Russia’s Oil-and-Gas Industry Is Starting to Feel the Bite of Sanctions

An exodus of Western energy companies, meanwhile, is disrupting major projects from the Arctic to the Pacific Ocean. Traders and banks, meanwhile, have been shunning Russian oil cargoes in recent weeks. All that is threatening Russian oil production, which represents one in every 10 barrels pumped globally. Other sanctioned petrostates, like Iran and Venezuela, have struggled to recover from the big hit to production such restrictions have caused. Analysts warn Russia could, too.

“This will set back the industry many years,” said Mikhail Krutikhin, a partner at independent consulting firm RusEnergy who advises Russian oil companies. “It means loss of competitiveness.”

Any decline of its energy industry could blunt one of Moscow’s most potent geopolitical weapons, long used to squeeze customers and pressure foreign governments. It is also a further blow for the beleaguered Russian economy: The oil-and-gas sector makes up around 40% of its budget revenue. Some 1.5 million people who work in the industry might lose their jobs by next year, analysts say.

Already, cracks are starting to show. One big pipeline consortium has warned that sanctions may slow repairs on part of its operation. Earlier this week, Russia said oil exports via a pipeline from Kazakhstan to the Black Sea may temporarily fall by around 1 million barrels a day—representing about 1% of global oil demand—citing storm damage. Repairs could take up to two months, Russian officials said. The Caspian Pipeline Consortium—partly owned by Russia, Kazakhstan, U.S. major

Chevron Corp.

and others—said finding spare parts “in the current market situation may be rather difficult.” A spokeswoman for Chevron said the company “is currently assessing the situation.”

Russian oil output, including crude and condensates, is now expected to fall 15% this year to its lowest level since 2003, according to the International Energy Agency. Rystad Energy consultants say that production may never return to its prewar peak if the sanctions last for several years.

Russian natural gas is a major source of energy for Europe. While a gas ban is off the table so far with European officials, policy makers are rushing to reduce their reliance on Moscow. Germany froze the $11 billion Nord Stream 2 pipeline project, which would have doubled the capacity of an existing Russian route.

Although Russian oil is still flowing to Europe, many traders have shunned cargoes as banks have refused to finance shipments following the invasion. Currently, Russia’s benchmark Urals crude is being sold at around $85 a barrel, a sharp discount to international benchmark Brent at $115, indicating that there aren’t enough takers.

“If this trend continues, even in the absence of direct sanctions [on oil exports], Russian oil tanks will fill up domestically and there will be nowhere else to put oil in storage,” said George Voloshin, an analyst at consulting firm Aperio Intelligence.

Russian officials say the country will diversify its export destinations and try to keep oil production steady. “Perhaps, we will earn less,” Deputy Prime Minister

Alexander Novak

said Monday. “We will do our best not to reduce” exports, he added.

Shortly after Russia’s invasion of Ukraine,

BP

PLC said it would divest its nearly 20% stake in Russian state-controlled oil producer Rosneft, while

Shell

PLC said it would end its Russian joint ventures. Exxon Mobil Corp. said it would shut down production from a multibillion-dollar oil-and-gas project it runs on Sakhalin Island in the North Pacific Ocean.

In recent days, the world’s largest oil-services companies,

Halliburton Co.

,

Baker Hughes Co.

and

Schlumberger Ltd.

, said they were winding down work or suspending new investment and technology deployment in Russia. That is a big blow for a sector in which foreign oil-services companies supply crucial support. For instance, these companies provide 60% of the industry’s software, according to Moscow-based energy advisory Vygon Consulting. While local Russian players provide most of the basic drilling, international firms dominate the market for advanced exploration and well-treatment techniques.

“It will have an impact on oil production because you’ll have a lack of new investments and a lack of technologies that Russia needs,” said

Audun Martinsen,

head of energy-service research at Rystad.

Russia’s oil output was already expected to peak this decade. Most of its active wells are old and require costly, labor-intensive techniques to get crude out of the ground. Russian companies were looking to borrow techniques from the U.S. shale patch, such as fracking, to access more reserves.

“Russia has been in a long fight over the years to arrest the decline in output,” Mr. Martinsen said. “This will accelerate the field decline.”

On the gas side, Moscow bet big on boosting its global liquefied natural gas market share, relying on international companies to develop its fields in the harsh conditions of the Arctic.

Mr. Martinsen said that now the country won’t have access to necessary technologies such as liquefaction units and reservoir stimulation services, which are important for developing the infrastructure. Refiners, meanwhile, will struggle to source certain chemicals needed for their refining processes.

Russian energy companies “have some engineers trained at Western companies, and they will try to make do with inferior technology, which is neither cutting edge nor super safe,” said Alexander Gabuev, senior fellow at the Carnegie Moscow Center think tank. “It’s Soviet technology, it’s not 21st century technology,” he said.

As with the rest of its sanctions-stricken economy, analysts expect Russia to look to China for help with energy investments. But they say that Beijing could be reluctant to bail out Moscow if it risks getting tied up in Western sanctions.

“Russia has become de-facto uninvestable,” said Henning Gloystein, director for energy, climate and resources at consulting firm Eurasia. “Even companies from countries that have not imposed sanctions on Russia, like China or India, are reluctant to engage as they fear future secondary sanctions that would also impact them.”

Write to Georgi Kantchev at [email protected]