Russian incursion changing world energy map beyond recognition

The Russian incursion into Ukraine is changing the world energy map beyond recognition, writes Brian Davis. Energy majors are offloading their stakes in Russian joint ventures and ceasing to do business with Russian companies, economic sanctions are being put in place, the oil price continues to climb and pressure is growing on US and European governments for a full Russian oil and gas embargo.

‘A week is a long time in politics.’ However, the news from Ukraine seems to be changing on an hourly basis.

In the early days of the invasion, Russian forces hit an oil depot near an air base in Vasylkiv near Kyiv, and blew up a gas pipeline in Kharkiv. While Russian-backed separatists in the eastern province of Luhansk claimed a Ukrainian missile had blown up an oil terminal in Rovenky.

BP exit from Russia could herald mass pull-out by Western oil majors
More recently, BP’s announcement on 27 February that it was offloading its 19.75% stake in Rosneft in response to the Russian invasion of Ukraine is triggering an avalanche of exits by other western oil companies, including Shell, involved in Russian oil and gas operations.

The British oil giant abandoned its stake in Rosneft after 30 years, in a move that could result in charges of up to $25bn. BP’s Chief Executive Bernard Looney and his predecessor Bob Dudley both resigned from Rosneft’s board after concluding BP can’t continue its involvement in the Russian oil company.

BP is the biggest foreign investor in Russia, but is by no means alone among Western companies with significant stakes in Russian operations. These include Shell, TotalEnergies, ExxonMobil, Equinor and Glencore.

UK Business Secretary Kwasi Kwarteng had expressed concern over BP’s links with Rosneft and welcomed the decision. For his part, BP’s Looney said: ‘I have been deeply shocked and saddened by the situation unfolding in the Ukraine and my heart goes out to everyone affected. It has caused us to fundamentally rethink BP’s position with Rosneft.’

What the BP action means
BP looks set to take an $11bn foreign exchange non-cash charge after the exit from Rosneft, and also expects a second non-cash charge of up to $14bn for the ‘carrying value’ of Rosneft. BP insists that the financial hit will not impact the short- and long-term financial targets within its well-publicised strategy to shift away from oil and gas to low carbon fuels and renewable energy.

Three joint ventures are currently underway with Rosneft and BP, including the Taas-Yuryakh oil project in eastern Siberia, which was expected to reach 100,000 b/d last year. BP also owns 49% of the Yermak Neftagaz onshore exploration programme in West Siberia and a 49% stake in the Kharampur project, a mature oil field where it was planned to extract gas. No buyers have been identified so far for BP’s Russian interests.

Norway pulls out, followed by Shell – who next?
BP’s move was followed a day later by the decision of Norway’s $1.3tn sovereign wealth fund to divest Russian assets worth $2.83bn in response to the Ukraine invasion. Meanwhile, Anders Opedal, President and CEO of Equinor, said: ‘In the current situation, we regard our position as untenable. We will now stop new investments into our Russian business, and we will start the process of exiting our joint ventures in a manner that is consistent with our values.’ Equinor has been in Russia for over 30 years and has a cooperation agreement with Rosneft, which it entered in 2012.

The same day, Shell severed all partnerships held with Gazprom and related entities, including its 27.5% stake in Sakhalin 2, one of the world’s largest integrated oil and gas projects. Sakhalin 2 is operated by Gazprom in a consortium with Shell and Mitsui and Mitsubishi of Japan. The field supplies about 4% of global LNG demand, mostly for Japan, South Korea and China.

Shell also holds a 10% stake worth $1bn in Gazprom’s controversial Nordstream 2 pipeline, which was scheduled to double the flow of gas from Russia to Germany before the German government pulled the plug last week by halting certification. Gazprom’s other European partners in the Nordstream pipeline – Uniper, Wintershall, Gasunie and Engie – are anticipated to follow Shell’s move.

Shell also has a 50% interest in a joint venture with Gazprom developing the Salym fields in western Siberia; and a 50:50 joint venture with the Russian company to explore and develop blocks in the Gydan peninsula in north-western Siberia. Shell did not give details of how or when it would exit the ventures.

TotalEnergies condemned Russia’s military aggression but stopped short on 1 March of joining BP and Shell in planning to exit ventures in oil and gas-rich Russia. The French company holds a 19.4% stake in Novatek, Russia’s largest producer of LNG and said it will ‘no longer provide capital for new projects in Russia’.

Many other western companies have operations in Russia which potentially face exit.

ExxonMobil has faced increasing pressure to sever ties with the country. Its subsidiary Exxon Neftgas holds a 30% stake in the vast Sakhalin 1 oil and gas project in the Russia Far East, which it has operated since 1995 on behalf of a consortium including Japanese and Indian partners as well as two affiliates of Rosneft. ExxonMobil previously partnered with Rosneft in exploration and research activities in Russia but withdrew from the joint venture after sanctions were imposed by the US and Europe following Russia’s annexation of Crimea in 2014. ExxonMobil’s Russian assets are currently valued at $4bn.

Chevron has a stake in the Caspian pipeline that transports crude from the Tengiz oil field in Kazakhstan to the Black Sea.

However, ConocoPhillips actually quit Russia in 2015 after 25 years of operation.

Commodity trading majors Trafigura and Vitol also have stakes in Rosneft oil projects, while Glencore has a 10% stake in Russian hydropower group EN+.

Meanwhile, the world waits to see if major US oilfield service companies Halliburton, Schlumberger and Baker Hughes will head for exit from significant Russian projects.

Oil prices continue to climb
Oil prices climbed higher on 28 February 2022, exceeding $100 for Brent crude. According to Rystad Energy’s Senior Oil Market Analyst Louise Dickson: ‘Oil prices climbed higher as the Ukraine conflict is nowhere near resolution and looks set to continue for some time.’

‘Russia’s energy supplies are very much at risk, either due to being withheld by Russia as a weapon or swiped off the market due to sanctions. Even with Russian and Ukrainian factions meeting at the border to discuss a military ceasefire, the fragile situation in the Ukraine and financial and energy sanctions across Russia will keep the energy crisis stoked and oil well above $100 in the near-term and even higher if the conflict escalates further,’ she adds.

What’s more, ‘continued fighting in the Ukraine itself put Black Sea trade at risk. And with 2mn b/d of Russia, Kazakh and Azeri oil passing through the Novorossiysk terminal daily, any disruption would have a direct upward risk premium. There is also immediate risk to the transport of Russian oil via the Druzhba pipeline, which can carry 1mn b/d of exports to Europe,’ Dickson suggests.

Unless there is a severe Russia-related supply disruption ahead of Wednesday’s OPEC+ meeting, Rystad Eenrgy does not expect Saudi Arabia, the United Arab Emirates and Iraq to lead the group and offer more supply to balance oil markets. However, the market analyst explains that OPEC+ barrels that are currently offline are of medium sour blend, and could substitute for the medium-sour Russian Urals blend if either pipeline or seaborne exports are disrupted.

Pressure grows on US and European governments for full Russian oil and gas embargo
Meanwhile, pressure on US and European governments to directly target Russia’s energy exports continues to grow, although market analysts still consider such an escalation of Western sanctions is unlikely given the potential for global economic damage.

Energy sanctions remain on the table, however, according to White House Press Secretary Jen Psaki on 27 February 2022, in a marked change of tone after Senior Biden officials have insisted they had all intention of carving out energy trades from any financial restrictions.

Some analysts believe the Biden administration might attempt ‘targeted political reductions’ in energy volumes, encouraging US buyers of Russian crude to find alternatives.

So far, Russian energy exports have escaped sanctions from US President Joe Biden, while he toughens economic sanctions on major Russian banks and cuts off the country from advanced technology like semiconductors. However, purchasing and selling Russian energy supplies are still allowed.

Biden recently told Bloomberg: ‘In our sanctions package, we specifically designed energy payments to continue. We are closely monitoring energy supplies for any disruption. We have been coordinating with major oil-producing and consuming countries toward our common interest to secure global energy supplies.’

Russia is one of the world’s biggest oil producers and a major exporter of energy and raw materials, from natural gas, oil and wheat to crop fertilisers and aluminium. Fearful of stoking inflation, central banks are weighing the risk of a need to hike interest rates against the risk of economic slowdown.

EU members met on 1 March 2022 to discuss response to US proposals for an emergency release of oil reserves in response to the crisis. However, member states are reported to be divided on whether the bloc should take part in a potential release, with EU law making any release conditional on strict criteria.

A Reuters report on 28 February 2022 said that Russian gas exports via Ukraine to Europe have so far ‘continued normally’. There is also concern that if Russia cut gas supplies to Europe it would be considered essentially ‘an act of war’.

Meanwhile, Germany is said to be considering building its first LNG terminals in a bid to break reliance on Russian gas imports. German Chancellor Olaf Scholz is reported by Reuters to have also floated the possibility of extending the life-spans of coal and nuclear to cut dependency on Russia. However, the authoritative EurActiv press agency says: ‘Keeping nuclear power plants online is being reviewed [by German politicians], but it may be unlikely… as the long-winded process of shutting down the country’s nuclear plants may have already progressed too far to be able to stop it, the operators of plants have warned.’

Russian vessels to be banned from UK ports
UK Transport Secretary Grant Shapps said on 28 February 2021 that Russian vessels will be banned from British ports ‘to ensure the Kremlin is not funding its war effort in the Ukraine with sales of oil and gas in the UK.’ 

The pledge came as Russian oil tankers were either docked or on the way to unload consignments in South Wales, Scotland and the Orkneys. As Shapps announced plans to bar any future arrivals, a Russian oil tanker was moored at Milford Haven in South Wales, while the Russian oil tanker NS Champion sought access to the Flotta oil terminal in the Orkney Islands.