Oil companies seek loopholes in the sanction regime on Arctic offshore development.(Photo: gazprom-neft.ru)
By Atle Staalesen
February 18, 2015
Despite the sanctions, U.S oil companies Shlumberger and Baker Hughes still bid for new contracts in Russian Arctic waters.
Both the EU and the U.S in September introduced sanctions against the Russian Arctic oil industry, banning cooperation in energy technology and services. However, the oil companies actively seek loopholes in the regime. Reportedly, both Shlumberger and Baker Hughes are bidding for contracts in the Prirazlomnaya project, Russia’s first and only offshore Arctic oil field in production.
Through daughter companies registered in other countries, the two American oil majors in November and December 2014 submitted contract offers on drill fluids, as well as on drilling operations, in the project, RBC.ru reports with reference to Bloomberg.
By operating through foreign subsidiaries, the American companies run a delicate balance between corporate interests and U.S government policy.
In January, Schlumberger announced its ambitions to buy a 45,65 percent stake in Eurasia Drilling, a Russian oil exploration company, thus openly challenging the sanction regime. Through Eurasia Drilling, Schlumberger might be able continue parts of its business operations in Russia.
Also other western oil and gas service companies look for loopholes in the sanctions. Among the Norwegian companies heavily engaged in the Russian Arctic is the North Atlantic Drilling Ltd, a subsidiary of Seadrill. The NADL in August 2014 inked a comprehensive deal with Rosneft over drilling in Russian Arctic waters and has since been pushing on Norwegian authorities for permission to proceed with planned operations in the Kara Sea.
The EU and U.S sanctions introduced in September 2014 ban companies from providing services necessary for deep water oil exploration and production, Arctic oil exploration or production and shale oil projects, including drilling, well testing and logging services.
That triggered a string of challenges for Gazprom and Rosneft, the two state-controlled companies with the monopoly right to develop Russian offshore projects. The situation was most critical for Gazprom Neft, the company operating Russia’s first and only offshore Arctic project, the Prirazlomnoye field.
The Prirazlomnaya project platform has up to 50 percent of services managed by foreign companies. Norwegian companies alone account for at least 25 percent of the equipment and technology applied at the installation. The lack of foreign equipement and services supply could ultimately jeopardize security at the platform.
Sanctions Don’t Bar Oil-Service Giants Bidding In Arctic
Wednesday, February 18, 2015
U.S. and European suppliers to the oil industry are still able to seek work in Russia’s Arctic despite sanctions designed to limit their involvement because the rules don’t apply to foreign subsidiaries.
Schlumberger Ltd., based in Houston and the world’s largest oil services company, and Baker Hughes Inc. have used units based outside the U.S. to bid for business in Russia’s Arctic, according to a Russian government website. Offshore projects in the Arctic are among those targeted by U.S. and European sanctions against Russia’s oil industry.
There’s no allegation that either company broke the rules and none of the bids was successful. Nonetheless, the use of subsidiaries to legally skirt sanctions will raise questions about the effectiveness of measures imposed to punish Russia by limiting Western involvement in its most important industry.
Schlumberger’s Russian unit bid in a December tender to supply drilling fluids to an offshore Arctic project operated by OAO Gazprom Neft, the oil unit of Russia’s state-run gas exporter, according to government documents. In November, Houston-based Baker Hughes’s local unit and a Panamanian unit of Schlumberger had offered drilling services at the same field.
That’s possible because international subsidiaries aren’t subject to sanctions, Alexander Bychkov, a partner at the Moscow office of law firm Baker & McKenzie LLP, said in an e-mail, addressing the topic generally.
The use of foreign subsidiaries is also risky for the companies involved, said Christopher R. Wall, senior international trade partner at law firm Pillsbury Winthrop Pittman LLP, speaking broadly about the subject.
“It’s a very small bar,” Wall said. “Many companies are now globally integrated, and it can be tripped very easily. I’m not sure I would advise any company to do that.”
The U.S. and European Union expanded sanctions against Russia last September over its annexation of Crimea and support for separatists in eastern Ukraine. The measures restricted access to technologies and expertise used for Arctic, deepwater and unconventional oil projects that are seen as drivers of the country’s future oil production growth.
“Schlumberger continues to closely monitor the U.S. and EU sanctions and restrictions, and continues to operate with full compliance to applicable laws,” said Alexander Borisov, a spokesman for Schlumberger in Russia. “We do not comment on our customers’ tenders, contracts or commitments.”
Baker Hughes declined to comment.
Gazprom Neft Shelf, the unit of OAO Gazprom Neft working in the Arctic, said in e-mailed respond to questions that it cooperates with Russian and international companies, declining to comment on the individual tenders.
“Our Russia sanctions do not apply to foreign incorporated subsidiaries of U.S. persons,” the U.S. Treasury said. “We cannot comment on specific cases.”
European Union officials didn’t respond to requests for comment.
As the world’s largest oil producer, Russia has become an important market for companies that supply equipment and expertise to the oil and gas industry. The sanctions were meant to curb their involvement in areas seen as crucial to the long- term health of Russia’s oil industry: the Arctic Ocean and shale fields in Siberia.
“Compliance with sanctions is obligatory for U.S. and EU citizens, as well as legal persons, their international branches and units, but not for their international subsidiaries,” Baker & McKenzie’s Bychkov said.
To operate in sanctioned areas, the companies need to create a Chinese wall between the EU or U.S.-based parent and its international subsidiary, according to Pillsbury’s Wall. Staff in the U.S. or EU can’t discuss potential work in projects covered by sanctions, he said.
Subsidiaries of Geneva-based oil service provider Weatherford International Ltd. in November 2013 agreed to pay $100 million for violations of U.S. sanctions that prohibit oil services and equipment exports to Iran, Cuba, Sudan and Syria.
The local unit of western service providers may believe the risks are worth maintaining good relations with key Russian oil producers, Vitaly Kryukov, head of Moscow-based independent research company Small Letters, said in a telephone interview.
“The companies are probably hoping they will be better positioned in the Russian market than their competitors once the sanctions are lifted,” he said.
Schlumberger’s long-term commitment to Russia is clear. Last month, the company agreed to pay $1.7 billion for a stake in Eurasia Drilling Co., Russia’s largest driller.