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Sanctions pose greater threat to Russian oil production than low oil prices — Fitch

March 11, 2015, 18:21 UTC+3 MOSCOW

Russian oil companies can withstand oil at $55 a barrel for several years but companies may be unable to make the investments needed to maintain production if access to funding does not improve

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© Dmitry Rogulin/TASS

MOSCOW, March 11. /TASS/. Western sanctions and their impact on corporates’ funding pose a greater threat to Russia's oil production than the weak oil prices, Fitch rating agency said in a report Wednesday.

According to Fitch analysts, Russian oil companies can withstand oil at $55 a barrel for several years. "But if access to funding does not improve and export restrictions remain, producers may not be able to make the investments needed to maintain production," Fitch reported.

"Sanctions have virtually eliminated access to Western capital markets for all Russian oil and gas companies, not just those directly affected. Russian banks can offer some liquidity, but they rely on the state and the Central Bank of Russia for funding and capital to maintain their lending capacity. Banks are therefore likely to roll over existing debt, but substantial new funding is unlikely," the report said.

Analysts at Fitch expect the Russian government to approve at least some of the remaining requests to co-fund projects from Russia's sovereign wealth fund. They also expect more financing deals with Chinese banks and off-takers, and potentially more direct investment from Chinese companies.

"We do not believe the sanctions prohibiting the transfer of certain technologies and equipment to Russia will have a significant impact on near-term the country's oil and gas production," the report said, adding though that if it persists the prohibition will hurt Russian oil production in the medium term.

"A sharp increase in the use of technologies such as horizontal drilling and hydraulic fracturing has helped offset production declines from traditional brownfield sites. But it has also made Russia even more reliant on equipment from Western suppliers, with over 50% of oil equipment imported," analysts at Fitch said, adding that it would take several years for Russian manufacturers to be able to substitute most of the imported hardware.

Infographics Oil prices over 30 years

Oil prices over 30 years

Year-average inflation-adjusted oil price. Infographics by TASS

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