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March 2, 2022updated 03 Mar 2022 12:11pm

Counting the cost of owning Russian energy assets

Amid public and political pressure on oil companies over the Ukraine crisis, BP, Equinor, ExxonMobil and Shell have said they will exit their Russian assets. TotalEnergies has been more equivocal on its plans. How markets react will be telling.

By Adrian Murdoch

Helge Lund, chairman of BP, says Russia’s military action has caused a fundamental change in the oil company’s relationship with the country. (Photo by Christophe Morin/Bloomberg)
  • BP, Equinor, ExxonMobil and Shell have announced that they will unwind their businesses in Russia, but TotalEnergies has not gone so far. 
  • The market reaction to such developments has been arguably muted, with some investors publicly applauding the likes of BP and Shell.  
  • The mechanics of divestment and what the knock-on effect could be on oil companies’ sustainable investment remain to be seen.  

As international condemnation mounts against President Vladimir Putin’s invasion of Ukraine, investors and international corporations are busy cutting ties with Russia. Entertainment groups Disney, Sony and Warner Bros have halted film releases there, aerospace group Boeing has stopped training pilots in Moscow, and Visa and Mastercard have blocked Russian financial institutions from their payment networks. 

But it is the big oil majors feeling arguably the heaviest weight of public – and government – pressure to exit their estimated $70bn-plus of Russian holdings, likely at a huge loss. 

BP, Norway’s Equinor, Royal-Dutch Shell Group and ExxonMobil (in that order) have all unveiled major divestment decisions in the past few days, while France’s TotalEnergies yesterday put out a less definitive statement on its plans. The spotlight is now on other big players, such as US-based Chevron, that have not made clear their position.  

They will presumably be watching the market’s reaction to their peers’ moves and weighing that against the reputational (and arguably also commercial) cost of continuing to hold Russian assets. The knock-on effect on renewable energy development is also part of the equation.  

Divestment plans

Divestment is not mere virtue-signalling. BP’s move to exit its stake in oil company Rosneft – made amid strong pressure from the UK government – will cost the British group a great deal.

It will be “eye-wateringly expensive”, says Susannah Streeter, senior investment and markets analyst at UK investment platform Hargreaves Lansdown. BP’s stake was worth around $14bn at the end of last year, she estimates, and if dividends from the Russian business are taken into consideration the disposal could cost the company up to $25bn.  

Meanwhile, Shell’s Russian assets are worth $6bn, estimates Giacomo Romeo, equity analyst at investment bank Jefferies in London, while Equinor says its Russian assets totalled $1.2bn at the end of last year.   

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Yet the energy company with the biggest Russian holdings not to have unequivocally announced a withdrawal is TotalEnergies. It has a 19.4% stake in PAO Novatek, Russia’s largest producer of liquefied natural gas (LNG), 49% of oil and gas producer ZAO Terneftegas, 58.9% and 20% of the Termokarstovoye and Kharyaga oil fields, respectively, 29.7% of the Yamal LNG project and 21.6% of the Arctic LNG 2 project.  

To put that into perspective, TotalEnergies says that at the end of 2020 it held 24% of Russia’s proved reserves. Little wonder that the company admits in its annual report that via these holdings it “exercises significant influence”. 

It is difficult to break down the value of the company’s investments in Russia; it is not detailed in the company’s accounts. But TotalEnergies’ stake in PAO Novatek alone was valued at $10bn at the end of 2020 and Jefferies estimates that it could be as much as $40bn (see chart below). 

But while TotalEnergies put out a statement on Tuesday (1 March) condemning Russian military aggression, it made no comment about its current operations. The company said only that it would “no longer provide capital for new projects in Russia”. TotalEnergies shares ended the day down 2.7%.

Then, late on Tuesday, ExxonMobil made a statement saying it deplored the "Russian military action" and was beginning the process of discontinuing operations and developing steps to exit the Sakhalin 1 oil and gas project. Its 30% stake is worth $4.6bn, according to Exxon’s 2020 annual report. The group operates Sakhalin 1 on behalf of an international consortium of Japanese, Indian and Russian companies.

Meanwhile, Chevron holds a 15% stake in the Caspian Pipeline Consortium, which runs from Kazakhstan’s Tengiz field to the Novorossiysk 2 marine terminal on Russia’s Black Sea coast, and in which it had invested $2.6bn.

“We are monitoring developments. As always, we comply with all current applicable laws and regulations,” says Sally Jones, senior corporate external affairs advisor for the Middle East, Europe and Eurasia at Chevron.  

Energy traders also have significant exposure to Russia. Trafigura and Vitol, for example, are both invested in Rosneft’s Vostok Oil project to drill for an estimated six billion tonnes of high-quality crude oil in Siberia’s Taymyr province.  

Singapore-based Trafigura acquired 10% of the $8.2bn project in December 2020, while Dutch firm Vitol took a 5% stake in October last year. 

“We continue to closely monitor the situation and ensure any transactions we undertake to comply with applicable regulatory requirements and sanctions,” says Victoria Dix, global head of media relations for Trafigura.  

Vitol did not respond to Capital Monitor requests for comment. 

"Moral imperative"

Britain’s business and energy secretary Kwasi Kwarteng wrote on Twitter on 28 February that companies in general had “a strong moral imperative” to isolate Russia. 

One could argue that it is not for companies to make ethical decisions that might harm their share price. But they would be unwise to underestimate the potential reputational damage to companies still active in Russia – not to mention the future practicalities of doing such business.  

A case in point: NS Champion, a Russian-owned tanker, was banned from docking at Orkney oil terminal on Monday. Britain’s secretary of state for transport Grant Shapps has written to all UK ports asking them not to provide access to any Russian-flagged, registered, owned, controlled, chartered or operated vessels. 

BP has certainly made its rationale clear. Chairman Helge Lund said in a statement that military action had caused “a fundamental change” in the company’s relationship with the country, while chief executive Bernard Looney said the divestment was “the right thing to do”.  

Similarly, explaining Equinor’s decision to halt new investments into Russia and start exiting its joint ventures with Rosneft, president and chief executive Anders Opedal said: “In the current situation, we regard our position as untenable.” 

Then, in respect of Shell’s announcement that it intended to exit its joint ventures with majority state-owned energy company Gazprom, CEO Ben van Beurden said: “We cannot – and we will not – stand by."

Shell’s divestment will include the company’s 27.5% stake in the Sakhalin 2 LNG facility on Sakhalin Island, north of the Japanese archipelago in the Pacific Ocean, as well as its 50% stake in the Salym Petroleum Development and the Gydan energy venture – both in western Siberia.  

Susannah Streeter of Hargreaves Lansdown says BP disentangling itself from Rosneft could limit the extent to which it can continue to accelerate its transition. (Photo courtesy of Hargreaves Lansdown)

Shell also plans to end its involvement in the Nord Stream 2 natural gas pipeline project from Russia to Germany, in which it has a 10% stake.  

The impact on the share prices of the companies was less dramatic than might have been expected. Although BP’s share price on Monday (28 March) fell as much as 7% during the day, it recovered to finish the day down 3.95%, but fell 1.77% yesterday. Shell closed on Tuesday (1 March) down just 0.68% lower.  

Streeter says the initial reaction has been “pretty limited” given the scale of the impairment and suggests investors are factoring in “reputational damage of continuing to do business with Russia”. Indeed, the relatively mild share price falls – particularly for Shell – could be seen as “a vote of approval for this wave of corporate censure”, she adds. 

Adam Matthews, chief responsible investment officer for the Church of England Pensions Board’s £3bn ($4bn) in assets, certainly thinks so. In a LinkedIn post on 28 March he called Shell’s move the “right decision”.  

A hit for renewables?

Of course, managing these withdrawals will be no simple task. None of the companies that have said that they intend to leave Russia has given any indication of how they would do it.  

“Based on current market conditions, a private sale is more likely, but would probably require a material discount,” says Jefferies’ Romeo.  

The moves also pose a longer-term problem: Russian asset write-downs could throw a spanner in the works of the oil companies’ transition to renewable energy. BP disentangling itself from Rosneft could limit the extent to which it can continue to accelerate its transition, says Streeter.  

Campaigners have long targeted BP and Shell for dragging their feet on this front. This could be a concern now that – as European politicians and others have pointed out – the need to expand renewable power capacity is all the more urgent to reduce dependence on Russian fossil fuels. 

Ultimately, however, BP, Equinor and Shell have set hugely significant precedents showing that corporates can take huge commercial hits to their business with an eye on long-term sustainability – and investors may even applaud them for it. 

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