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A Rhum deal: US sanctions threaten North Sea project

Uncertainty over US sanctions is causing jitters among oil and gas project developers

Just the threat of US sanctions against Iran and Russia is throwing oil and gas projects into doubt. The 22 May announcement that planned work would be postponed on the BP-operated Rhum field in the North Sea, in which the Iran's state-owned oil company has a 50% stake, comes hot on the heels of increased US pressure to halt the Nord Stream 2 gas pipeline from Russia to Europe.

The North Sea situation is a complex one, given BP is in the process of selling its operator's stake in the Rhum field to rising London-based minnow Serica Energy, which is acquiring it as part of the so-called BKR package of assets along with BP's adjacent Bruce and Keith fields. Between them, the fields account for around 5% of UK gas production

The plan was for BP to carry out work on the R3 well on Rhum, starting in late May, ahead of a transfer of all the assets to Serica at some point in the third quarter 2018. Butthe National Iranian Oil Company's stake in Rhum—which dates back four decades to the era of the shah—means BP must rely on renewal of a US government licence to enable it work with its partner US services firms, US personnel and US-sourced equipment. The same would apply to Serica in the future.

Thus far the Office of Foreign Assets Control (OFAC) license, which is issued by the US Treasury Department, has been regularly renewed. But uncertainty now surrounds the next renewal, for the period after the current license expires on September 30.

Meetings ahead

Both BP and Serica have applied for a license beyond that date, but meetings with OFAC, while scheduled for the next few weeks, have yet to take place. The fear is that the decision by US president Donald Trump to withdraw from the Iran nuclear pact and threaten to re-impose sanctions of Tehran could harm their prospects.

The companies are maintaining a positive stance. "Serica and BP are both committed to resolving the issue of US sanctions as they apply to Rhum with a view to enabling a timely completion of the BKR Transaction in the third quarter of 2018 and safeguarding ongoing operations. The deferral of work on the R3 well, pending resolution of the sanctions position, is not expected to impact the long-term recovery of Rhum reserves, nor the completion of the BKR Transaction," Serica said in a 22 May statement.

However, the work deferral does reflect concern over the outcome of the OFAC license talks—and the failure to grant one would hugely complicate future development, with neither company wanting to fall foul of the US authorities.

BP has much bigger operations in the US than in the North Sea these days and makes much more money from them—the US accounted for some 20% of its upstream profits in 2017. So, there will be little appetite among shareholders to rub Washington up the wrong way.

For its part, Serica is keen to push through the BKR deal, which would turn the company into a major player on the UK continental shelf. But analysts say working without an OFAC license would be a daunting prospect, even if the firm itself has no direct US interests. Firms with links to the US would still be reluctant to risk a run-in with the US government by working on the project, narrowing down considerably the choice of possible partners.

Nord Stream in US crosshairs

US rhetoric over potential sanctions is also fogging the outlook for the Nord Stream 2 gas pipeline project intended to bring more Russian gas to Europe by 2019.

In mid-May, Sandra Oudkirk, a US deputy assistant secretary of state, said the US would be "delighted" if the project was abandoned, saying it would increase Russia's "malign influence" in Europe. She suggested it could be sanctioned under existing legislation, which enabled the government to take action against Russian energy projects. The laws were introduced in 2017 following Russia's invasion of Ukraine and in response to Russia's alleged interference in the US election.

US opposition to the €9bn ($10.6bn) Nord Stream 2 project is nothing new and reflects the high geopolitical and commercial stakes surrounding the project. Washington is reluctant to see Russia gain a greater stranglehold over gas supply to Europe, and especially at the expense of Ukraine, whose transit pipelines could be bypassed if the northern route via the Baltic was expanded.

Blocking Nord Stream 2, which would have a capacity of 55bn cubic metres a year, could also benefit the US commercially, if that resulted in an increase in US liquefied natural gas imports into northern Europe. However, Oudkirk said ascribing the threat of US sanctions to that motivation would be "false".

For its part, the Nord Stream 2 consortium maintains that the pipeline would just be another in an increasingly diverse set of routes for gas to access European markets and, as such, would give the continent improved energy security, without giving Russia too much control over it. The group includes Russia's Gazprom, Shell, Engie, Austria's OMV and German-based Uniper and Wintershall.

"The notion that Russia could use gas as a weapon—even if it wanted to—is simply a hoax," the leaders of OMV, Uniper and Wintershall wrote in a jointly written article published in early May.

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