Shell’s LNG plans challenged by new US sanctions on Russian gas field

By STEPHEN BIERMAN, ELENA MAZNEVA and JOE CARROLL
Bloomberg

The US declared one of Russia’s largest offshore oil and natural gas fields off limits to American tools and expertise, potentially disrupting Royal Dutch Shell’s plans to liquefy the fossil fuel for export.

Sanctions imposed to punish Russian President Vladimir Putin’s regime for the annexation of Crimea and support for Ukrainian separatists were expanded to bar the transport of US-made equipment to Gazprom’s Yuzhno-Kirinskoye field off Russia’s eastern coast, according to a US Department of Commerce statement on Friday.

Russian-US relations have sunk to their lowest levels since the Cold War following the Crimean annexation last year and a shooting war in eastern Ukraine. A previous round of sanctions prohibiting the use of US technology in Russia’s Arctic, deep-water and shale fields forced ExxonMobil to abandon a $1 billion drilling project in late 2014.

“It’s a ratcheting up” of sanctions, said Doug Jacobson, a sanctions attorney at Jacobson Burton LLC in Washington, DC. “It’s an additional arrow in the quiver the United States is using, and I expect you’ll see more of this type of approach.”

This is the first time the so-called entity list has been used to restrict access to a natural resource, Jacobson said. The list is normally used to ban dealings with individuals and corporations, he said.

The designation means nothing manufactured in the US or containing more than 25% of US content can be used to tap the gas field, Jacobson said

‘Destructive’ Move

Additional sanctions are “destructive” for Russia’s ties with the US, Kremlin spokesman Dmitry Peskov told reporters during a conference call Friday. It’s wrong to say that sanctions are destroying any sector of Russia’s economy, he said. Sergei Kupriyanov, a spokesman at state-run Gazprom, declined to comment.

Shell may gain access to Yuzhno-Kirinskoye as part of potential asset swaps with Gazprom, CEO Ben Van Beurden said last week.

“We engage with the relevant authorities and take action to ensure we comply with all applicable sanctions or related measures,” Shell said in an e-mailed statement Friday. “Shell remains committed to working in Russia and we value working with our Russian partners.”

The Yuzhno-Kirinskoye deposit contains an estimated 637 billion cubic meters (22.5 trillion cubic feet) of gas and 97 million metric tons of oil and condensate, according to Gazprom’s website. The company said earlier the field would feed new capacity at the Sakhalin-2 LNG plant, the only such facility in Russia. Shell holds 27.5% of the Gazprom-led project.

LNG Supplies

Supplies from Sakhalin-2 make up about 9% of the gas needs of Japan, the world’s biggest LNG buyer, according to Shell’s Van Beurden.

Under the new restrictions, anyone wanting to use US-made gear at Yuzhno-Kirinskoye would need to obtain a special license from the US government. Jacobson said such licenses are never issued and the requirement represents a de facto total ban on the use of such equipment at the field.

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