Big Oil’s Flight From Russian Entanglements Will Send Prices Higher

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The oil pump, industrial equipment

Fallout from the Russia/Ukraine crisis is dropping like so many bombs on big oil companies that had entered into various deals with Russian oil companies since the fall of the Soviet Union 1990. That fallout promises to create collateral damage of its own in the weeks and months to come, as production losses from the moves inevitably pile up, rendering an already-tight oil market constrained by years of under-investment in new reserves even less capable of meeting rising global demand.

BP was the first major Western oil firm to announce it would cancel Russian-based business ventures, warning investors last Sunday that it would incur 1st-quarter impairment charges of as much as $25 billion. The British oil company, formerly one of the real giants of the industry, purchased a 19.75% stake in Russian-controlled Rosneft. BP’s Rosneft holdings currently account for 50% of its oil reserves and a third of its global oil production. An interesting facet of those holdings is that BP does not actually own interests in product, but instead benefits as a result of a dividend paid by Rosneft. That dividend amounted to $640 million in 2021.

The holdings are currently valued at $14 billion but BP is also encumbered by a reported $11 billion in foreign exchange losses, according to the Wall Street Journal. Later in the week, Bloomberg reported that BP was considering selling its interest back to Rosneft at a highly-discounted price. Regardless of the final nature of the exit, the loss of these assets constitutes a big hit on a company that is already greatly diminished by the estimated losses of $80 to $100 billion resulting from the 2011 Deepwater Horizon oil spill in the Gulf of Mexico.

The other British major, Shell, followed on Monday with its own announcement of an exit from its various Russia-connected ventures. Those holdings include the controversial Nord Stream 2 pipeline, for which Shell contributed 10% of the €9.5 billion construction costs in the form of a loan. They also include a 27.5% stake in the Sakhalin 2 LNG plant, which is 50% owned and operated by Gazprom.

“We are shocked by the loss of life in Ukraine, which we deplore, resulting from a senseless act of military aggression which threatens European security,” Shell Chief Executive Ben van Beurden said in a release.

Shell also warned that its exit from its Russian investments would result in an impairment that some estimate to be as high as $3 billion.

ExxonMobil said on Tuesday that it would exit Russian projects and investments it values at $4 billion. Exxon currently operates large oil and gas production facilities at Sakhalin Island as part of a consortium that includes Rosneft. The operations there are also the site of a proposed multi-billion dollar LNG export facility. Obviously, Exxon’s departure puts the future of that facility in doubt.

“ExxonMobil supports the people of Ukraine as they seek to defend their freedom and determine their own future as a nation. We deplore Russia’s military action that violates the territorial integrity of Ukraine and endangers its people,” the company said in a statement.

In an interview with CNBC Tuesday, Chevron CEO Michael Wirth did not commit his company to pulling out of its Russia-related investments, which are comparatively small to its competitors. “A number of other companies had to take very difficult decisions. We have very little exposure to Russia as a company, but these are very difficult decisions to be made,” he told CNBC.

Norwegian major Equinor also said this week that it would start the process of canceling its comparatively small investments in Russian oil production, which currently amounts to about 30,000 barrels of production daily.

At the end of the day, all investments in Russia’s oil and gas sector by western companies over the last three decades must now be considered at risk. These major companies and others have provided Russia-based projects with infusions of much-needed capital and helped to enable that country to raise its national oil production to as high as 11 million barrels of oil per day.
The flight of that capital, combined with western sanctions that have steadily increased in their severity over the last two weeks, promise to strain Russia’s ability to maintain such high production levels and continue to meet its commitments under the OPEC+ agreement. That is a strain that an already-tight global market for crude – which saw the Brent price top $115 per barrel in early Thursday trading – can ill-afford.

Just one more of many reasons to believe that crude prices still have nowhere to go but up from here.

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