RUSSIA SANCTIONS: $150/BBL
US and EU sanctions against Moscow are in danger of turning round and biting the west by constraining global oil supply and pushing up prices in coming years, the former chief executive of BP has warned.
Tony Hayward said that cutting off capital markets from Russia's energy groups, which would eventually lead to less investment in Russian oil production, was likely to damage long-term supply. He said the US shale boom had obscured the growing risks to the world's supply picture, but its effect would wear off, leaving the global economy dangerously exposed to potential disruptions in the flow of oil.
His comments came as the US and Europe expanded sanctions against Russia on Friday with the US adding Gazprom, Europe's leading energy provider, and Lukoil , the privately owned oil group, to the list of companies deprived of US goods, technology and services for deepwater, Arctic offshore and shale projects. EU and US sanctions have also imposed restrictions on financing for some state-owned Russian energy companies.
"The world has been lulled into a false sense of security because of what's going on in the US," Mr Hayward said in an interview with the Financial Times, referring to the shale boom that has driven a 60 per cent increase in US crude output since 2008. But he asked: "When US supply peaks, where will the new supply come from?"
As output from mature basins such as the North Sea and Alaska's North Slope declines, the world had been banking on new barrels from places such as Canada, Iraq and Russia. But the latter's future production from untapped resources in the Arctic and the vast shale reserves of Siberia are under threat because of sanctions, Mr Hayward said. "Because of financial sanctions, the big gorillas are going to start cutting their activities," he said.
Mr Hayward, who runs oil explorer Genel Energy and is chairman of commodities group Glencore , also expressed doubt about projections for a big increase in oil production from Iraq. He said current circumstances meant the country would struggle to reach targets to double production by 2020.
The advance of Isis militants in northern Iraq has coincided with political instability in other big oil-producing countries such as Libya. But the barrels lost through post-Arab Spring unrest have been matched by new supply from North America. Without that additional supply, the world would be facing an oil price of $150 a barrel, according to Mr Hayward. Instead, Brent crude has fallen from about $108 per barrel at the start of the year to about $97 today.
Western sanctions could endanger a number of joint ventures that Rosneft , the state-controlled Russian oil group, has set up with western majors such as ExxonMobil to explore for oil in Russia's Arctic seas.
But according to Michael Cohen, an analyst at Barclays, sanctions will not only hurt future projects, but could also make it much harder for European oil groups and service companies to provide support for their current operations in Russia. "These fields can continue operating, but expanding drilling could prove to be more challenging in this environment if the project relied on European parts," he wrote.
That could affect existing projects where foreign companies are active, such as Sakhalin 1, where Exxon already operates in partnership with Rosneft.
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