Oil companies head for Russia’s exit door
First it was BP, announcing on 27 February it was exiting its near 20% stake in Russia’s Rosneft – and taking an estimated $25bn hit in the process.
Then it was Equinor one day later, the Norwegian company announcing a retreat from its Russian joint ventures and the cessation of all new investments in the country.
Next came Shell. On 28 January, the major said it would exit its joint ventures with Gazprom and related entities, including a 27.5% stake in the Sakhalin-2 liquefied natural gas facility and a 50% stake in the Salym Petroleum Development and Gydan ventures. Shell will also halt its involvement in the Nord Stream 2 gas pipeline project. Shell’s Russian holdings were valued at about $3bn at end-2021.
Then it was TotalEnergies – holder of a 19.4% stake in Russia’s second-largest gas producer, the non-state Novatek – which said it would no longer provide capital for new projects in Russia (though crucially, it did not announce any exit from its Russian positions).
Of the big majors with Russian “skin” in the game, ExxonMobil is the latest to signal its departure. The US supermajor said on 1 March that it would exit Russian oil and gas operations that it has valued at more than $4 billion and halt new investment
The scramble to unwind Russia could leave one of the world’s largest oil and gas producers without the active presence or participation – and capital -- of any foreign major.
The ramifications of all this cannot be overemphasized. Russia is the world’s third-largest producer of petroleum and other liquids (after the US and Saudi Arabia), with an annual average of 11 million barrels per day (b/d).
Production has been tacked up higher still this year. Russian oil production increased to 11.05m b/d from the start of February, according to data cited by Reuters.
Moscow has been hiking output in concert with the OPEC+ producer group in response to the global post-Covid demand recovery.
At face value, the IOC divestment process should not overly trouble Russia – given that the current sanctions regime does not explicitly target its oil and gas exports. Furthermore, domestic companies dominate domestic output, with about 81% of its total crude oil production in 2020 emanating from the likes of Rosneft, Lukoil, Surgutneftegas, Gazprom, and Tatneft.
Many of these companies are busy with expansion programmes. Gazprom Neft – the gas giant’s oil producing arm – has this year achieved its strategic goal of more than doubling its oil output and reaching annual production of 2m b/d. It is planning to boost production by 5% annually in 2023 and 2024, to reach 2.6m b/d by 2025.
But although Russian oil and gas production has not been hit hard by international sanctions, Russia’s hydrocarbons industry remains vulnerable to outside pressure. That is why the majors signaled their departures.
Gamechanger
Reuters deemed the BP exit as representing “the boldest step yet by a Western oil company with operations in Russia.” It certainly comes as a major blow to BP’s operations and finances. BP reported profits of more than $2.4bn from its interest in Rosneft – delivering a healthy $640m in dividends to shareholders.
There are three main BP JVs with Rosneft covering upstream oil and gas.
Yuryakh oil project in eastern Siberia, producing about 100,000 b/d. Another is the Yermak Neftegaz JV which is conducting onshore exploration over about 260,000 km2 in the West Siberian and Yenisey-Khatanga basins.The third covers the mature Kharampur oilfield, where the partners were planning to produce gas and double crude output. Some of those projects will lose serious momentum through BP’s departure.
But perhaps more significant still is that Rosneft was meant to play a core role in helping support BP’s hydrocarbons development, as it continues its transition to net zero.
Russia accounts for nearly 55% of BP's proved liquids reserves, 44% of its proved gas reserves and about one-third of its oil and gas production. Critically, these are low cost barrels – with average lifting costs estimated at less than half of BP’s internal target of $6/b by 2025.
The fuller reaction from Russia to the BP decision is keenly awaited. A terse statement on news agency Novosti stated only that BP’s decision “destroys a successful 30-year co-operation”.
The move may have come as a surprise to the Kremlin, but BP is taking the long view on this. As its chairman Helge Lund said, the decision is “in the best long-term interests of all our shareholders.” The BP board had concluded, after a thorough process, that its involvement with Rosneft simply could not continue.
Estimates suggest that abandoning that Rosneft stake could cost it $25bn – including the $14bn carrying value of its holding. Rosneft’s importance to BP was only likely to have increased as the company continued its programme of asset sales in global oil and gas.
BP chiefs will be knuckling down on what to do with its global hydrocarbons portfolio, now it has lost 40% of forecast equity output in 2030. Shell will feel the pinch from the loss of Sakhalin-2 LNG.
What of ExxonMobil, which employs about 700 Russian nationals and has five major sites and production locations? Though its Russian assets, valued at $4bn are high, in overall production terms it doesn’t leave a huge dent, given that it accounts for just 2% of its total fossil fuel assets. Losing those would not devastate the company’s balance sheet or operations.
Nonetheless, Exxon will no longer oversee oil and gas production facilities on Sakhalin Island in the Far East, placing the future of the planned LNG plant there in doubt.
TotalEnergies – together with BP – is most exposed to Russia, which may explain its decision not to announce any sell-down in its local operations. The French major has a 20% interest in the Yamal LNG venture and 21.6% in the Arctic LNG 2 project. But it will argue that its local operations are with Novatek, which does not have formal links to the Russian state. It will hope that will insulate it from further pressure. That remains to be seen.
Industry challenge
But the Russian exits present a major challenge for an oil and gas industry already reeling from the pressure of the energy transition.
Though short-term side-benefits such as higher oil prices will help ease the pain, the disruption will inevitably affect upstream projects and plans.
Rosneft's planned projects are configured under the Vostok Oil special purpose production in the next few years. In turn, these form an important part of the country’s OPEC+ strategy.
According to the US Department of Energy’s Energy Information Administration, declining output from Russia’s more mature fields (primarily in Western Siberia, Russia’s largest oil producing region) was set to offset the production growth coming from greenfield development, which may result in Russia’s crude oil production declining by the end of the 2020s.
Collectively, the Vostok fields could potentially produce about 1-2m b/d at peak production. But as the EIA notes, much of the infrastructure required to fully develop the project into an industrial hub still needs to be built.
The significance goes beyond what happens in Russia. For if Russian production growth is challenged, the question will be asked as to where the world will source much needed organic barrels in the 2020s.
That could provide fresh impetus to global IOCs’ operations that had previously been subject to mothballing or given a lower prioritization – again, in line with the added focus on moving to net zero.
Pressure may increase for North Sea offshore projects to be given renewed investment focus. The UK industry lobby group OGUK predicts that UK gas production will decline 75% by 2030 unless new fields are opened. It says that geological surveys show that many such fields remain, and are estimated to contain oil and gas equivalent to 10-20bn barrels of oil - enough to sustain production for 10-20 years.
That may go against the grain of Western energy strategy, particularly in the wake of Cop26. But given the capacity of events in Russia to surprise even seasoned Kremlin watchers, the possibility of a renaissance in hydrocarbons projects in areas such as the North Sea cannot be disuotned.
As OGUK Energy Policy Manager Will Webster argued: “In the longer term, if UK gas production is allowed to fall as predicted, then our energy supplies will become ever more vulnerable to global events over which we have no control – as we now see happening with Russia’s threatened invasion of Ukraine.”
James Gavin
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