Back in 2014, a raft of Western sanctions stifled Russia’s Arctic oil ambitions, but three years later Moscow is looking to kickstart its own homegrown oil renaissance to try and match America’s shale boom.
At the time, those sanctions were carefully calculated to hamstring Russia’s future energy production without immediately decimating its economy—allowing the West to express its displeasure over the annexation of Crimea without throwing a wrench in the global economy. And, for a time, the sanctions appeared to achieve their stated effect. Russia was slow to acknowledge its own shale reserves in the Bazhenov formation, located in middle of Siberia, and of the relatively few projects it did have running to take advantage of its Arctic reserves, many relied on Western companies.
(Some Western companies like Exxon Mobil were hit particularly hard. The shelving of a joint venture in the Black Sea with Rosneft, which included projects in the Russian Arctic as well, reportedly cost Exxon $1 billion. This week, the energy giant appealed to the Treasury Department for a sanctions waiver—a terrible optic, given that its former CEO Rex Tillerson is in the Administration.)
But though industry consensus once seemed to be that Russia would end up spinning its wheels in these unconventional projects without the necessary technology and expertise from the West, that assessment is starting to shift. The FT reports:
[Energy] companies have found ways round the restrictions. Indeed, 2,000km south-west of Tsentralno-Olginskaya-1 in western Siberia, Gazprom Neft, Russia’s third-largest oil producer, is showing few ill effects.
Late last year, it became the first Russian company to demonstrate shale oil fracking expertise with a 1km-long horizontal well 2.3km below ground at a site in the vast Bazhenov field, estimated to be the world’s largest shale oil deposit. Gazprom Neft was able to use homegrown technology that it was forced to develop after the sanctions prompted its international partners to walk away from the project. “We are like a snowball,” says Sergey Vakulenko, head of strategy and innovation at the company, a unit of gas giant Gazprom. “The harder you squeeze, the harder we get.”
If these state-owned Russian oil companies are indeed like snowballs, then we might expect their success to build upon itself. But only time will tell. Arctic drilling is an entirely different beast than the conventional operations Russia relies upon for the vast majority of its current oil and gas production.
And Moscow isn’t just battling Western sanctions in its attempt to shore up its future energy security. The collapse in oil prices has hurt the country’s budget revenues—Russia’s breakeven oil price is $72 per barrel, and current prices are hovering between $50 and $55—and the current market environment makes more technically challenging projects a lot less attractive. So while sanctions may not be constraining Russian energy options as much as the West might hope, cheap oil certainly is.
Still, however successful Rosneft is in developing these unconventional reserves, this whole situation is a testament how the whole nebulous concept of “sanctions”—which more than anything have been used to paper over the uncomfortable fact that there is little else that the United States or its European partners were willing to do to Russia over Ukraine—can have unintended consequences.