Obama’s sanctions on Russian oil as an incentive to cut wasteful spending

This past Thursday, the US Department of the Treasury announced that

John E. Smith will be leaving his position as Director of the Office of Foreign Assets Control (OFAC) in early May. Mr. Smith has served as OFAC’s Director/Acting Director since February 2015 and has been with OFAC for over 11 years, previously serving as its Deputy Director and as an Associate Director.

Smith testified before a House subcommittee last November, speaking of the sanctions against Russia imposed by Obama’s administration and expanded by Trump’s, but not yet the April 2018 round, obviously:

Our sanctions against Russia are having an impact. In October, Russian oil company Rosneft announced a hold on a major South Black Sea oil project, citing sanctions as limiting its ability to obtain modern extraction technology and equipment.

Well, OK. I can see some missed opportunities from this project. Rosneft’s offshore JV with a global major could help the Russians acquire advanced production technology and, more importantly, engineering expertise, which could then spill over or seep through to other sectors.

But let’s not forget that companies like Rosneft – huge and state-controlled – have a weakness for spectacular, colossal, politically significant projects. Back in October 2017, with Brent at $55 per barrel, it was not at all clear that a deepwater project would yield a decent return on capital. Yes, Black Sea is a much more attractive location than the Laptev Sea in terms of construction, operating, and transportation costs. But no, it was not obvious that at least some of the money budgeted for the Black Sea project shouldn’t have been allocated, say, to developing tight and unconventional reservoirs in European Russia.

In other words, the sanctions cited by John Smith as “having an impact” may have improved capital discipline at Rosneft and helped it avoid suboptimal capital spending.

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