Dmitry Magonya, the managing partner of ART DE LEX, commented on the US decision to impose sanctions against Gazprom’s largest field on the shelf

On Friday, the US imposed sanctions against the Yuzhno-Kirinskoye field of Gazprom in the Sea of Okhotsk. The sanctions prohibit the export, re-export, and transfer of equipment for this project without the approval of the Bureau of Industry and Security, a part of the US Department of Commerce.

Yuzhno-Kirinskoye is included on the sanctions list because “it was reported that it contains significant reserves of oil,” according to the Department of Commerce, and its development will result in a violation of the sectoral sanctions. The US sanctions apply to projects in oil fields where work is carried out at a depth of more than 500 feet (about 152 meters). The sea depth in the field varies from 110 meters to 320 meters, as stated on the Gazprom website. Yuzhno-Kirinskoye is one of the largest oil fields on the Russian shelf. Its reserves are second only to Gazprom’s Shtokman field in the Barents Sea.

The Yuzhno-Kirinskoye reserves account for almost 640 billion cubic meters of gas and 97 million tons of condensate. A year ago, Energy Minister Alexander Novak announced the discovery of huge oil reserves in the field–a total of 464 million tons. However, they are not yet available to Gazprom. The field is the main asset of Gazprom’s Sakhalin-3 project.

Shell wants a stake in it in exchange for their assets, as the CEO of Shell, Ben van Berden, recently stated. Unlike the Stockman field, Gazprom has big plans for Yuzhno-Kirinskoye. In June, Gazprom and Shell, which have a production-sharing agreement, announced the construction of the third phase of the LNG plant as part of the Sakhalin-2 project. They also are planning a fourth phase.

The LNG plant at Sakhalin-2 is now the only LNG company in Russia. Its capacity is 10 million tons per year, and the third phase will add another 5 million tons to its capacity. In addition to gas from Yuzhno-Kirinskoye field, the plant can process gas supplies from Kirinskoye, Lunskoye, according to Michael Krutikhin, of RusEnergy, a partner in the operation.

In 2014, the US blocked Gazprom’s access to long-term loans. In addition, there are sectoral sanctions prohibiting the US and European companies from providing equipment and services for projects in the Arctic, for deepwater drilling, and for the development of light tight oil (LTO). The sanctions against Yuzhno-Kirinskoye are not unique, compared with earlier sectoral sanctions, but they infinitely expand the circle of entities that are potentially subject to restrictions, as the managing partner of the ART DE LEX law firm, Dmitry Magonya, stated.

Without foreign suppliers, it will be difficult for Gazprom to develop the Yuzhno Kirinskoye field. If further exploration shows that the oil and gas are in one reservoir, the oil has to be extracted first. Then a platform is required, Krutikhin noted. For the production of gas, a subsea production system will be necessary. Based on Gazprom’s list of import substitutions, only the American firms FMC Technologies, Cameron, GE Subsea, and Norwegian Aker produce such equipment.

“The liquefaction of gas also depends on imported technologies, so the sanctions apply to the Russian LNG projects,” stated Mikhail Korchemkin, the director of the East European Gas Analysis. Rosneft and ExxonMobil want to build the Far East LNG facility Gazprom-Baltic LNG. Novatek is building a plant on the Yamal Peninsula.

Representatives of the Ministry of Energy and Gazprom refused to comment. The spokesperson of the deputy prime minister, Arkady Dvorkovich, did not respond to a request from Vedomosti. Dnmitry Peskov, the presidential press secretary, told Interfax that the American sectoral sanctions against Russia lead to the destruction of bilateral relations. A representative of Shell stated that “we are working with the relevant government bodies to act in accordance with all of the trade measures and sanctions. We continue doing business in Russia and appreciate our relationship with our Russian business partners.”