Russia Sanctions Proposal Seen Having Most Impact on Gas Pipes

(Bloomberg) -- New Russia sanctions proposed by members of the U.S. Congress could hinder the development of some natural gas export pipelines, but otherwise do little to harm the country’s largest energy companies.

A bill was introduced this week to punish the Kremlin over allegations it interfered in U.S. elections and exerts a "malign influence" in countries including Ukraine. If passed into law, it would prohibit investments in Russian liquefied natural gas facilities outside the country, and the supply of capital, technology or equipment to future domestic oil fields.

A third measure in the bill, banning the financing of any global energy projects supported by the Russian government or state-run companies, is the most significant, according to analysts at Fitch Ratings and Aton LLC. It could delay new export links such as Gazprom’s Nord Stream 2 and the European leg of TurkStream, said Aton energy analyst Alexander Kornilov.

Both pipelines, which state-run Gazprom PJSC is building in the face of opposition in the European Union and the U.S., will carry Russian gas to Europe, bypassing Ukraine. The Nord Stream 2 link under the Baltic Sea is jointly funded by Gazprom and five regional energy companies. The planned TurkStream leg from Turkey to the EU is set to receive financing from a 50-50 joint venture between Gazprom and its Turkish partner.

If adopted, the sanctions may force foreign investors to stop providing capital to the pipelines, Fitch Ratings oil and gas director Dmitry Marinchenko said. "Yet in the worst case, Gazprom can finance the pipelines on its own," he said.

Nord Stream 2 is set to cost 9.5 billion euros ($10.7 billion), and by the end of 2018 the project had received about 80 percent of the total financing, Gazprom Chief Executive Officer Alexey Miller said at the time. The Russian gas giant estimated its own spending on the TurkStream extension infrastructure this year at around 76.5 billion rubles ($1.15 billion).

LNG on the Radar

The LNG sanctions listed in the new bill would not have an immediate impact because there are no such projects right now. The nation produces the fuel only within its borders, with Gazprom operating a plant on Sakhalin Island in Russia’s Far East, and Novatek PJSC running a new plant on the Yamal Peninsula in the Arctic region.

Those companies have no plans to construct LNG plants abroad and are focusing on new local projects. Novatek is preparing a final investment decision for a second Yamal plant and mulls a third facility on the peninsula, while Gazprom aims to expand the Sakhalin project and build a plant on the Baltic coast.

So the sanctions would do nothing to curb Russia’s drive to raise its share of the global LNG market to as much as 20 percent by 2035, after doubling its share to 8 percent last year.

"The ban on non-existing Russian liquefied-gas projects abroad is a rather unpleasant signal" as it puts the nation’s LNG ambitions on the U.S. sanctions radar for the first time, Fitch’s Marinchenko said. "It is key for Russia that its future domestic LNG projects are not sanctioned eventually."

Future Projects

The proposed ban on financial, technology and equipment supplies to future Russian oil fields would also have little impact. Russia still relies mostly on projects launched back in Soviet times for the bulk of its crude output, with new major discoveries quite rare.

Still, in the long-run, the restrictions could hit Russia’s ability to maintain production, Marinchenko said. Overall, "the new sanctions package will hardly come as a shock for the Russian energy industry, yet it won’t go unnoticed either," he said.

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