Russia's oil industry could suffer the biggest ever withdrawal of foreign investment in a short period.
What: BP and Equinor have both announced they will withdraw from Russia.
Why: Western majors have quit in light of Moscow's invasion of Ukraine.
What next: More IOCs face pressure to withdraw, and the exodus will leave Russia even more dependent on Russia for economic and political support.
International oil companies (IOCs) have started announcing plans to exit Russia, potentially marking the biggest ever withdrawal of foreign investment from the country’s oil and gas industry during such a short period.
BP calls time on Russia
BP was the first to unveil plans to pull out of Russia in light of Moscow’s invasion of Ukraine. The company has a 19.75% interest in Russia’s largest oil company Rosneft, run by influential Kremlin ally Igor Sechin. In an email to employees on February 27 seen by NewsBase, CEO Bernard Looney said that he had been “deeply shocked and saddened by the situation unfolding in Ukraine.”
“In the hours and days since military action began, we have been fundamentally rethinking our position with Rosneft,” Looney said.
BP plans to divest its shareholding in Rosneft, and until a buyer is secured, it will not include any production and profits from the Russian company in its results. Looney and former BP head Bob Dudley will also step down from Rosneft’s board.
In a statement online, BP said that having a stake in Rosneft no longer aligned with its business and strategy, and that a divestment was in the best long-term interests of shareholders. BP chairman Helge Lund made the UK major’s position on the Ukrainian conflict clear.
“Russia’s attack on Ukraine is an act of aggression which is having tragic consequences across the region,” he said. “This military action represents a fundamental change. It has led the BP board to conclude, after a thorough process, our involvement with Rosneft, a state-owned enterprise, simply cannot continue.”
BP also said it would withdraw from its various upstream joint ventures with Rosneft in Siberia. They include Taas-Yurakh, Yermak-Neftegaz and Kharampur.
BP has been working in Russia for over 30 years, having opened its first office in the country in 1990. Its biggest early upstream investment was the acquisition in 1997 of a 10% stake in Sidanco, which at the time was the country’s fourth-largest oil company. BP combined its various upstream assets in Russia with those of local investor TNK in 2003 to form TNK-BP. TNK-BP was sold in 2013 to Rosneft for $55bn, giving BP its current shareholding in the national oil company.
The relationship between BP and Rosneft lasted over the years because it was mutually beneficial. On the one hand, BP benefitted from Russia’s low-cost production, helping it drive growth elsewhere in its portfolio. The company had been banking on its Russian assets to generate the capital necessary to rapidly build up its energy transition business, under an ambitious strategy it unveiled in 2020.
On the other hand, Rosneft relied on BP for its advanced technology and equipment, its experience and its financial clout, which has helped it take projects forward that would otherwise be considered too complex or costly to develop.
Equinor follows suit
Rosneft has likewise reached out to Equinor to help it exploit some of Russia’s more challenging oil players. But the Norwegian company too decided to withdraw on February 28.
In a statement, Equinor CEO Anders Opedal said the company was “deeply troubled by the invasion of Ukraine, which represents a terrible setback for the world, and we are thinking of all those who are suffering because of the military action.”
The conflict in Ukraine has made Equinor’s activities in Russia “untenable,” he said. Not only will the company cease investing in the country, but it will also begin the process of withdrawing from its existing joint ventures there.
Equinor has been working in Russia since 2013, once again primarily with Rosneft. At the end of 2021 it had $1.2bn of assets in the country, from which it nets a combined 25,000 barrels of oil equivalent per day (boepd) in production. These assets include its joint ventures with Rosneft in east and west Siberia and in the Volga-Urals formation, and its 30% stake in the Zarubezhneft-operated Kharyaga production-sharing agreement (PSA) in the northern Timan-Pechora basin.
As was the case with BP, Equinor was attracted to Russia by its low-cost production. Without its support, Rosneft may struggle to maintain production at challenging North Komsomolskoye heavy oilfield in west Siberia, and may be unable to exploit the difficult-to-recover Domanik limestone oil formation, where the pair are currently undertaking a three-year pilot programme.
Shell next in line
Next in line was Shell, which said late on February 28 it was leaving its joint ventures with Gazprom. It is partnered with the Russian gas giant at the 10mn tonne per year (tpy) Sakhalin-2 LNG plant in the Russian Far East, and with Gazprom's oil arm Gazprom Neft at the Salym Petroleum oil development in west Siberia.
Shell played an integral role in jump-starting Russia's LNG sector. It was the original operator of the Sakhalin-2 LNG terminal, the country's first, with Gazprom only replacing it in the role when the project was midway through development. Gazprom had hoped for the company to play a role in its planned Baltic LNG terminal, but the partnership fell through in 2019 after Gazprom brought on board a partner at the project belonging to sanctioned Russian oligarch Arkady Rotenburg.
With BP, Equinor and Shell now gone, pressure will build on those IOCs that still have a significant presence in Russia. First and foremost is France’s TotalEnergies, which holds a 16% interest in Russia’s largest gas producer Novatek. The company is also an investor in Novatek’s 17mn tpy Yamal LNG plant, launched in late 2017, and its 20mn tpy Arctic LNG-2 plant. US major ExxonMobil, meanwhile, operates the Sakhalin-1 oilfields in the Far East, while German company Wintershall Dea is helping Gazprom develop deep gas reservoirs at the Urengoi field in west Siberia.
Neither TotalEnergies nor ExxonMobil have publicly stated they are considering a withdrawal from Russia. But severe Western sanctions against Russia imposed in response to the conflict in Ukraine will make operating there difficult, and the companies are likely to face sustained pressure from governments and NGOs to leave the country.
The next question is which, if any foreign investors will replace them. Indian companies are actively involved in Russia’s oil and gas industry, and New Delhi has been more reserved in its criticism of Russia’s invasion of Ukraine. But Chinese state companies seem more likely candidates.
Like Russia, China’s relationship with the West has grown more adversarial, albeit to a lesser extent, over its anti-democratic practices, alleged genocide of Uyghurs and intentions towards Hong Kong and Taiwan, among other issues. Russia and China have been keen to expand both their economic and political ties, as was evidenced during Russian President Vladimir Putin’s meeting in Beijing with Chinese counterpart Xi Jinping in February. Among the many deals signed during Putin’s trip, Gazprom and CNPC agreed on a new gas deal covering 10bn cubic metres of annual supply.
When relations with the West first collapsed in 2014, in the aftermath of annexation of Crimea, Putin proudly declared that Russia would make a pivot towards Asia. The success of this strategy lies in balancing out Western and Chinese interests. Isolated from Europe, Russia may find itself comfortably dependent on China, which will be sure to exploit its junior partner’s weakened state where it can.