The Russian oil and gas industry has been under pressure from sanctions for several years. The first sanctions against Russian oil and gas companies were imposed by the countries of the European Union and the United States in 2014. The restrictions affected the supply of equipment, provision of services and work on oil production in the Arctic and on the deep-sea shelf. Since then, the industry has developed in the paradigm of "import substitution" and the search for technological partners in Asian countries.
The oil and gas industry includes not only companies engaged in direct mining, but also a wide range of related activities — drilling, supply and repair of equipment, etc.
Oilfield services (geophysical surveys of wells, drilling support, field exploitation) were one of the most import-oriented industries at the time of the beginning of the sanctions pressure. The key players in this market were foreign companies Schlumberger, Baker Hughes, Halliburton. According to the Central Dispatching Department of the Fuel and Energy Complex (CDU of the Fuel and Energy Complex), in 2020, these companies accounted for up to 38% of hydraulic fracturing operations. In 2022, these companies limited their activities in Russia. For example, Schlumberger has stopped investing in local projects and suspended the deployment of technology in companies.
The oil and gas companies Shell and Wintershall Dea decided to withdraw from the Nord Stream 2 and Sakhalin-2 projects, and ExxonMobil from the Sakhalin—1 project, the only operator of which was at that time. The result was a sharp reduction in oil production at these projects, the freezing of the construction of liquefied natural gas (LNG) plants and the modernization of Russian refineries.
Fig.1 The volume of oil and natural gas production in the Russian Federation in 2018-2023.
Source: Rosstat
The dynamics of natural gas production in the Russian Federation allows us to conclude that the sanctions had a negative impact on the industry: European countries, which were the largest consumers of Russian gas, limited the volume of purchases.
In March 2023, Rosstat stopped publishing oil production data. A month earlier, the Government of the Russian Federation adopted amendments to the law "On Official Statistical Accounting and the System of State Statistics in the Russian Federation", according to which the specifics of access to official statistical information can be established, including in terms of temporary suspension of its provision and dissemination. Rosstat's closure of oil data reflects the general trend towards closing statistics in the face of sanctions pressure.
Parallel import
After the withdrawal of Western companies from the market, domestic companies are forced to look for new suppliers. Russia legalized parallel imports by Decree of the Government of the Russian Federation No. 506 dated March 29, 2022. According to this regulatory legal act, only original goods of certain categories and brands specified in the list of the order of the Ministry of Industry and Trade of the Russian Federation dated April 19, 2022 No. 1532 can be imported into the Russian Federation without the permission of the copyright holder. In February 2024, the list was supplemented with a number of items of mining and pumping equipment (in particular, Epiroc and Husqvarna brands).
At the same time, parallel imports have long been used in international trade between the United States and European Union countries. In the judicial practice of the United States, the "first sale doctrine" has been developed, according to which the resale of original goods is not a violation. However, it is not permissible to introduce goods intended for sale in other countries into use by third parties if those goods are significantly different from those intended for sale in the United States. In the European Union, products put into circulation by the right holder can be sold throughout the EU without restrictions. For example, importers resell goods purchased in countries with lower prices to countries where prices are higher. At the same time, the opposite situation may also be observed: exporters from countries with higher prices are forced to reduce the cost in order to expand the geography of supplies. Thus, parallel imports are supported by EU legislation as a tool for the formation and maintenance of a single market.
In the context of the legalization of parallel imports, China has strengthened its position as Russia's leading foreign trade partner. The growth in demand for Chinese products is caused, firstly, by significantly lower prices relative to European analogues, and secondly, by a wide range of manufactured equipment and components. Competitive prices for products are due to a developed system of measures to support exporters from the state.
Fig.2 Import of certain types of oil and gas equipment from China in 2018-2023, USD million
Source: UN Comtrade Database
According to the UN Comtrade world foreign trade database, imports of oil and gas equipment from China in 2023 increased significantly compared to 2022. The highest growth rates were noted in the segment of gas purification and filtration equipment (+120%). At the same time, the peak of imports of these products was noted in 2021, which was caused by an increase in demand for equipment for cleaning medical gases during the coronavirus pandemic. When analyzing imports for 7 months of 2024 relative to the same period last year, a similar trend can be noted — the volume of imports of equipment for filtration and purification of gases increased in value terms by 26%.
Fig.3 Import of certain types of oil and gas equipment from China for 7 months 2023-2024, USD million
Source: General Customs Administration of the People's Republic of China
The key suppliers of oil and gas equipment from China include the following companies:
- Norinco Vehicle and ZhenHua Oil (part of the Norinco holding) supply drilling equipment, oil and gas extraction equipment, oil pipes, and oilfield chemicals.
- KERUI Petroleum & Gas exports gas compressor, drilling and repair equipment, nitrogen production and injection units.
- CNPC manufactures drilling rigs, drill bits, geo-navigation systems, well tools, and drilling pumps.
- Sinopec Oilfield Equipment Corporation supplies hydraulic fracturing rigs, well servicing equipment, drilling bits and tools, well tools, oil pipes and gas compressors.
- Jereh Group has been ramping up shipments to Russia since 2014 after the first oil and gas sanctions were imposed, exporting shale drilling equipment and gas compressor units.
Import substitution potential
Sanctions pressure from Western countries and restrictions on technological cooperation with foreign equipment suppliers did not affect the decision of Russian oil and gas holdings to implement major investment projects. According to the Ministry of Industry and Trade of the Russian Federation, the share of domestic equipment in the oil and gas industry was about 40%, at the end of 2024, the agency estimates this figure at 70%. The restrictions have pushed the domestic industry to create new competitive technologies. Reducing import dependence on foreign equipment is embedded in the Doctrine of Energy Security and the Energy Strategy of the Russian Federation until 2035.
The degree of dependence on imported equipment varies in different product segments. According to the estimates of the oilfield services company Akros, this figure ranges from 80% in high-tech segments, such as intelligent well injection systems, systems for rotary controlled drilling, to 10% in low-tech segments of oil production, such as the separation of raw materials into fractions due to physical processes. At the legislative level in April 2023 The Government of the Russian Federation has identified priority areas for projects of technological sovereignty and structural adaptation of the Russian economy, the share of domestic equipment in which does not exceed 50%. The following segments are distinguished in oil and gas engineering: technologies for drilling and exploration, production of equipment for liquefied natural gas (LNG), transportation of oil and gas, processing of hydrocarbon raw materials, as well as equipment for the development of offshore and Arctic projects. According to the Central Department of Fuel and Energy Complex, currently there are about 90 hydraulic fracturing complexes of imported equipment in Russia, the service life of 80% of the complexes is 10 years or more, in the coming years they will need to be updated at the expense of domestic developments.
In the context of a reduction in pipeline gas supplies to Europe due to sanctions pressure, the development of production and export of liquefied natural gas is a promising direction. At the end of 2021 The Government of the Russian Federation has prepared a federal project "Breakthrough into LNG markets", the purpose of which is to provide Russian projects for the production of liquefied natural gas with domestic equipment and technologies, as well as guarantee the long-term technological independence of LNG production projects in Russia. The project passport notes that at the moment the share of domestic equipment in LNG production does not exceed 40%.
At the end of June 2024, the European Union countries approved the 14th package of sanctions restricting the transit of Russian liquefied natural gas. The restrictions relate to the re-export of fuel from the EU to third countries and apply both to transshipment from ship to ship and loading from ship to storage facilities on shore. The supply of liquefied natural gas for its consumption within the importing country is not subject to restrictions. In addition, new investments and the supply of equipment and services for the completion of the Murmansk LNG and Arctic-2 projects under construction are prohibited. These circumstances may lead to a deterioration in the forecast of the Ministry of Economic Development of the Russian Federation for the production of liquefied natural gas, according to which the level should reach 38 million tons in 2024. At the same time, if the EU countries refuse Russian gas, Turkey, Uzbekistan, Iran and India may become promising LNG consumers.
Fig.4 Volumes of liquefied natural gas production in the Russian Federation, 2018-2023, million tons
Source: Rosstat
The estimates of the Ministry of Industry and Trade of the Russian Federation regarding the substitution of foreign products are confirmed by Rosstat data. There has been a significant increase in the production of certain types of oil and gas equipment: in the production of drilling machines, output increased by 135%, in the production of equipment for filtration and purification of gases — by 29%, in the production of heat exchangers and gas liquefaction machines — by 17%. Rosstat calculates the volume of output of these types of equipment in value terms, therefore, to assess the impact of inflation on output, it is necessary to evaluate producer price indices for the products in question. According to Rosstat, the increase in producer prices for heat exchangers and gas liquefaction machines, equipment for filtration and purification of gases in 2023 compared to the same period last year amounted to +8%, for drilling machines — +12%. The excess of the increase in production volumes over the producer price index allows us to confirm the conclusion that domestic producers increased production volumes in volume terms.
Fig.5 Production volumes of certain types of oil and gas equipment in the Russian Federation, 2018-2023, billion rubles.
Source: Rosstat
The largest domestic manufacturers of the Russian Federation
Despite the sanctions restrictions, domestic manufacturers hold stable positions in a number of goods. According to the estimates of the Ministry of Energy of the Russian Federation, since 2014, Russian companies have localized more than 140 types of oil and gas equipment that were previously imported. Thus, KGRIOGENMASH JSC has mastered the production of natural gas liquefiers on a high-pressure throttle-ejector cycle and has established their supply to China. The company is implementing four projects for the construction of low-tonnage LNG plants in Russia. The BORETS Group of Companies has developed a submersible linear actuator for a plunger pump, which allows oil to be extracted in wells up to 4 km deep. IZHNEFTMASH JSC (part of the Rimera Group of Companies) has developed 8 types of equipment for underground mining since 2022.
