Selling Russia isn’t as painful for the Western oil and gas supermajors as the scale of their writedowns suggests. But this will further diminish their global relevance compared to the real giants of the fossil fuel industry today: the state-controlled national oil companies.
As the global response to Russia’s invasion of Ukraine intensified, independent oil and gas companies headed for the exit. Exxon Mobil XOM 2.91%
became the latest shoe to drop on Tuesday night, after BP,
Equinor EQNR 1.07%
Given the shortage of buyers and the complexity of selling in a sanctions web, they will likely have to write down or even write off a total of $22 billion in assets.
The lion’s share of that is BP’s 19.75% stake in Rosneft,
with a book value of $14 billion. It accounted for around half of the British company’s reserved oil and gas reserves and a third of its oil production, but only around 3% of its cash flow over the past four years. Exxon Mobil has $4 billion in Russian assets, mostly in an oil and gas facility it operates on the island of Sakhalin in Russia’s Far East.
Shell’s $3 billion includes joint ventures with gas export giant Gazprom and a stake in its mothballed Nord Stream 2 gas pipeline. Equinor held $1.2 billion in Russian joint ventures with Rosneft. French supermajor TotalEnergies had said it would not invest in new Russian projects, but did not mention selling existing assets. He is now under political pressure at home to do more.
Investors seem relatively optimistic. BP’s stock is down just 1.4% this week, representing just over $1 billion in market value. One of the reasons is the natural hedge of rising oil and gas prices. Even though the sanctions regimes so far exclude key commodities, they affect some banks involved in the trade. The market is avoiding Russian oil as it waits for more information, pushing crude prices well above $100 a barrel.
In addition, the exit from Rosneft’s Arctic drilling programs removes a troublesome stain from BP’s green transition story. And investors likely discounted holdings for local political risk and the possibility that assets will never be redeemed.
Meanwhile, state-owned oil and gas companies appear to be carrying on business as usual. A drama-free meeting is expected when the Organization of Petroleum Producing Countries and its friends, including Russia, meet today to discuss production quotas. Western divestments are therefore likely to accelerate an existing trend: the shift from independent producers to OPEC states as decarbonization accelerates.
Russian and Middle Eastern companies are spending more on drilling and exploration than before the pandemic. Independent supermajors are generally not: they face capital discipline demands in the United States and a strategic shift to low-emissions energy in Europe. Public producers are largely sheltered from these pressures. Instead, most of them must meet the demands of their political masters to exploit natural resources to meet national needs for energy, employment and state revenue.
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As independent supermajors chart a course into the growing clean energy market, they are ceding stakes to national oil companies in the fossil fuel market, which is expected to eventually shrink. The pace of the transition to low-emission energy is the subject of much debate. In oil and gas production, however, the shift from independent to national companies is only accelerating.
Write to Rochelle Toplensky at [email protected]
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