and production or shale oil projects.

The Russian Energy Ministry estimates that imports represent a quarter of oil and gas equipment and up to 100% of offshore-specific equipment, a large part of which comes from the EU and the US.

In Gazprom Neft’s case, the sanctions also prohibit transactions in or provision of financing and other dealings in new debt of longer than 30 days (90 days in the US), new equity and provision of investment services for or assistance in the issuance of or dealing with prohibited securities.

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