Without access to western technology, Russia won't be able to carry out the much needed modernisation of its oil refineries

New sanctions target Arctic drilling

A new set of sanctions imposed on Russia by the EU and the US aims to block deepwater, Arctic offshore, or shale oil exploration projects.

By preventing banks to loan money to Russia’s state-owned energy companies and banning technology exports vital to the industry, the West hopes to increase pressure on Russia to give up on its ambitions in Ukraine.

"It is designed to effectively shut down this type of oil exploration and production activity by depriving these Russian companies of the goods, technology and services that they need to do this work," a US senior official said on Friday.

Russia is particularly dependent on the West for catalysts, refining equipment and gas turbine parts, and will most likely have to put on hold not only new projects, but also the much needed modernisation of its existing refineries and oil fields.

Yury Zolotnikov, a deputy head of the oil refining department, said Russia will likely experience fuel shortages as a result of the sanctions as the margin between production and demand is dangerously small.

To improve production efficiency, Russia would have to invest into new equipment and development of new sites.

"So far, there have been no such sanctions, but they obviously could create problems (for refinery modernisation)," Zolotnikov told Reuters in an interview.

The sanctions have already hit Russia's state-owned energy giant Rosneft, which has had to cut its staff as its production falls.

Rosneft needs to invest more than $21bn (£13bn) annually until 2017 to launch new fields and upgrade refineries. It said last week it planned to replace all equipment and technology imports from the West as the US and EU sanctions.

In May, Energy Minister Alexander Novak asked President Vladimir Putin to boost funding for domestic producers because a quarter of all equipment used in oil output enhancement was imported. The modernisation drive is estimated to cost about $55bn this decade.

Zolotnikov said Russian refineries were unable to sharply increase production over the next two years, which may lead to shortage of gasoline. He added that the increasing number of accidents and routine maintenance work at refineries also pointed to possible fuel supplies disruptions.

"You can't rule out incidents at the plants, maintenance seasons in April-May and September-October, risks are being created. It is necessary that production is higher than consumption by at least 3 million tonnes," he said.

According to his data, production of gasoline of 3, 4 and 5 grades in Russia is seen at 38 million tonnes in 2014. It would only reach 38.3 million tonnes in 2015 and 38.8 million in 2016.

Russia has faced several gasoline shortages in the past, the latest in May 2011, when domestic refineries boosted exports in search of higher margins.

A fuel shortage for Russia's drivers would be a politically damaging for the Kremlin.

Zolotnikov said one way to avert the crisis was to increase gasoline imports from neighbouring Belarus which currently run at 1.5 million tonnes a year.

In January-July, Russia increased shipments of gasoline from Belarus by a third, to 812,000 tonnes.

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