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Energy Companies Gear Up for More Pain In Russia With Sanctions

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Bloomberg

Some of the world’s biggest energy companies could see as much as 5 percent of their revenue disappear amid sanctions that shut them off from the Russian energy frontier.

Amid rising violence in eastern Ukraine between government and separatist forces, the European Union today sought to punish Russia for its involvement by restricting exports of deep-sea drilling and shale-fracturing technologies. The U.S. followed suit with its own set of expanded sanctions.

Russia relies on companies including Exxon Mobil Corp., BP Plc, Halliburton Co. and Schlumberger Ltd. for the latest technology and expertise it needs to develop oil and natural gas resources that sprawl across nine time zones.

The U.S. and EU are imposing restrictions on the transfer of certain oilfield technologies into Russia, including hydraulic fracturing technologies that have helped boost North American crude production and set the U.S. on a course toward energy independence. In addition, rigs capable of drilling horizontally may also be banned, said Emily Stromquist, an energy analyst at Eurasia Group in London.

“It hurts from an earnings standpoint,” Kurt Hallead, an analyst at RBC Capital Markets in Austin, said in a phone interview. “They basically have to eat a lot of fixed costs if their revenue goes away.”

New Sanctions

Oilfield service companies Halliburton, Baker Hughes Inc. (BHI) and Weatherford International Plc each generate between 4 percent to 5 percent of their global sales from Russia, while Schlumberger gets 5 percent to 6 percent, according to RBC Capital Markets.

EU governments agreed today in Brussels to restrict the export of equipment being used to modernize the oil industry, a key prop for Russia’s economy, two EU officials told reporters. The new package of EU sanctions will “track pretty closely” with those already imposed by the U.S.

Russia would most immediately be affected, Stromquist said, if it’s restricted from using so-called liquefaction technology, which is used to chill natural gas so it can be shipped overseas to more profitable markets. The liquefaction industry was pioneered by Royal Dutch Shell Plc (RDSA) in the 1960s, which delivered the first shipment of Algerian gas to London aboard a tanker called the Methane Princess.

The increased sanctions are not expected to drive the service companies out of Russia, Hallead said.

Halliburton’s Compliance

“Halliburton continues to operate in Russia and does so while complying fully with all laws applicable to our operations, including relevant trade restrictions,” Susie McMichael, a spokeswoman at Houston-based Halliburton, said today in an e-mailed statement.

Representatives for Schlumberger, Baker Hughes and Weatherford didn’t immediately return e-mail and phone messages seeking comment.

Sanctions already imposed on U.S. energy companies in Russia have so far had a “minimal impact” on Halliburton’s business in the country, Chief Operating Officer Jeff Miller told analysts and investors July 21 on a conference call. That could change if the scope of sanctions expands, he said.

Halliburton generates 15 cents in annual earnings per share in Russia, and 4 to 5 percent of its total revenue, Hallead wrote in a July 22 note to investors. Total company revenue is estimated to be $32.7 billion this year, according to the average of 30 analysts’ estimates compiled by Bloomberg.

Russia, source of one of every eight barrels of crude oil produced worldwide, depends on European and U.S. technology and expertise to prop up output from Soviet-era oilfields, according to Philipp Chladek, an analyst at Bloomberg Intelligence.

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