Despite recent visits by German Chancellor Angela Merkel and US Secretary of State John Kerry to Russia, the international community appears unlikely to soon lift sanctions imposed on Russia after its invasion of Ukraine.
Effect on Russia Exports?
Russia is one of the largest hydrocarbon producers in the world. Although cushioned by the relative decrease in the value of the Russian Ruble to the U.S. Dollar, the global sanctions initially imposed in March 2014 and increased afterwards may reduce future Russian oil, gas and refined product exports to countries that have imposed sanctions.
These sanctions have not immediately restricted the export of Russian oil and gas. In fact decreased internal Russian demand has actually increased oil exports in recent months. Should the Russian economy resume growth despite global sanctions, increased internal demand and discouraged future disinvestment by global companies in Russian exploration and development could limit its export ability.
Effect of Sanctions on Asian Pivot; Not What It Was Thought?
Russia exports approximately 5 million barrels of crude oil and nearly 2 million barrels of refined products per day. Currently shipped mostly to Europe, Russia has recently sought direct Chinese investment in pipeline and oilfield infrastructure to grow its export potential away from the European Union. China has promised significant investment, but many of those promises remain unfulfilled.
Given the strength of the Chinese Yuan, China’s foreign reserve advantage, and the potential size of the market, China has significant negotiation leverage with Russia. The Chinese are driving a hard bargain and any long-term agreement with likely leave Russia heavily dependent on Chinese imports as a source of hard foreign currency revenue for decades to come.
Russian Oil & Gas Demographic Challenge
The North American unconventional revolution has created a generational shift change as the industry seeks to find and train new workers. While the post OPEC Thanksgiving 2014 meeting price downturn caused some North American layoffs, the Russian oil and gas industry does not have the luxury of skilled workers competing for open positions. Russia currently lacks enough workers to maintain and grow its hydrocarbon infrastructure.
Unlike the United States, Russian does not today appear to attract and train new workers into industry. The economic sanctions imposed last year are now causing younger Russian entrepreneurs to leave the country. Russia does enjoy a highly educated workforce but its working-age population is declining by a million people a year. Recently the Russian death rate has begun surging.
How will Russia Meet its Oil & Gas Technology Challenges?
Russia does not currently have the technology to pursue many challenging oil and gas projects on its own.
Russia needs modern downstream processes to replace its shut-down and obsolete tea pot refineries. Sanctions have discouraged international companies from transferring this technology to Russia. The current lower crude oil price environment and sanctions have also caused some global companies to slow down or cancel Russian investments.
Current, and possibly growing, sanctions on the Russian economy, the Asian pivot, and Russian demographics pose a long-term threat to Russia’s ability to maintain and grow hydrocarbon exports. Absent lifted sanctions and restored foreign direct investment, Russian decline could reduce exportable product. Other sources of supply growth, for example North American unconventional production and expanded petrochemical refining capacity, will be available to meet the growing global demand growth should Russian exports decline.