"Preliminary thinking" right now may turn into a ban on the US and European companies from cooperating with Russia for future oil exploration. Reportedly, the US and the European Union (EU) are contemplating to stop the oil hunt in unconventional oil fields that include the Arctic territory, deep seas or shale formations for crude.
A possible EU ban may soon be followed by a similar move by the US. America may impose restrictions on exporting 'U.S. gear and expertise' for specialized exploration. US officials said that Russia is not equipped to produce these on their own.
The US has emphasized that it will refrain from providing exemptions relating to existing contracts, which would be impacted. However, US officials, who spoke on conditions of anonymity, clarified that they are not sure if the EU would do the same. The sanctions will be a big blow to billions of dollars of business related to future exploration.
Can Exxon Remain the Reliable Partner?
The sanctions raise concerns about what happens to oil majors like Exxon Mobil Corp. ( XOM ) and BP p.l.c. ( BP ). Incidentally, the US oil behemoth Exxon Mobil had commenced drilling in Russia's Arctic last month. The Arctic prospect, Universitetskaya, is estimated to hold 9 billion crude barrels, translating into a market price of $894 billion.
Exxon had started drilling even after sanctions against Russia's Rosneft. This led the Russian President Vladimir Putin to welcome the cooperation. He said: "I am convinced that the joint projects between Rosneft, Exxon Mobil and other companies will benefit our national economies, will contribute to strengthening the global energy situation."
However now, the ban will close the gap that the previous sanctions had "left room for a unit of Bermuda-based SeaDrill Ltd. ( SDRL ) to sail the West Alpha floating rig into Russian waters in late July on behalf of Irving, Texas-based Exxon Mobil and Moscow's state-controlled OAO Rosneft," reported Bloomberg. Exxon brought the rig from Norway in hopes of some significant discovery in the Kara Sea.
Putin had called Exxon "an old and reliable partner." Exxon has drilling rights over 11.4 million acres of Russian land and seafloor. Exxon has been working with Rosneft on Russian oilfields for more than 10 years.
Following the latest developments, Alan Jeffers, an Exxon spokesman, said that the company is assessing the situation. "We always follow the law," he said.
What Happens to BP, Royal Dutch Shell & TOTAL S.A.
BP will also be under focus. It is among the biggest foreign investors in Russia's oil industry. BP's total production in Russia in 2013 was a staggering 961,000 barrels of oil equivalents per day. BP holds 14.3 billion barrels of reserves and 48 billion barrels of offshore resource potential in Russia. Moreover, BP holds significant ownership of Russian oil firm Rosneft.
In its 2014 Investor Update, BP spoke of Russia playing a vital role in shaping its future. The company sees significant long-term opportunity in Russia. However, things have changed a great deal since the Russia-Ukraine crisis started. Possible sanctions on Russia's energy sector will further change the scenario. BP spokesman Toby Odone said : "We will look at any new sanctions and we will of course comply with all applicable sanctions."
Royal Dutch Shell plc ( RDS.A ), also has massive investments in Russia. These include investments in latest reservoir-management techniques to boost crude production in certain fields and exploration of some untapped shale formations.
The sanctions will also keep European oil major like TOTAL S.A. ( TOT ) and Statoil ASA ( STO ) on the hook. Russian wells contribute about 10% of Total's output. Meanwhile, Statoil Chief Financial Officer Torgrim Reitan said: "This is something we're monitoring closely…Our positions in Russia have a very long time horizon."
OPEC Cuts Russia's Oil Supply Forecast
Meanwhile, the Organization of the Petroleum Exporting Countries (OPEC) has cut Russia's oil supply forecast. OPEC projects supply from Russia to be at 10.51 million of barrels of oil per day (mb/d) on average in 2015. This is lower than 2014 forecast of 10.53 mb/d.
Why Investors Need to Be Watchful
The US and European officials said that the deal is not yet final. They may scrap the idea completely if ceasefire between Ukraine and pro-Russian separatists is maintained. Apart from the US and Saudi Arabia, Russia is among the top oil producers. It continues to be the primary energy supplier to Europe. These make the sanctions all the more worrisome. Also, Russia's conventional oil fields have been on a downtrend and the country needed to move to Siberia and Arctic.
Meanwhile, the energy sector is the only one among the 10 S&P industry groups that is in the red for both one and three-month periods. Energy Select Sector SPDR ( XLE ) has lost 1.7% and 2.3% in the last one and three-month periods.
Crude prices have taken a beating of late, dragging the sector lower. Crude prices are most likely to exhibit a sideways-to-bearish trend in the coming months, mostly trading in the $90-$100 per barrel range. As North American supply remains strong and the groundbreaking agreement with Iran makes it easier for the country to sell the commodity, we are likely to experience a pressure in oil prices .
Among other concerns, International Energy Agency recently said that demand growth in second half of 2014 will slowdown to its lowest level in two and a half years. The latest numbers from the agency predicts demand growth to slow down to below 500,000 barrels per day (b/d) in the last half of this year. Also for 2014 and 2015, global oil demand growth targets were revised down to 900,000 million b/d and 1.2 million b/d.
All the stocks discussed, Exxon, BP, Royal Dutch Shell, TOTAL S.A. and Statoil ASA, carry a Zacks Rank #3 (Hold).
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report