Western majors mull future in Russia faced with new sanctions risk

As Western leaders pledge to implement "swift and deep" sanctions against Russia in case of any further escalation in Ukraine, energy majors with existing assets in Russia may have to review their future investments in the Russian oil and gas sector amid increased sanction risks.

Russia is no stranger to sanctions. Back in 2014, Western sanctions against Russia already limited Western companies' involvement in the Russian energy sector, yet potential new restrictions are something the country "has never seen before", as US President Joe Biden put it.

In conference calls on 2021 results, international oil majors mainly took a positive stance on their future in Russia yet were also ready for alternative outcomes.

"There are no changes to our ongoing business in Russia today. And if something comes down the road, then obviously, we'll deal with it as it comes," BP CEO Bernard Looney said in a call with investors on Feb. 8.

BP holds a nearly 20% stake in Rosneft, Russia's largest crude producer, and has seen a steady increase in its output in Russia since 2013 despite existing sanctions.

Similarly, TotalEnergies CEO Patrick Pouyanne expressed hope that the two sides resolve tensions and avoid new sanctions.

"We experience these types of situations, but I hope not, because for Europe it's very important. The consequence of any energy sanctions on Russia and impact on oil and gas prices will be huge," Pouyanne told analysts Feb. 10.

TotalEnergies has a very active presence in Russia, holding a nearly 20% interest in Novatek, as well as 20% and 10% stakes in its projects Yamal LNG and Arctic LNG 2. In addition, the company owns a 20% interest in the onshore Kharyaga oil field.

"Of course, due to the crisis we look at the figures to know what the risk is, global cash flow from Russia was around 1.3 billion euros in 2021. It's sizeable, but it's 5%," Pouyanne said.

At the same time, "globally the company would be winning", he added, because of the increase in prices amid geopolitical uncertainty surrounding Ukraine's future and Russia.

According to S&P Global Ratings, sanctions on Russia's oil exports would likely cause a global energy crisis with prices going well above $100/b and disruption to global supply chains.

Dated Brent prices have been trading near seven-year highs of almost $100/b on rising demand and declining oil inventories.

Benchmark Dated Brent crude was assessed by S&P Global Platts at $97.835/b on Feb. 11, up 41 cents, while WTI MEH was assessed up $3.22 at $94.50/b.

Future risk

Although potential new sanctions against Russia are conditional on escalation of tensions with Ukraine, analysts see new restrictions highly probable with or without an actual military conflict.

"We do not rule out new sanctions even with de-escalation. This is similar to what we expected from the very beginning – there'll be no war, but sanctions will be imposed," analysts at RenCap said.

While any imminent exit of Western majors from Russian projects is unlikely, it raises a question of their future readiness to invest in the Russian energy sector.

"I don't think companies will willingly pull out of existing assets unless the situation gets really dire. It would be surprising if companies were forced to pull out of existing assets," James Henderson, Russia expert and director of the Energy Transition Research Initiative at the Oxford Institute of Energy Studies, told Platts.

According to Platts Analytics, US and EU restrictions on activity in Arctic, shale, and deepwater development risk extending to more conventional projects depending on military developments in Ukraine.

In 2018, ExxonMobil was forced to quit Arctic projects with Russia's Rosneft due to US sanctions imposed in 2014 but remained operator of the Sakhalin 1 project in eastern Russia.

"Even if a diplomatic solution resolves the current standoff, persistent uncertainty may influence future investment decisions of Western companies," chief geopolitical adviser Paul Sheldon said.

This goes against President Vladimir Putin's attempt to lure in foreign investments with incentives for green energy projects in Russia.

It also may create uncertainty for Vitol and Trafigura's stakes in Rosneft's giant Vostok Oil project, which will link up some of the company's vast resources with the Northern Sea Route, a development priority for Russia that will allow shipping to both European and Asian markets.

According to RenCap analysts, Rosneft's megaproject is key for Russia to continue boost output beyond pre-crisis 11.4 million b/d of oil equivalent in the long-term starting 2025-2026.