Russia’s recognition of two breakaway regions in eastern Ukraine could threaten key investments from Western oil giants and push up global energy prices further in the coming weeks.
Since the last days of the Cold War, Russia’s energy-based economy has become entwined with Europe’s. European energy companies such as BP, TotalEnergies and Shell have major operations and investments in Russia. Although the expansion of those holdings was largely halted after the annexation of Crimea by Russia in 2014, they remain important centers of profit and are now at risk.
To isolate President Vladimir V. Putin from Russia, President Biden and the European Union on Tuesday imposed new sanctions on the Russian government and the country’s political and business elite. The measures are not directly aimed at the energy sector. As a result, oil and gas prices rose only modestly on Tuesday afternoon in New York.
But analysts said the energy industry could still be damaged if the crisis drags on, especially if Mr Putin decides to send troops to the rest of Ukraine or take over the capital Kiev. Such an aggressive move would most likely force Mr. Biden and other Western leaders to step up their response.
European leaders are already targeting some of Russia’s energy exports. Chancellor Olaf Scholz said on Tuesday that Germany is suspending certification of the Nord Stream 2 pipeline, which is to supply Russian gas. The decision has no direct consequences for the European energy supply because the pipeline is not yet operational. But Russian gas shipments through Ukraine could be halted, especially if Putin’s forces push further into Ukraine or if he cuts off gas supplies to Europe in retaliation for Western sanctions.
Russia supplies one in ten barrels of oil used around the world. After Western officials said Russian troops had penetrated eastern Ukrainian regions controlled by separatists, oil prices rocketed to nearly $100 a barrel on Tuesday, the highest level in more than seven years, before moderating.
Energy experts say the oil price could easily rise another $20 a barrel if Mr Putin wants to occupy more or all of Ukraine. Such an outcome would also pose huge problems for Western oil companies doing business in Russia.
“In that environment, the legal and reputational risks faced by Western energy companies operating in Russia will greatly increase,” said Robert McNally, who was an energy adviser to President George W. Bush and now president of the Rapidan Energy Group, a consulting firm. . “For oil markets, this means slower supply growth and even tighter global balances and higher prices in the coming years.”
TotalEnergies, based near Paris, owns nearly 20 percent of Novatek, Russia’s largest liquefied gas company, and Shell has a strategic alliance with Gazprom, Russia’s natural gas monopoly.
The western oil company most closely involved with Russia is BP, which owns nearly 20 percent of Rosneft, the state-controlled energy company managed by Igor Sechin, who is widely regarded as a close ally and adviser to Putin. BP’s director Bernard Looney and his former director Bob Dudley sit on Rosneft’s board of directors with Mr Sechin and Alexander Novak, Russia’s deputy prime minister.
Rosneft contributed $2.4 billion in profits and $600 million in dividends to BP in 2021 and has a secondary listing on the London Stock Exchange. About a third of BP’s oil production, or 1.1 million barrels per day, came from Russia last year.
BP executives have so far expressed their composure. “We’ve been around for over 30 years and our job is to focus on our business, and that’s what we do,” said Mr. Looney in a recent conference call with analysts. “If something comes on the road, then of course we will handle it as it comes.”
Most oil companies report huge profits due to rising oil and gas prices. European companies use part of their profits to invest more in wind, solar, hydrogen and other forms of cleaner energy. But the current crisis could be a major distraction, if not worse.
Doing business in Russia has always been complicated, especially as Mr Putin reaffirmed state control over energy and pressured private investors.
Shell was forced to relinquish control of its main Russian liquefied gas project on Sakhalin Island, in eastern Russia, to Gazprom in 2006. Shell will retain a modest stake in the facility and appear to be looking to keep the door open for more business in Russia. Along with four other European companies, it helped fund the Nord Stream 2 pipeline worth an estimated $11 billion to Germany.
TotalEnergies has continued to invest in a $27 billion natural gas complex on the Yamal Peninsula, in the Arctic, which Novatek manages. The project circumvented previous Western sanctions by obtaining funding from Chinese banks. It started producing gas for European and Asian customers in 2017.
Share prices of BP and Total closed more than 2 percent lower on Tuesday and Shell lost about 1 percent.
The prospects for Western oil companies looking to do business in Russia were once much brighter. Exxon Mobil, Italy’s ENI and other foreign oil companies partnered with Rosneft in 2012 and 2013 to explore the Arctic oil and gas fields.
But US and European Union sanctions imposed after Russia’s seizure of Crimea forced many Western companies to stop expanding in Russia, in part by limiting access to funding and technology for deepwater research.
Exxon formally relinquished exploration ventures with Rosneft in 2018 and suffered a $200 million after-tax loss.
Understand how the crisis in Ukraine developed
Ben Cahill, an energy analyst at the Center for Strategic and International Studies in Washington, said tougher and broader sanctions could be in the works.
“It is possible that new sanctions will deter Russia from moving to areas like hydrogen that are part of the long-term diversification,” he said. Sanctions could make life difficult for foreign companies like BP and Shell if they target the oilfield services sector and block equipment they need for operations in Russia.
Russia is the world’s third largest oil producer and the second largest natural gas producer. So any crisis involving it will undoubtedly rock energy markets and the global economy.
Besides Russia itself, Europe will bear the brunt of the pain. More than a third of Europe’s gas supplies come from Russia at a time when reserves are low and prices are high. Half of Russia’s five million barrels of oil exports per day go to Europe. A much more modest 700,000 barrels per day go to the United States.
But energy experts say the crisis would have been worse about 20 years ago, before the United States released massive amounts of oil and natural gas from hydraulic fracturing shale. Russia’s occupation of Crimea also encouraged Europe to build several major terminals it needed to import more liquefied natural gas, and many more are planned as US energy companies build terminals to export more gas.
“The crisis this year isn’t as bad as it could have been,” said Amy Myers Jaffe, an energy expert at Tufts University’s Fletcher School.
She added that Putin’s aggressive moves in Ukraine could backfire by eroding Russia’s importance as an energy supplier to Europe. “We’re going to see more of those steps and policies and an increase in renewables,” she said.
Yet European gas prices are about four times higher than a year ago, forcing consumers and businesses to pay more for electricity and heat. And the opportunity to tap Russia’s vast energy resources is shrinking with each escalation.
“If Russia moves troops outside their line of control, it’s hard to imagine a Western company going to be allowed to do additional exploration and production in Russia,” said David L. Goldwyn, who served as a senior energy diplomat at the State Department. . under President Barack Obama.