U.S. Oilfield Gear Sales to Russia May Face Restrictions

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Sales of oilfield gear ranging from 60-foot-tall drilling rigs to electric pumps could be covered by the next round of sanctions against Russia being prepared by the U.S., according to three people briefed on the plans.

American companies seeking to sell oilfield technology to Russia that’s manufactured or patented in the U.S. would be required to seek export licenses, according to the people, who asked for anonymity, citing the sensitivity of the deliberations. If sanctions were imposed, licenses for future sales could be denied, the people said.

Among the companies most affected would be Halliburton Co. (HAL), Exxon Mobil Corp. (XOM) and National Oilwell Varco Inc. (NOV) The European Union isn’t expected to join the U.S. in imposing the sanctions, the people said, leaving European rivals such as Schlumberger Ltd. and Paris-based Total SA (FP) free to pick up business that U.S. companies must give up.

“The sanctions could be short term, but losing contracts to their peers like a Schlumberger could be a negative even longer term,” Rob Desai, an analyst at Edward Jones in St. Louis, said in a phone interview. “Once those contracts switch over, there’s a question if they want to switch back.”

Representatives for Halliburton and National Oilwell Varco, both based in Houston, and Irving, Texas-based Exxon Mobil, declined to comment. Joao Felix, a spokesman for Schlumberger, which has headquarters in Paris and Houston, couldn’t immediately be reached for comment. A spokeswoman for the U.S. Treasury Department, which administers U.S. sanctions, declined to comment.

Export Licenses

Most oilfield technology sold to Russia doesn’t require export licenses today, said Douglas N. Jacobson, a sanctions lawyer at Jacobson Burton PLLC in Washington. Additional restrictions probably aren’t imminent, he said.

“They may be working on them as an arrow in their quiver,” he said.

The new measures would hit an industry vital to the Russian economy. Russia exported $160 billion worth of crude fuels and natural gas-based industrial feedstocks to Europe and the U.S. in 2012. The Russian government, the owner of majority stakes in OAO Gazprom, OAO Rosneft and OAO Transneft, relies on commodity sales for budget revenue and on energy exports for inflows of foreign currencies.

The U.S. kept up pressure on Russia to do more to reduce tensions in Ukraine or face stiffer sanctions as violence marred a temporary cease-fire in the conflict-torn former Soviet republic.

Greater Costs

“Until Russia fully makes that kind of commitment to the peace process and to the stability of Ukraine, the United States and Europe are compelled to continue to prepare greater costs, including tough economic sanctions, with the hopes that they will not have to be used,” U.S. Secretary of State John Kerry said at a news conference at NATO headquarters in Brussels yesterday.

Russian markets fell as investors wagered that the previous day’s gains were overdone after rebels violated the truce. The Micex Index fell from an eight-month high, plunging 2.4 percent to 1,481.95 by the close in Moscow.

While White House officials downplay the likelihood President Barack Obama will move unilaterally if European leaders don’t back more aggressive sanctions, U.S. lawmakers from both parties say they’re ready to support the administration moving ahead with penalties if Russia doesn’t back away from Ukraine.

‘Mercantile Interests’

“There are times where our foreign-policy interests trump individual mercantile interests, and now is one of those times,” said Senator Bob Corker, a Tennessee Republican who serves on the banking and foreign relations committees.

Two leading groups representing U.S. business, the National Association of Manufacturers and U.S. Chamber of Commerce, this week launched an advertising campaign to try to preempt any unilateral sanctions affecting the energy, technology and banking industries by the Obama administration, and urging Europe to act in concert with the U.S.

So far, Obama has imposed sanctions on individuals and companies tied to President Vladimir Putin or accused of destabilizing Ukraine. The list of people forbidden to do business with the U.S. includes Rosneft Chief Executive Officer Igor Sechin and financial institutions such as OAO Bank Rossiya and SMP Bank.

Range of Responses

White House press secretary Josh Earnest, while not addressing specific steps the U.S. may take, said the administration has “evaluated a range of responses” to get Russia to back down in Ukraine. Any sanctions will be more effective “if many of Russia’s trading partners are cooperating in that effort,” he said at a press conference yesterday.

Western oil-service companies are looking to Russia to fuel their international growth plans.

Halliburton announced a partnership in February with Gubkin Russian State University of Oil and Gas to provide “state-of-the-art” support, including staff for technical boards and educational material for the school program aimed at producing more oil from shale.

National Oilwell Varco, the largest U.S. maker of oilfield equipment, is building a plant in Russia to help put together drilling rigs and is keeping a “very close eye” on Russia, Chief Executive Officer Clay Williams told analysts and investors on an April 28 conference call, the same day that a new round of U.S. sanctions was announced.

“There’s a growing recognition I think amongst Russian oil companies for the need for new technology much like their counterparts in North America and elsewhere around the globe,” Williams said. “Very encouraged about the progress on the plant, sanctions notwithstanding.”

To contact the reporters on this story: David Wethe in Houston at dwethe@bloomberg.net; Kasia Klimasinska in Washington at kklimasinska@bloomberg.net

To contact the editors responsible for this story: Susan Warren at susanwarren@bloomberg.net; Chris Wellisz at cwellisz@bloomberg.net Chris Wellisz

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