U.S. Sanctions May Risk Russia's Oil Production, Refining

(Bloomberg) -- The new U.S. sanctions placed on Russia may put the country’s longer-term crude production potential at risk.

America’s ban on exporting certain "sensitive" goods and technologies, which will take effect later this month, may be a bitter pill for the Russian oil producers to swallow as the 11-million-barrel a day industry is heavily reliant on foreign drilling and refinery equipment. Earlier this month Nikolai Patrushev, secretary of Russia’s Security Council and close ally of President Vladimir Putin, called the dependancy "a serious problem," as cited by Interfax.

If the new sanctions affect the Russian oil and gas industry directly it could have a significant impact, especially if Europeans support the penalties, according to Dmitry Marinchenko, oil and gas director at Fitch Ratings.

"New LNG, refinery, and petrochemical projects may be under threat," Marinchenko said, as Russian and Chinese equipment may not be a working alternative to U.S. and European products. "Oil production may be affected on the more complicated projects."

It may take as much as five years for Russian oil companies to almost fully switch to Asian and local equipment, while for refineries and gas producers the timeframe is at least seven years, Marinchenko estimated.

"Russian oil companies already successfully replace even rather complicated individual pieces of foreign equipment, the issue is their mass production," Andrey Polischuk, energy analyst at Raiffeisen Centrobank in Moscow, said. "It may prove a challenge over the longer-term, as the industry will need a whole range of new equipment producers - we are talking about serving the needs of some of the world’s largest oil companies".

U.S. Sanctions May Risk Russia's Oil Production, Refining

The U.S. took a tougher stance on Russia on Wednesday for the nerve-agent attack on former double-agent Sergei Skripal and his daughter in the U.K. in early March. The sanctions could block exports of goods and technologies worth hundreds of millions of dollars, with waivers allowed for space-flight activities and U.S. foreign assistance. Investors in Russia are also concerned about a separate bill that seeks to sanction Russia for alleged interference in the 2016 U.S. elections.

The move to sanction Russia for electoral interference pushed the ruble to its lowest level since November 2016, also pressuring Russian government bonds. Russian oil companies may need to search for new markets for as much as 500,000 barrels a day of crude and oil products which the U.S. could no longer import if the Trump administration continues to toughen its sanctions against the Kremlin.

The potential loss of exports to the U.S. market, however, is a lesser problem than being excluded from Asian and European buyers. Every day Russia exports over 5 million barrels of oil and condensate, mostly to Asian and European markets.

Russia has increased crude production to just below its post-Soviet record of 11.22 million barrels a day following a new agreement made in June with its OPEC allies to increase output to meet consumer demand. The nation is said to be planning to stick to that production level for the next five months.

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