EU Sanctions Threaten Rosneft Offshore Drilling Plans

The latest European sanctions may thwart plans by OAO Rosneft (ROSN), Russia’s largest oil producer, to boost sagging output by drilling offshore.

New export licenses for energy-related equipment and technology will be denied if the products are destined for deep water, arctic or shale-oil projects in Russia, the European Union said in a statement yesterday.

“The idea is to constrain Russia’s ability to develop new production in the future without affecting current production and supply,” Edward Chow, a senior fellow at the Center for Strategic and International Studies, said by e-mail.

The EU agreed to the measures to force Russia to end its involvement in Ukraine following the July 17 downing of a Malaysian airliner over territory held by pro-Russian separatists. Rosneft also faces U.S. sanctions limiting its access to capital markets and travel by Chief Executive Officer Igor Sechin.

Subject to Sanction

Rosneft shareholders may welcome a halt in plans to invest in Russia’s offshore zones due to the high cost of extracting the oil resource, said Ivan Mazalov, who helps manage $4 billion at Prosperity Capital Management in Moscow.

“Offshore development is value destructive for Rosneft at current oil prices, so no upside is destroyed,” said Mazalov.

Rosneft shares rose 1.8 percent to 224.31 rubles at 6:22 p.m. in Moscow.

40 Wells

The limits on equipment may crimp Rosneft’s plans to drill as many as 40 exploration wells in Russia’s offshore areas with Exxon Mobil Corp. (XOM), Eni SpA and Statoil ASA (STL) by the end of 2018, the company said in a Feb. 4 presentation.

“There’s nothing today that changes our impression of the progression of the projects,” which are still at a very early stage, Knut Rostad, a spokesman for Statoil, said by phone. “We will ensure that our activities are in compliance with the sanctions.”

Rosneft’s press service didn’t immediately comment on offshore plans. Eni didn’t respond to e-mails seeking comment.

“We are assessing the impact of the sanctions,” Exxon spokesman Alan Jeffers said by e-mail today.

Russia’s 2008 strategic laws, which favor state-led companies, effectively restrict exploration on the nation’s continental shelf to Rosneft and OAO Gazprom, the world’s largest natural gas producer. Gazprom retains plans to develop the vast Shtokman deposit in the Barents Sea, even after a partnership with Statoil and Total SA failed to reach an investment decision.

Caspian Drilling

OAO Lukoil, Russia’s second-largest oil producer, has offshore exploration and production in the Caspian Sea. Lukoil contracts Russia’s largest driller Eurasia Drilling, which has its own fleet of so-called jack-up rigs, for exploration in the inland sea.

Oil output by Rosneft fell to an average 4.13 million barrels a day in the second quarter from an average 4.22 million in the fourth quarter, according to financial results on the company’s website.

The explorer seeks to boost oil and gas output 30 percent by 2020, Sechin said on May 24 in St. Petersburg. Rosneft and Exxon plan to begin a well in the Kara Sea next month with a Seadrill Ltd. rig to exploit a deposit the size of the city of Moscow. The well, targeting a structure with more than 9 billion barrels of oil and gas potential, may surpass $700 million in cost.

Seadrill will make a statement later today, Chief Financial Officer Rune Magnus Lundetrae said by phone.

To contact the reporter on this story: Stephen Bierman in Moscow at sbierman1@bloomberg.net

To contact the editors responsible for this story: Will Kennedy at wkennedy3@bloomberg.net Alex Devine, Ana Monteiro

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