Gazprom plans to acquire imported subsea equipment despite the U.S. sectoral sanctions

Gazprom, a Russian state-run energy company, plans to acquire imported subsea equipment needed for the development of its Yuzhno-Kirinskoye gas field on the Sakhalin Island continental shelf. According to Vsevolod Cherepanov, Gazprom’s board member, in 2019 the company plans to install imported flowing wellhead equipment (so-called ‘christmas tree’) onto four offshore wells. The drilling will start in mid-June 2018, but the wells will only be drilled to reach the cap of the reservoir. In 2019 Gazprom plans to acquire new subsea equipment but if this plan fails the company will continue drilling other development wells without penetrating into the reservoir, said Mr Cherepanov cited by “Kommersant” business newspaper. He also noted that the equipment for the first 8-12 development wells will be imported.

Gazprom will nevertheless have to find a way to avoid U.S. sectoral sanctions that affect Yuzhno-Kirinskoye gas field. World’s major subsea equipment manufacturers work under either the E.U. or the U.S. jurisdiction, so they would hardly agree to supply this equipment openly.

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Sakhalin – Khabarovsk – Vladivostok gas pipeline. Image credit: Gazprom

Discovered in 2010, Yuzhno-Kirinskoye gas field is one of Gazprom’s biggest offshore fields. Its recoverable reserves are estimated at 711.2 billion cubic meters of natural gas, 111.5 million metric tonnes of gas condensate, and 4.1 million tonnes of oil. It is expected that during the field development phase 37 wells will be drilled. Gas production is expected to start in 2023, reaching its planned output of 21 billion cubic meters per year in 2034. Before the sanctions were imposed in 2014, Gazprom planned to supply gas from the field as LNG in cooperation with Shell, international oil and gas major. However, in 2015 the company decided to supply gas via its Sakhalin – Khabarovsk – Vladivostok gas transmission system to customers in Russia and China.

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Sakhalin III project map. Image credit: Gazprom

Development of Yuzhno-Kirinskoye field will require installing special subsea equipment. Apart from the flowing wellhead equipment, Gazprom would need to purchase subsea manifolds, umbilical cables, ROVs and special software. The world’s major manufacturers of this equipment are FMC Technologies (U.S.), One Subsea (Schlumberger subsidiary), GE (U.S.) and Aker Solutions (Norway). Another producer of subsea flowing wellhead equipment is Chinese MSP/Drilex, its equipment is used for the development of offshore Luhua project in China. Gazprom is currently working on developing local subsea equipment that would reduce its dependence on imports. However, it is very unlikely that Russian equipment required by Gazprom will be available in the market any time soon.

According to industry analysts, Gazprom will either have to purchase the equipment from China or develop a ‘sanctions-avoiding’ purchasing scheme with one of the European suppliers. The latter option is supposed to be more difficult since such equipment is usually produced for specific projects, making it easy for regulators to monitor and control such deals.

“Despite the U.S. sanctions, Chinese manufacturers can supply this equipment to Gazprom if it will offer attractive terms,” says Alexander Gabuev, head of the Asian program at the Carnegie Moscow Centre. “There is a proven scheme – they create a chain of companies, and if one company from this chain is affected by sanctions, a new one is then created.”

Earlier in April Deloitte, a management consulting firm, reported that Russian oilfield services companies still lack technologies required for exploration and development of offshore oil and gas fields. The main benefits from the Western sanctions on Russia got companies from China and some of the South-East Asian countries – that did not join sanctions regime – supplying equipment to Russian operators. Deloitte expects that the share of oilfield equipment imported to Russia from such countries, including China, South Korea and Singapore, will increase in the near future. For example, Chinese drilling equipment manufacturer Jereh has already created a chain of maintenance centres and storehouse facilities in Russia to optimise logistics and improve the quality of services provided to Russian customers.

We believe that, if this trend continues, Western companies may lose the Russian market due to competition from Asian companies and Russia’s strategy to develop its own technologies to substitute imports. For example, Gazprom is currently working on developing subsea equipment in cooperation with Roskosmos, Russian state exploration company, and Central Design Bureau of Marine Engineering Rubin, Russian submarine developer. In few years time Russian oil and gas majors and OFS companies may have their own equipment making Russian oilfield service sector less dependent on imported technologies. This may require Western governments to rethink their sanctions policy against Russian oil and gas sector, while the European and American oilfield services providers and equipment suppliers may have to develop new business strategies to stay in the Russian market.

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