BP BP -6.12%
PLC’s abrupt unraveling of relations with Russia, which took 30 years to form, shows the growing risks Western companies face in doing business there – and the mess they can face to get out of it.
The British oil company announced on Sunday that it would sell its nearly 20% stake in Russian state oil company Rosneft, valued at around $14 billion at year-end, days after the invasion of Ukraine by Russia sparked an international outcry. Earlier this month, BP defended its longstanding partnership with Rosneft even as Russian President Vladimir Putin’s threats against its neighbor intensified.
The decision, which came under pressure from British government officials, surprised some investment analysts, who expected BP to try to ride out the turmoil or at least take more than a few days to figure out its future in Russia. It reflected the rapidly changing landscape for companies doing business in the country as condemnation of Russia increases around the world.
“From big companies like BP pulling out to liquor stores refusing to stock Russian vodka, the dominoes are falling,” said Jason Bordoff, founding director of Columbia University’s Center on Global Energy Policy. “If Russia continues its current invasion of Ukraine, it will simply not be acceptable for people in the international business community to do business with Russia.”
Now the big challenge facing BP, according to bankers and analysts, is getting something close to pre-invasion value for Rosneft’s stake. A foreign buyer might struggle to feel comfortable with the political and financial quagmire of wartime sanctions and Russia’s profile as a global pariah, they said.
“We thought it would be technically more difficult to exit the position, but they did,” Bernstein energy analyst Oswald Clint wrote in a client note Monday. “Military action in Ukraine means there is no choice when it comes to their exposure to a state enterprise.”
Some saw BP’s drop of as much as 7.7% on Monday, on top of a smaller drop last week, as evidence of investors’ calculations that BP could get very little return or even walk away. Based on Monday’s market reaction, Redburn Ltd. energy analyst Peter Low said, “In the minds of many investors, that value could be zero.”
BP opened an office in Moscow in 1990 and later that decade bought a stake in a Russian oil company. In 1998 BP formed an alliance with Rosneft and through subsequent agreements came to own 19.75% of Rosneft in 2013. Together they own three joint ventures which BP is also exiting.
Due to its stake in Rosneft, BP has had the most exposure to Russia among the oil and gas majors, but it is not alone. On Monday, the Norwegian energy group Equinor LIKE
A said he decided to stop new investments in Russia and start withdrawing from his Russian joint ventures after Moscow’s attack on Ukraine. It came a day after Norwegian government officials announced they would take steps to freeze and ban Russian assets from the country’s more than $1 trillion sovereign wealth fund.
The developments have intensified pressure on other energy companies to determine what they might do with their stakes in Russian energy projects. On Monday, the British oil major Shell SHEL -1.42%
PLC has announced that it will exit its joint ventures with Russian energy giant Gazprom PJSC,
citing Russia’s invasion of Ukraine. Shell also said it would end its involvement in financing Nord Stream 2, a gas pipeline project that Germany froze amid the Ukraine crisis. Shell’s Russian interests are smaller than those of BP, although the severing of ties with Nord Stream 2 also has international symbolic power. The pipeline has been at the center of debates over Europe’s dependence on Russian gas.
The French company TotalEnergies SE also has significant investments in Russia. The company did not respond to a request for comment on Monday.
BP officials said Putin’s February 24 invasion of Ukraine marked a turning point. It sparked a BP board meeting the next day and another on Sunday as the company considered how to respond.
Russia’s aggression “has led BP’s board of directors to conclude, after a thorough process, that our involvement with state-owned Rosneft simply cannot continue,” the BP chairman said on Sunday. Helge Lund. BP CEO Bernard Looney has resigned from Rosneft’s board with immediate effect.
Some analysts said the move was partly a relief, offering a justifiable break from the financially and reputationally volatile partnership with Russia. “Exposure to Russia has been a major overhang for stocks for years, so a clean exit is positive,” Bernstein’s Clint wrote.
“The timing and forced exit of Rosneft is less than ideal,” analysts at JPMorgan & Co. said in a note on Monday, but added that the loss of dividends from Rosneft’s stake could be offset by the end of BP’s “Russian overhang”.
Analysts also said the Russian business did not sit well with many investors looking for BP to accelerate its push towards low-carbon investments. Divesting Rosneft’s stake, while painful in the short term, helps clarify the company’s longer-term strategy, they said.
BP said it would take a financial hit of up to $25 billion, although its actual loss – even if it receives nothing for Rosneft’s stake – would be much smaller, analysts said.
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