Western Oil Companies, Facing New Demands, Find It Easier To Exit Russia

Loren Steffy, UH Energy Scholar

Western companies continue to abandon the Russian market in the wake of the Ukraine invasion, and their departures, combined with sanctions from the U.S. and its allies, have led to a growing economic isolation of Russia.

Perhaps most surprising among the exodus has been the voluntary departures of western oil companies. In late February, BP said it plans to sell its will sell its 20 percent stake in the Rosneft, the Russian national oil company. Shell announced it would exit its joint ventures in Russia and stop purchases of Russian oil on the spot market. And Exxon Mobil declared it would close its operations in Russia and exit the Sakhalin-1 project, which the company helped launch, amid much fanfare, in the mid-1990s.

All three companies maintained a presence in Russia even after U.S. sanctions imposed after Moscow’s 2014 annexation of Crimea.

In the years after the fall of the Soviet Union, Russia represented the next great hope for major oil companies. Its huge energy reserves, and its need for western oil technology, gave companies a chance to boost reserves at time they desperately needed them. At the same time, Russia welcomed the influx of foreign investment and technology.

“In the late 90s and early 2000s, there was a belief that Russia was going to globalize and westernize, adopt the rule of law, and that foreign investment was going to have huge benefits for the Russian people and democracy,” said Greg Bean, director of the Gutierrez Energy Management Institute at the University of Houston.

Over time, though, western oil companies scaled back their operations as more energy assets were taken over by the state or handed to people with close ties to Putin.

Houston-based ConocoPhillips, for example, which launched a project in northwestern Russia with Rosneft in 1992, sold its stake in the venture and stopped operating in the country in 2015.

“There isn’t much of an oil industry left over there,” said Bruce Mismore, the former chief financial officer for Yukos, once Russia’s second-largest oil company. “The BP play and the Conoco play were originally to put reserves on the books, but neither of them could exercise any level of control over the assets.”

In addition to the changes in Russia, though, oil companies face different demands these days. Investors are pushing companies to be more responsible, both environmentally and socially. BP, Shell and Exxon have all pledged to reduce their carbon footprints, and BP and Shell have adopted long-term strategies to shift from fossil fuel production to renewables.

The reputational risk of staying in Russia simply outweighed the financial benefits.

“Their businesses in Russia, even though they’re fairly decent size, are from a financial perspective pretty small,” Bean said.

Even so, they could be considered material. BP, for example, valued its Rosneft stake at $14 billion, and said it could lose another $11 billion in foreign exchange losses accumulated since 2013.

But it’s easier for companies like BP to abandon Russia now, because their interests there no long hold the promise they once did.

“They’re not really viewed as being a platform for any kind of growth — to the extent that you still want to grow oil and gas production, and I don’t think BP and Shell want to do that.”

With western companies more focused on carbon emissions these days, investment in Russian energy looks less attractive. Many of the country’s onshore fields are mature, the use of flaring remains extensive, and the oil and gas produced must be transported thousands of miles through pipelines — all of which produces unwanted carbon.

“Getting that out of your portfolio does help from a carbon intensity perspective,” Bean said.

The question, of course, is how much the western pullout will affect the Russian energy industry. Bean said that unlike oil companies in the U.S. and Europe, Russia is showing no signs of moving away from oil and gas production, in part because energy sales account for 60 percent of its gross domestic product. But it’s going to be harder for Russia to maintain production without technical support from western companies. Over the years, it’s relied on support of foreign companies for help in boosting production of mature onshore fields and developing new offshore plays such as Sakhalin-1.

“To the extent that they want to be the last man standing in this business 30 years from now, they lose access to expertise” they might need to remain a major producer, Bean said.

Divestment by major oil companies is just one aspect of the economic backlash Russia now faces. Some refiners are refusing to buy Russian oil and banks are balking at financing Russian energy shipments.

And while Europe depends on Russia for 40 percent of its natural gas, most of which is used for power generation, Misamore thinks it’s unlikely Putin will cut off the continent regardless of what other sanctions European nations impose. He can’t afford to alienate his best customers at a time when the Russian economy needs the money.

“If they cut it off, they just cut off 60 percent of their cash flow, and they can’t have that,” Misamore said. “They’ll try as hard as they can to keep the cash flowing through energy sales. Europe is dependent upon Russia, but Russia is dependent upon Europe. It’s a mutual threat.”

Misamore, who has been unable to return to Russia after Yukos’s assets were seized by the government, knows what it’s like to run afoul of Putin. While he has long believed that Putin is trying to reassemble the old Soviet empire, even he was surprised by the scale of the attack on Ukraine.

“I thought he would go after the two provinces they basically already controlled and make those part of Russia,” he said. Now, he believes that if Putin succeeds in gaining control of Ukraine, he will keep going, perhaps targeting Georgia or another former Soviet republic.

That doesn’t bode well for a global energy market that is already facing more tumult than its seen since the 1970s. So far, there’s little sign of relief. Saudi Arabia and the rest of OPEC remain committed to the modest production increases they agreed to before the invasion. But that could change. While OPEC members have been more disciplined about production quotas in recent years, the current upheaval could undermine their unity. The United Arab Emirates said this week it would push other OPEC members to boost production.

Such a boost, however, isn’t likely to come quickly. And while major oil companies may be leaving Russia, they are unlikely to boost production elsewhere. U.S. production is ramping up, and will likely hit a record 12.6 million barrels a day next year, but it won’t be enough to settle the markets in the short-term. Western oil companies may have found it easier to leave Russia than they once did, but their exist is likely to intensify the global economic fallout from the Ukraine invasion.

American consumers have few places to turn. The U.S. is considering lifting sanctions on Venezuela or even Iran, but those options simply overlook past atrocities because of present ones. The bottom line, as Pickering Energy Partners founder Dan Pickering noted recently, is if the U.S. doesn’t want to buy oil from bad actors, we can expect higher prices.

Loren Steffy is a writer-at-large for Texas Monthly, an executive producer for Rational Middle Media and a managing director for 30 Point Strategies, where he heads the 30 Point Press publishing imprint. He is the author of five nonfiction books: “Deconstructed: An Insider’s View of Illegal Immigration and the Building Trades” (with Stan Marek), “The Last Trial of T. Boone Pickens” (with Chrysta Castañeda), “George P. Mitchell: Fracking, Sustainability, and an Unorthodox Quest to Save the Planet, The Man Who Thought Like a Ship,” and “Drowning in Oil: BP and the Reckless Pursuit of of Profit.” His first novel, “The Big Empty,” was published in May 2021.

Steffy is the former business columnist for the Houston Chronicle and previously was the Dallas (and Houston) bureau chief and a senior writer for Bloomberg News. His award-winning writing has been published in newspapers and other publications worldwide. He has a bachelor’s degree in journalism from Texas A&M University.

UH Energy is the University of Houston’s hub for energy education, research and technology incubation, working to shape the energy future and forge new business approaches in the energy industry.