Sanctions will thwart Rosneft’s ambitions to join the ranks of oil’s superpowers

THE close bond between Igor Sechin, Rosneft’s boss, and Vladimir Putin, Russia’s president, can work both ways. His seat in Mr Putin’s inner circle brings rebuke. Mr Sechin is on an American blacklist, and Rosneft is barred from seeking longer-term finance from American banks, over Russia’s behaviour in Ukraine. But it brings rewards too. This week an international arbitration court ordered Russia’s government to pay $50 billion to shareholders in Yukos, an oil company it destroyed (see article). The case was a reminder that Mr Putin handed most of Yukos’s assets to Rosneft, setting it on the way to becoming the world’s biggest stockmarket-listed oil company by output.

If Mr Sechin were bothered by a travel ban and the threat of asset seizures, he has not let on. But this week’s fresh round of American and EU sanctions, partly aimed at Russia’s oil industry, threaten to do far more damage to Rosneft’s ambition of tightening its powerful grip on energy at home and Mr Putin’s aim of using energy to beef up Russian influence worldwide.

Rosneft has come a long way in a short time. By the end of the 1990s it pumped just 4% of the country’s oil. Its assets had been parcelled out and privatised. Mr Putin was determined to wrest back control of oil to restore the state’s leading role in the economy. And nabbing most of Yukos, then Russia’s biggest oil producer, allowed Mr Sechin to begin remaking Rosneft as a national champion along the lines of Norway’s Statoil and as a serious rival to the West’s “supermajors”.

Rosneft has some way to go. Its absorption of various smaller domestic oil firms, and a deal in 2012 to buy TNK-BP from a group of oligarchs and Britain’s BP, have elevated Rosneft’s oil and gas production to the equivalent of 4.9m barrels a day (b/d). Surpassing Exxon Mobil as the world biggest listed oil firm by production is one thing. But in terms of return on capital, stockmarket value and technical capability, it is still behind.

However, the TNK-BP deal brought more than just oil. The 20% stake in Rosneft that BP got as part of the transaction was a means of importing a supermajor’s management and engineering skills. They are sorely needed. Production has peaked at Rosneft’s older fields and will start to decline in a couple of years. To keep the barrels rolling it needs oil from reservoirs that are far more difficult to tap.

The latest sanctions are intended to stop it. Aside from its joint venture with BP, the Russian firm plans others with Exxon, Statoil and ENI of Italy to drill in the Arctic as well as other offshore fields, and to exploit Russian shale oil. Like most national oil companies, Rosneft lacks the experience and know-how to operate in the extreme conditions of the Arctic and other harsh locations. Supermajors bring not only the equipment to extract oil and gas but expertise in building and managing giant projects. Going it alone, as Petrobras of Brazil has found in its vast new offshore fields, can pile on costs and delays.

Huge oil and gas developments typically take five years or more to get running, so Rosneft needs to start now. The latest sanctions are likely to make this impossible. All eyes will be on Exxon. A rig operated by the American giant left Norway for the remote Kara Sea two days after the downing of Flight MH17 and is set to start exploratory drilling in August. Sanctions may put future stages of the project in doubt.

A ban on importing vital technology is not the only impediment. Access to capital is likely to dry up. Sanctions already in place prevent American banks from making long-term loans to Rosneft and other Russian energy firms, including Novatek, a domestic gas producer. Wider banking restrictions will make foreign lenders even more fearful of making loans in Russia. A $9 billion fine that BNP Paribas agreed to pay in early July, for violating American sanctions against countries including Sudan and Iran, has had the desired effect.

Other obstacles also lie in Rosneft’s path. Its rise relies on dealing a blow to its fiercest domestic rival by getting Mr Putin to end Gazprom’s monopoly on gas exports. Its reasons may be more strategic than commercial. The cost of developing new gasfields is rising, whereas prices are falling. But as James Henderson of the Oxford Institute for Energy Studies points out, large-scale gas production is the mark of a diversified oil giant. Shell and Exxon both produce as much gas as oil. That said, by attacking on all fronts Rosneft risks becoming as bloated and inefficient as Gazprom, rather than a Western-style supermajor.

A new favourite

Mr Putin may well acquiesce in downgrading Gazprom. Its might as a tool of foreign policy has waned. In Europe, its main export market, its influence has diminished as the EU has weakened its grip on prices by liberalising markets and through the courts. Rosneft could be a more potent long-term weapon. Oil is more profitable and traded more globally than gas. Rosneft’s management, more dynamic than Gazprom’s, could take advantage. Rosneft made a rapid pivot to the booming markets of Asia, striking deals with the likes of China National Petroleum Corp, whereas Gazprom took a decade over an export deal with China and then did so on terms that favoured Russia’s Asian neighbour.

Yet sanctions may help Gazprom to keep Rosneft at bay a little longer. Europe’s reliance on Russian gas has left the industry free of direct sanctions. If winter approaches with the crisis in Ukraine still raging, Russia may be tempted to respond to Western pressure by turning off Europe’s supplies. That would, temporarily at least, return Gazprom to the front line of Russian energy “diplomacy”.

Economist