Rosneft Moves to Thwart EU Sanctions With Norwegian Rigs: Energy

Jul 31, 2014 9:54 am ET

July 31 (Bloomberg) -- A Norwegian drill rig owner is supplying Russian oil giant OAO Rosneft and Exxon Mobil Corp. with the kind of high technology that will be barred under U.S. and European Union sanctions taking effect as soon as tomorrow.

Though the EU said it will deny export licenses for equipment intended for deep-water and arctic oil production, Rosneft’s six rig leases from Seadrill Ltd.’s North Atlantic Drilling unit, signed July 29, appear to thwart sanctions intended to block Russian oil companies from obtaining Western drilling expertise. Seadrill’s unit can proceed with the Rosneft contracts, worth $4.25 billion, because they were signed before the sanctions take effect, said Rune Magnus Lundetrae, Seadrill’s chief financial officer.

The drilling contracts show how the latest round of international sanctions may have only minimal impact on Russia’s oil industry, at least in the short-term.

“This is not exactly a full, frontal assault on the Russian economy,” Frances Hudson, who helps oversee $305 billion as global thematic strategist at Standard Life Investments, said in a telephone interview from Edinburgh. The sanctions “are just nibbling around the edges” of Russia’s energy sector.

The European Union and the U.S. decided to tighten sanctions against Russia over its support of separatists in eastern Ukraine. The new measures target the banking, energy and defense industries, threatening business in Russia for companies from BP Plc to Siemens AG and Renault SA.

More Restrictions

It is initially unclear how sanctions might affect Seadrill and its unit, North Atlantic Drilling Ltd., since they have roots in multiple countries. Seadrill owns 70 percent of North Atlantic Drilling, and the companies are controlled by billionaire John Fredriksen, a Norway-born Cypriot citizen whose nickname is the Viking King. Both companies are incorporated in Hamilton, Bermuda, and Seadrill lists its headquarters as London, while North Atlantic Drilling is managed from Norway.

“We understand that the sanctions will be possibly valid from Friday, August 1, and apply to future contracts. And these contracts were signed July 29,” Lundetrae said yesterday in a phone interview.

Rosneft rose as much as 1.2 percent and traded 0.4 percent higher at 224.9 rubles as of 11:11 a.m. in Moscow, extending a winning streak to three days. Seadrill rose 0.9 percent to 229.4 kroner in Oslo. North Atlantic Drilling rose 1.2 percent in New York yesterday to $9.60.

Norway Connection

Norway is not part of the EU, though its government has signaled it will probably abide by the sanctions against Russia. Seadrill’s Lundetrae declined to comment on which laws the contracts might be governed by.

Rosneft was first to announce yesterday it had locked in its contracts with the Seadrill unit, which is a piece of the maritime empire controlled by Fredriksen.

“Entering into long-term offshore drilling agreements will allow Rosneft to ensure implementation of exploration and development of its harsh environment offshore license areas,” Rosneft Chief Executive Officer Igor Sechin said in the statement.

Fredriksen has never shied away from geopolitical strife. The $16.7 billion shipping magnate started amassing his fortune in the 1960s trading oil in Beirut and leasing crafts to the U.S. military in Vietnam, and in the 1980s running oil for Iran during its war with Iraq.

The U.S. and European Union won’t be able to impose an airtight block on the technologies they want to keep from the Russians, said Bryan Early, assistant professor of political science at the State University of New York at Albany who is writing a book about how countries thwart sanctions. “They will be able to find some replacement technology on the international marketplace,” he said.

Narrow Targets

The sanctions enacted thus far against Russia’s energy sector have left untouched the sprawling natural gas industry and so-called conventional crude production that generate more than half the national budget. The bans have targeted a narrow list of gear and technologies used in deep-water, Arctic and shale prospects, none of which are key to Russia’s current or near-term oil output, Hudson said.

“Putin knows that these sanctions are all bark, no bite,” said Fadel Gheit, an energy analyst at Oppenheimer & Co. in New York.

Exxon, which has partnered with Rosneft on Russian oil projects for more than a decade, expanded its relationship with the Moscow-based company in 2011 by signing a $3.2 billion exploration pact. Chairman and Chief Executive Officer Rex Tillerson expressed doubts in May that sanctions would prove effective. Exxon spokesman Alan Jeffers said yesterday that the Irving, Texas-based company still was assessing the sanctions.

’Narrow’ Sanctions

“These are very narrow, very circumscribed sanctions,” said Pavel Molchanov, an energy analyst at Raymond James & Associates Inc. It’s not an issue that Rosneft and the other Russian energy producers “are going to lose much sleep over.”

North Atlantic Drilling’s agreement with Rosneft provides six offshore rigs to the Russian company through 2022.

Under a letter of intent announced in May, North Atlantic Drilling and at least one other Fredriksen-owned company are to provide as many as nine offshore rigs to Rosneft, Lundetrae said. The six rigs are part of the nine-rig deal, he said.

Rosneft is also set to buy a stake in the Seadrill unit, which it could increase to as much as 50 percent over time, people familiar with the deal said in May.

--With assistance from Mikael Holter in Oslo and Isaac Arnsdorf in New York.