Future turns dark for Russia’s oil industry

A week after a chorus of Western executives from Exxon Mobil, BP, Shell and other companies denounced Moscow’s violent onslaught in Ukraine and pledged to pull their companies out of Russian ventures, it appears the turbulence for Russia’s energy industry has only begun.

For the oil companies, three decades of carefully nurturing investments in what was always a difficult political environment is poised to quickly go by the boards. But the high point of Western involvement in Russia passed years ago, pushed along in part by outrage over Moscow’s annexation of Crimea in 2014.

The Russian oil industry, though, is likely to experience a wrenching reworking about how it does business in the coming weeks, months and even years. In the short term, this painful reckoning will come not so much because blue-chip oil companies are leaving but because Russian oil and gas have suddenly become toxic to many buyers.

On Tuesday, President Joe Biden announced a ban on Russian oil imports to the United States, a move aimed at further penalizing Russia. Earlier in the day, Shell, Europe’s largest oil company, said it would stop buying the country’s oil and gas and “withdraw from its involvement in all Russian hydrocarbons.”

Until the invasion, Russian oil was a critical fuel in Europe and other markets, including the United States, where it made up about 7% of imports. Now the Russian crude known as Urals is being sold either at steep discounts to Brent crude, the international bench mark, or not at all. Beyond the United States, other countries are considering whether to impose embargoes on Russian energy imports.

The question that the Russian industry immediately faces is whether to throttle back production. Russia has been producing about 10% of the world’s oil supplies.

“There is no reason to produce more oil if you cannot sell it,” said Tatiana Mitrova, an expert on the Russian industry and a fellow at the Columbia Center on Global Energy Studies.

Russian companies will be shopping for new buyers in Asia and other regions where the outrage over Ukraine is less pronounced. Mitrova said that over time, “there will be a massive orientation of oil and gas flows from European markets, first of all to China.”

Mitrova said Russia would accelerate expansion of existing oil and gas pipelines to China.

In the longer term, though, the future of the Russian industry, which bankrolls a large portion of the government budget, has turned cloudy. China, for instance, is a hard bargainer that pays only a fraction of the price for Russian natural gas that customers in rich European countries like Germany and Italy are now paying.

And the output of the vast West Siberian oil fields and other older operations that have sustained Russia as a world-leading oil producer for decades is in decline.

New fields being developed by Russia around the Arctic are “notable for their harsh operating conditions and higher costs,” according to a recent study by Energy Aspects, a research firm.

In the past, Western companies have taken on difficult projects like offshore drilling and liquefied natural gas, or LNG, development while leaving the more plain-vanilla undertakings to Russian competitors.

Where the capital and know-how for these projects will come from is now open to question. The most high-profile of these developments, Vostok, which would sprawl across a vast northern region, “could be disrupted as U.S. and EU sanctions place growing pressure” on the Russian industry, the report said.

Exxon announced last week that it would wind down its involvement in a quarter-century-old oil and gas project on Sakhalin Island in the Russian Far East. | AFP-JIJI
Exxon announced last week that it would wind down its involvement in a quarter-century-old oil and gas project on Sakhalin Island in the Russian Far East. | AFP-JIJI

On March 2, Trafigura, a Singapore-based trading company that is financing part of Vostok, which is led by Rosneft, the state-controlled oil company, said it was “reviewing the options” regarding its 10%, 1.5 billion-euro shareholding in Vostok Oil, a vehicle for some of these developments.

Vostok, a North Sea-size group of projects, may be Russia’s hope for the coming years, but Mitrova and other specialists say the Russian industry could probably keep plugging along for some time even after the large companies have sold or otherwise disposed of their investments.

Of course, when the hundreds of Western technical experts and managers based in Russia leave, they will be missed, and the Russian industry could develop headaches trying to find high-tech spare parts and software updates.

Still, ventures involving Western companies account for only about 15% of Russian oil production, Mitrova figures. Russia has a large oil and gas industry with trained personnel who can operate most facilities, analysts say.

“It is very easy to find Russian technical people to work on these projects,” said Serkan Sahin, an analyst who follows Russian oil at Energy Aspects.

Well before the invasion of Ukraine, Western companies had largely stopped seeing Russia as a crucial part of their future.

In 2018, Exxon Mobil was forced to pull out of its most promising Russia venture, drilling in the Arctic, because of sanctions imposed after Russia annexed Crimea. Exxon announced last week that it would wind down its involvement in a quarter-century-old oil and gas project on Sakhalin Island in the Russian Far East. Shell is also on Sakhalin, where it is a minority shareholder in a liquefied natural gas venture, and it, too, said it would exit the investment.

BP has also been slowly exiting Russia. In 2013, it gave up on a joint venture called TNK-BP, which it had formed with a group of oligarchs 10 years earlier, selling it to Rosneft for $12.5 billion in cash and a nearly 20% stake that it was required to take in the state-controlled company.

The Rosneft holding was, until recently, too valuable to walk away from (BP pegged it at $14 billion at the end of 2021) but also increasingly uncomfortable for a Western giant steering away from oil, and its investors.

“I think it was an easy decision to make,” said Oswald Clint, an analyst at Bernstein, a research firm.

The glaring exception is TotalEnergies, the French company, which continued to invest in giant liquefied natural gas projects in the Russian Arctic after the Crimea sanctions were imposed.

TotalEnergies also owns nearly one-fifth of Novatek, a Russian natural gas producer that is the main owner of the Arctic installations. TotalEnergies said recently that it would not invest in new projects in Russia, but it seems to be digging in on the LNG ventures – one of which is not expected to start producing until 2023.

There is of course the question of whether the oil companies will really leave. They have not sold anything yet, and if Vladimir Putin, the Russian president, decided to stop the war and was rehabilitated, they might be persuaded to change their minds.

On the other hand, there is little reason to think that they would make announcements involving billions of dollars of investments without carefully considering the consequences. Putin and his associates follow the oil industry closely and are unlikely to look kindly on companies and executives that abandoned him at one of his most difficult moments.

© 2022 The New York Times Company

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