Russia’s move in Ukraine makes prices and energy companies unstable

Russia’s recognition of two breakaway regions in eastern Ukraine could threaten key investments by Western oil giants and continue to drive up global energy prices over the next few weeks.

Since the closing days of the Cold War, Russia’s energy-based economy has become closely tied to Europe’s. European energy companies such as BP, TotalEnergies and Shell have large operations and investments in Russia. Although the expansion of those holdings was largely halted after Russia annexed Crimea in 2014, they are still important profit centers and can now be at risk.

Seeking to isolate President Vladimir V. Putin of Russia, President Biden and the European Union impose new sanctions about the Russian government and the country’s political and business circles on Tuesday. The measures do not target the energy sector directly. That’s why oil and gas prices were just slightly higher on Tuesday afternoon in New York.

But analysts say the energy sector could still be hurt if the crisis drags on, especially if Putin decides to send troops to the rest of Ukraine or seek control of the capital, Kyiv. . Such aggression will most likely force Mr. Biden and other Western leaders to regroup their responses.

European leaders have targeted some of Russia’s energy exports. Chancellor Olaf Scholz on Tuesday said Germany would stop certifying the Nord Stream 2 pipeline, which is believed to supply Russian gas. The decision will not have an immediate impact on Europe’s energy supplies as the pipeline is not yet operational. However, Russian gas shipments through Ukraine could be halted, especially if Putin’s troops move further into Ukraine or if he cuts gas to Europe in retaliation for Western sanctions. .

Russia supplies one out of every 10 barrels of oil used around the world. After Western officials said Russian troops had entered separatist-held areas of eastern Ukraine, oil prices briefly spiked early Tuesday to nearly $100 a barrel, the highest ever. for more than seven years, prior to adjustment.

Energy experts say oil prices could easily rise by $20 a barrel if Putin seeks to capture more or all of Ukraine. Such an outcome would also cause major problems for Western oil companies doing business in Russia.

“In that environment, there are legal and reputational risks that energy companies take on,” said Robert McNally, who served as an energy adviser to President George W. Bush and is now president of Rapidan Energy Group. Western activities in Russia face will increase sharply. steadiness. “For oil markets, this means slower supply growth and an even tighter global balance and higher prices in the years to come.”

TotalEnergies, based near Paris, owns nearly 20% of Novatek, Russia’s largest liquefied natural gas company, and Shell has a strategic alliance with Gazprom, the Russian natural gas monopoly.

The Western oil company most associated with Russia is BP, which owns nearly 20% of Rosneft, the state-run energy company managed by Igor Sechin, who is seen by many as an ally and Putin’s close adviser. BP CEO Bernard Looney and former chief executive Bob Dudley sit on Rosneft’s board along 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 bpd, came from Russia last year.

BP executives have so far remained calm. “We’ve been there for over 30 years and our job is to stay focused on our business and that’s what we’re doing,” Mr. Looney said in a recent conference call with fellow executives. analyst. “If something happens on the road, then obviously we’ll deal with it when it comes.”

Most oil and gas companies have reported bumper profits due to rising oil and gas prices. European companies are using a portion of their profits to invest more in wind, solar, hydrogen and other cleaner forms of energy. But the current crisis could be a major distraction, if not worse.

Doing business in Russia has always been complicated, especially as Putin reasserted state control over energy, squeezing private investors.

Shell was forced to relinquish control of Russia’s flagship liquefied natural gas project on Sakhalin Island, eastern Russia, to Gazprom in 2006. Shell retains a modest stake in the facility and seems to want to open the door for more business. in Russia. Along with four other European companies, it helped fund an estimated $11 billion Nord Stream 2 pipeline to Germany.

TotalEnergies has continued to invest in a $27 billion natural gas complex in the Yamal Peninsula, in the Arctic, that Novatek controls. The project has bypassed previous Western sanctions by receiving funding from Chinese banks. It started producing gas for European and Asian customers in 2017.

Shares of BP and Total closed Tuesday down more than 2%, and Shell fell about 1%.

The outlook for Western oil companies looking to do business in Russia used to be a lot brighter. Exxon Mobil, Italy’s ENI and other foreign oil companies partnered with Rosneft in 2012 and 2013 to explore oil and gas fields in the Arctic.

But US and European Union sanctions imposed after Russia’s occupation of Crimea forced many Western companies to stop expanding their operations in Russia in part due to limited access to finance and technology for exploration. deep water.

Exxon officially abandoned its exploratory joint venture with Rosneft in 2018 and suffered an after-tax loss of $200 million.

Ben Cahill, an energy analyst at the Center for Strategic and International Studies in Washington, said stronger and broader sanctions are likely to be introduced.

“It is possible that the new sanctions will try to prevent Russia from entering areas such as hydrogen, part of its long-term diversification,” he said. “Sanctions could make it difficult for foreign companies like BP and Shell if they target the oilfield services sector and the block of equipment they need to operate in Russia.”

Russia is the world’s third largest oil producer and second largest natural gas producer. So any crisis related to it could affect energy markets and the global economy.

Besides Russia itself, Europe will feel the brunt of the pain. Almost 30% of Europe’s gas supply comes from Russia at a time when reserves were small and prices were high. Half of Russia’s 5 million barrels of oil exports per day go to Europe. About 700,000 bpd arriving in the United States was much more modest.

But energy experts say the crisis will be worse than it was about 20 years ago, before the United States released large amounts of oil and natural gas from the hydraulic fracturing of shale. Russia’s occupation of Crimea has also encouraged Europe to build some of the major terminals it needs to import more liquefied gas, and more are planned as American energy companies build new ones. gas to export more gas.

“This year’s crisis isn’t as bad as it could be,” said Amy Myers Jaffe, an energy expert at the Fletcher School at Tufts University.

She added that Putin’s aggressive moves in Ukraine could backfire by eroding Russia’s importance as an energy supplier to Europe. “We will be looking at more of those steps and policies as well as an increase in renewable energy,” she said.

However, gas prices in Europe are still nearly four times higher than they were a year ago, forcing consumers and businesses to pay more for electricity and heat. And Russia’s ability to tap into its vast energy resources becomes less and less likely with every escalation.

“If Russia moves troops beyond its control, it is hard to imagine that any Western company would be able to see it,” said David L. Goldwyn, a former senior energy diplomat at the US State Department. additional exploration and production permits in Russia. under President Barack Obama. Russia’s move in Ukraine makes prices and energy companies unstable

Fry Electronics Team

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