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US sanctions on Russian oil chief raise concerns for foreign companies, investors

FILE - In this Friday, Oct. 11, 2013 file photo CEO of state-controlled Russian oil company Rosneft Igor Sechin commissions new equipment at the Rosneft oil refinery in the Black Sea port of Tuapse, southern Russia. The U.S. Department of the Treasury on Monday, April 28, 2014, designated seven Russian government officials, including two key members of the Russian leadership’s inner circle, and 17 entities pursuant to Executive Order (E.O.) 13661. E.O. 13661 authorizes sanctions on, among others, officials of the Russian Government and any individual or entity that is owned or controlled by, that has acted for or on behalf of, or that has provided material or other support to, a senior Russian government official. Sechin is on the list. (AP Photo/RIA-Novosti, Alexei Nikolsky, Presidential Press Service, File)

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FILE - In this Friday, Oct. 11, 2013 file photo CEO of state-controlled Russian oil company Rosneft Igor Sechin commissions new equipment at the Rosneft oil refinery in the Black Sea port of Tuapse, southern Russia. The U.S. Department of the Treasury on Monday, April 28, 2014, designated seven Russian government officials, including two key members of the Russian leadership’s inner circle, and 17 entities pursuant to Executive Order (E.O.) 13661. E.O. 13661 authorizes sanctions on, among others, officials of the Russian Government and any individual or entity that is owned or controlled by, that has acted for or on behalf of, or that has provided material or other support to, a senior Russian government official. Sechin is on the list. (AP Photo/RIA-Novosti, Alexei Nikolsky, Presidential Press Service, File)

LONDON - U.S. sanctions targeting the president of Russia's largest oil company could complicate the operations of Western oil companies with important investments in Russia, such as BP and Exxon.

The sanctions target only Igor Sechin, the president of Rosneft, and not the company itself. That means BP, Exxon and others will be able to continue to work with Rosneft, one of the world's biggest oil companies, to explore for and produce oil and gas.

For now.

Analysts are worried that the sanctions by the U.S. against Sechin are a prelude to tougher ones against Rosneft. That could force Western oil companies to abandon or suspend their partnerships and some very ambitious oil exploration plans.

"(Sechin) perhaps may not be able to go shopping in Paris in the foreseeable future, but that is not the same thing as penalizing the actual company," says Pavel Molchanov, an energy analyst at Raymond James. "That could be the next step, though."

BP, based in London, owns a 20 per cent stake in Rosneft. ExxonMobil, based in Irving, Texas, has a broad agreement with Rosneft to explore for oil in the Russian arctic and across a wide region of western Siberia. Eni of Italy and Statoil of Norway also have deals with the Russian company.

Western investor-owned oil companies and Rosneft, which is controlled by the Kremlin, need each other. These companies are in a constant struggle to find more oil and gas to replace what they produce and sell every day. Russia is one of the few countries in the world that harbour vast reserves of untapped hydrocarbons.

But much of Russia's remaining oil and gas is expensive and difficult to reach, found either in the harsh climate of Arctic seas or trapped in tight rock onshore. Western companies have the capital and the technical expertise to help Rosneft produce that oil and gas — and generate cash that helps the Russian government fund its operations.

Adnan Vatansever, a senior lecturer at the Russia Institute at King's College London, estimates that half of Russia's federal revenue comes from oil and gas sales.

Sechin, like Putin a former KGB officer, has been president of Rosneft since the early 1990s. He is seen as the mastermind behind the 2003 takeover of the private oil company Yukos, whose founder, Mikhail Khodorkovsky, was jailed following disputes with the Kremlin. Rosneft seized Yukos' most valuable assets, making it Russia's largest company.

Targeting Sechin, a confidante of President Vladimir Putin, is seen as a warning shot, signalling that the West could also go after Russia's biggest companies if Moscow doesn't help to resolve the crisis in Ukraine.

The fact that such sanctions might have an impact on Western interests gives them more heft, said Philip Hanson, associate fellow in the Russia and Eurasia program at the think-tank Chatham House.

"Sanctions are a message," he said. "They are an instrument that are somewhere between pure diplomacy —talking — and warfare."

At the same time, Western governments also would prefer to avoid sacrificing important investments made by their own companies, or to disrupt oil and gas supplies in a way that would push energy prices higher around the world.

"The goal of these actions is not to punish energy companies, it's to get the Kremlin to think twice," says Molchanov.

Even sanctions against just Sechin complicate life for companies like BP. Because he's an American, BP CEO Bob Dudley may be barred from communicating with Sechin, raising practical questions about how they will continue to work together. For now, Dudley plans to continue to attend board meetings.

Exxon has signed agreements with Rosneft for "a series of multibillion-dollar exploration projects," the company says on its website. Molchanov wrote in a research note last week that Russia comprised 6 per cent of Exxon's oil and natural gas production in 2013.

Sanctions and the Ukrainian crisis are already having an impact on foreign companies, if indirectly. Fears that sanctions will slow the Russian economy have caused the ruble to drop sharply in recent months, cutting the value of Russian earnings and assets.

BP said its earnings from its stake in Rosneft fell sharply in the first quarter because of the ruble's decline. Earnings from BP's stake in Rosneft fell to $271 million in the quarter ended March from $1.08 billion during the fourth quarter of last year.

Another effect of the sanctions is that foreign investors are delaying or pulling out of deals in Russia out of concern that further sanctions or turmoil will unravel them.

"The general effect of restricting the flow of international credit to Russia has had quite a chilling effect not just to Russia itself but in the companies that deal with them," said Chatham House's Hanson.

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Fahey reported from New York.

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