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(John Kemp is a Reuters market analyst. The views expressed arehis own)
By John Kemp
LONDON, Aug 4 (Reuters) - EU sanctions on Russia's oilsector will not seriously hamper the development of new oilresources in either the short or the long term, though theyleave open the possibility of further escalation if relationswith Russia deteriorate in future.
Taken as a whole, the restrictions announced on July 31 arebest viewed as a piece of "sanctions theatre" designed to showthe public and Washington that the EU is doing something inresponse to the downing of the Malaysian airliner over easternUkraine while keeping the costs to EU energy firms as low aspossible.
Sanctions will be enforced in the form of a "priorauthorisation" requirement before certain oil-related goods andservices can be exported for use in Russia, according to the EUOfficial Journal ("Council Regulation 833/2014 concerningrestrictive measures in view of Russia's actions destabilisingthe situation in Ukraine" July 31).
Restrictions apply to the "sale, supply, transfer or export"of certain technologies "suited to the oil industry for use indeep water exploration and production, Arctic oil explorationand production, or shale oil projects" (Article 3 paragraphs 1and 3).
Covered technologies are set out in a list which consistsmostly of steel pipe and casings used for the construction ofpipelines and oil wells, as well as drilling and pressurepumping equipment, and some floating or semi-submersibleproduction platforms (Annex 2).
Technical assistance, brokerage services and financinglinked to the same items and technologies are subject to thesame prior authorisation requirement (Article 4 paragraph 3).
Enforcement of the sanctions is left to individual EU memberstates, though there are basic information and consultationrequirements.
In theory, member states "shall not" grant authorisation forany technology transfers or technical assistance related todeepwater, Arctic and shale projects.
But the ban contains several important exclusions whichshould ensure that most if not all existing and future projectsare exempted:
(1) Sanctions apply only to oil production, not gas.
(2) Export authorisation "may" be granted for equipment,technical advice or financing "arising from a contract or anagreement" concluded before August 1 (Article 3 paragraph 5second part).
(3) Sanctions apply only to deepwater, Arctic and shaledevelopments, not to conventional oil fields.
In combination, these exclusions apply to all current andannounced projects, and cover billions of barrels of potentialoil and gas production over the next few decades.
For example, agreements between Exxon, BP, Shell, Total and Russian companies todevelop Arctic, offshore and shale formations in Russia areeither exempt because they were concluded before Aug 1, orbecause they are principally drilling for gas, or can beclassified as conventional oil production.
The language of the regulation is very permissive. Theconcept of a "contract or an agreement" concluded before thedeadline is particularly stretchy since it is not limited to afinal investment agreement but seems to encompass plans whichare still only at the provisional stage.
Most major oil and gas companies, as well as servicecompanies, should have no difficulty in arguing the provision ofequipment and technical advice is linked to the execution ofexisting obligations for contracts or agreements which arealready in place.
In addition, most wells produce a mix of oil, gas andcondensate, in varying proportions. The regulations onlyprohibit the export of equipment and advice for oil projects.Gas projects are clearly allowed. And the regulations are silentabout condensates (otherwise known as natural gas liquids).
It should not be too hard to argue that equipment and adviceis being exported for gas rather than oil. Get ready for asudden increase in the number of projects looking for "gas,""wet gas" and "condensate" in future.
FLEXIBLE RESPONSE
National authorities have been left to determine preciselyhow to apply the sanctions and the generous exemptions.Everything will depend on how they decide to interpret therestrictions and exclusions.
In the hands of national governments, the energy sanctionscould be a flexible instrument for escalating or de-escalatingpressure on the Russian government in response to events inUkraine.
If the relationship continues to worsen, EU governments caneasily tighten the sanctions by employing a more expansive viewof the sanctions and a more restrictive view of the exclusions,or take the opposite view if relations improve.
The EU promised "these measures will be kept under reviewand may be suspended or withdrawn, or supplemented by otherrestrictive measures, in light of developments on the ground."
But access to the Russian oil and gas sector is vital for anumber of large EU energy companies, which will lobby hardbehind the scenes for the most permissive interpretation inorder to safeguard their own supplies and investments.
If a strict interpretation of the sanctions is enforced,Russia is likely to turn to other suppliers, notably its ownfirms and China, for the capital and expertise needed to developnew oil resources, which would harm western energy companieswithout necessarily doing much to reduce Russia's productionpotential.
The sanctions are also intended to send a signal about thepolitical acceptability of doing business with Russia's oil andgas companies.
For advocates, the hope is that many companies will end orat least scale back deals even where they would be allowed undercertain readings of the regulations.
"The more this looks like the (U.S.) administration is usingpages from the Iranian financial sanctions playbook, the greaterthe likelihood that market players will voluntarily cut theirbusiness ties to stay ahead of potential penalties," MarkDubowitz of the Foundation for Defense of Democracies told theWall Street Journal ("Recent history suggests tougher Russiasanctions are needed" July 30).
The Foundation for Defense of Democracies has been aprominent advocate for sanctions on Iran, and now Russia.
"Sanctions are as much about psychology as legalities,"Dubowitz told the Journal.
But while it is possible companies will adopt a restrictivereading of the new regulations, it seems more likely they willpush for a permissive one, and try to continue with business asusual as much as possible.
Oil and gas companies have lots of experience dealing withcomplicated political and legal environments.
As drafted, the export restrictions contain enoughexclusions and ambiguity that most projects should be able toproceed, at least in the next few years, when much of thepreparatory work will be small scale.
For most deepwater, Arctic and shale developments,large-scale production was years away, even before the sanctionsannouncement.
Oil and gas producers and service companies will hope tocontinue with enough work to protect their projects in the shortterm, while hoping for a medium-term thaw in politicalrelations. (Editing by William Hardy)
