President Vladimir Putin, who is fixated on Russian greatness, is attempting to sabotage the only economic sector that gives Moscow any claim to superpower status and helps fund his war in Ukraine: oil and gas.
All of this is jeopardized by his invasion.
Sanctions prevent Russia from gaining access to critical Western technology and finance that would allow it to drill for oil in remote, inhospitable Siberian and Arctic fields. Western companies' departure also jeopardizes the country's ability to produce ultra-profitable liquefied natural gas in the coming decade.
Russia may also have to look for new markets. The European Union is considering a move against oil in its sixth round of sanctions, which will be announced this week. Countries are already establishing short-term objectives to reduce their reliance on Russian oil and gas.
"We need to proceed on the basis that in the foreseeable future, supplies of energy to the West will be reduced," Russian President Vladimir Putin said earlier this month, vowing to "increase energy resources to other regions of the world."
However, rerouting exports to Asia necessitates the construction of pipelines and LNG terminals, and Russia lacks both the cash and the technology to make such a shift quickly. China simply cannot absorb all of Europe's massive energy consumption to aid the Kremlin. Beijing, which is already Moscow's largest crude buyer, has its own strategic goals in maintaining a diverse supply chain.
The withdrawal of energy majors such as Shell, BP, and ExxonMobil from Russia has made headlines, but the oil service companies, led by the trio of Halliburton, Schlumberger, and Baker Hughes, will ultimately prove far more significant.
That is because many of Russia's heartland oil fields in western Siberia are in decline after a gushing heyday in the 1980s and 1990s.
Techniques developed and perfected by Texas experts, such as using remote-piloted robots to drill rock horizontally for miles while using state-of-the-art imaging software to locate and push out the last drops of oil, rely on technology that has now been approved.
"These technologies are a product of market-driven innovation and technology progress, primarily originating in the U.S.," said Vladimir Milov, a former Russian deputy energy minister who is now a member of the opposition. "Soviet oil industry lacked them, and Russian private oil industry simply bought them, because why develop something on your own when you can simply hire Halliburton and Schlumberger?"
The service companies have stated that they will not take on new work in Russia, and Halliburton has stated that it intends to wind down its current operations there. The three declined to say how big the contracts were or how much time they had left on them.
According to Rystad Energy's upstream analysts, the result will be a drop in Russian oil production of between 4% and 7% per year.
If the companies completely withdraw, "could bring Russian output down by 10, 15 percent, I don't think that's an exaggeration," Milov said.
Run-of-the-mill "Well drilling, production, and exploration can all be done by Russian service companies, as well as service divisions of the largest oil producers like Rosneft and Surgutneftegaz," said Daria Melnik, senior upstream Rystad analyst.
However, as the search for new supplies forces exploration deeper underground or further out into places like the Arctic, the cost of doing so will rise.
"You’re fighting a rearguard battle, trying to maintain the old production fields as long as you can, retreating step by step, drilling all the while … pleading with the Russian government for more funds in the form of cheap loans, and will you build us a port please, and by the way we’ll need a new pipeline ," Thane Gustafson, a Russian politics professor at Georgetown University in Washington, said. "It’s many billions of rubles that are needed for the state's helping out with this next chapter of Russian oil"
Natural gas, on the other hand, is a different story.
"“For the majority of the Russian gas industry they really are not dependent on Western companies, except potentially for finance," said Jonathan Stern, founder of the Oxford Institute for Energy Studies' gas program.
When it comes to gas sales, Russia is also more secure than when it comes to oil sales. Because of strong opposition from countries like Germany and Hungary, the EU is currently ruling out sanctions against natural gas — much of which enters the bloc via pipelines.
While the EU considers its gas options, Putin lacks the ability to quickly move gas to other markets. Rather than focusing on liquefied natural gas technology for global ship export, Russia's gas strategy has been to build expensive pipelines west that would pay for themselves over time — Blue Stream, Yamal Europe, TurkStream, Nord Stream, and the recently halted Nord Stream 2.
Putin has one gas export pipeline to China operational, and talks for two more are ongoing.
But crucial pipelines within Russia are missing, preventing state-owned Gazprom from diverting gas from fields in the country's west to new Asian buyers.
Building such pipelines "will take time, probably most of this decade," Stern said.
Putin hoped to diversify Russia's exports away from Europe by 2035, capturing a fifth of the global LNG market. Experts say he will be able to kiss his dreams goodbye if he does not have access to Western technology and money.
"LNG will face the largest delays," Melnik predicted. "We don’t have our own technology, we don’t have our own equipment, we don’t even have gas turbines or LNG tankers."
Due to financial sanctions imposed on Russia, South Korean shipyards building ice-breaking LNG carriers for Russian companies are already concerned about getting paid.
The Zvezda shipyard in Russia, which is supposed to build the country's next-generation LNG fleet, uses French liquefaction technology, which is also out of reach due to EU sanctions.
"Projects like Rosneft’s Far East LNG, Gazprom’s Baltic LNG — those are pretty much dead in the water," Stern said.
Natural gas wells, on the other hand, are easier to turn off and on than oil wells, which can be damaged if shut down — something that could happen if sanctions prevent Russia from easily selling its crude.
"You can turn the tap down in gas and keep it in the field without killing your field, so it’s flexible," said Thierry Bros, a professor at Sciences Po Paris. "the risk is having too little sales."
Although Russia is becoming increasingly isolated from the rest of the world's finance and technology, it is not completely helpless.
"You can not say Gazprom is a Soviet company," Bros said. "Vladimir Putin under some strict orders, but otherwise it’s a company that has a lot of young, educated people, they’ve been traveling to Europe, they understand. ."
The Western withdrawal, however, "could leave some of the Russian installations in trouble, not because they're incapable of running them themselves, because they've learned a great deal in the last 20 years," Stern said. "It's more the spare parts issues, the questions of maintaining equipment on a timely basis."
Proponents of Fortress Russia argue that the government has a variety of options for easing the pain.
"Several weeks ago we heard that Russia allowed non-payment of royalties to foreign license-holders of technology," Melnik said. "Given that departing companies are unlikely to haul back equipment and sanctioned technology already on the ground, Russia could "just steal technologies and replicate them."
"If we are in a situation where sanctions will be there for a really long time," said Margarita Balmaceda, a professor of diplomacy and international relations at Seton Hall University in the United States, "then technologies that have been useful in 2022 will not be useful In 2032."
An exodus of IT specialists and other tech experts has occurred in Russia, potentially jeopardizing those reverse engineering plans.
"Russian authorities will try to do their best to keep those people here in Russia by proposing high salaries, different subsidies, other incentives because this is our very very weak point," Melnik said.
Despite the economic blow that will hit Russia, Sofya Donets, a Moscow-based economist and Russia director with Renaissance Capital, believes that the oil and gas sector will likely receive strong financial support from the Kremlin as the industry works to reorient itself toward Asian markets.
However, there could be long-term consequences, such as the ostracization of Russia by global financial markets, dimming the outlook.
Donets explained, "That’s the kind of stigma. Even if sanctions will be removed at some point, I don't expect like any investors to be back to this market any time soon."
By fLEXI tEAM