Russia aggression unsettles energy companies, prices
Industry stands to suffer further as crisis drags on
Russia's recognition of two breakaway regions in eastern Ukraine could threaten important investments of Western oil giants and further drive up global energy prices in the next few weeks.
Since the closing days of the Cold War, Russia's energy-based economy has become entwined with Europe's. European energy companies like BP, TotalEnergies and Shell have major operations and investments in Russia. Although expansion of those holdings was largely halted after Russia's 2014 annexation of Crimea, they remain important profit centers and could now be at risk.
Seeking to isolate President Vladimir Putin of Russia, President Joe Biden and the European Union imposed new sanctions on the Russian government and the country's political and business elite Tuesday. The measures do not directly target the energy industry. That's why oil and gas prices settled only modestly higher
Tuesday afternoon in New York.
But analysts said the energy industry could still be hurt if the crisis dragged on, particularly if Putin decided to send troops into the rest of Ukraine or sought to take control of the capital, Kyiv. Such aggressive action would most likely force Biden and other Western leaders to ratchet up their response.
European leaders are already taking aim at some Russian energy exports. Chancellor Olaf Scholz said Tuesday that Germany would halt certification of the Nord Stream 2 pipeline, which is supposed to deliver Russian gas. The decision will not have an immediate effect on European energy supplies because the pipeline is not yet operating. But Russian gas shipments through Ukraine could be halted, especially if Putin's troops push farther into Ukraine or if he cuts off gas to Europe in retaliation for Western sanctions.
Russia supplies 1 out of every 10 barrels of oil used around the world. After Western officials said Russian troops had entered eastern Ukrainian regions held by separatists, oil prices quickly jumped early Tuesday to nearly $100 a barrel, their highest level in more than seven years, before moderating.
Energy experts say oil prices could easily rise an additional $20 a barrel if Putin seeks to occupy more or all of Ukraine. Such an outcome would also cause huge problems for Western oil companies that do business in Russia.
“In that environment, the legal and reputational risk faced by Western energy companies operating in Russia will rise sharply,” said Robert McNally, who was an energy adviser to President George W. Bush and is now president of the Rapidan Energy Group, a consulting firm. “For oil markets, this means slower supply growth and even tighter global balances and higher prices in the coming years.”
TotalEnergies, which is based near Paris, owns nearly 20% of Novatek, Russia's largest liquefied natural gas company, and Shell has a strategic alliance with Gazprom, Russia's natural gas monopoly.
The Western oil company most involved in Russia is BP, which owns nearly 20% of Rosneft, a state-controlled energy company managed by Igor Sechin, who is widely considered a close Putin ally and adviser. BP's CEO, Bernard Looney, and its former CEO Bob Dudley sit on Rosneft's
board with 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 onethird of BP's oil production, or 1.1 million barrels a day, came from Russia last year.
BP executives have so far expressed calm. “We have been there over 30 years and our job is to focus on our business, and that is what we are doing,” Looney said in a recent conference call with analysts. “If something comes down the road, then obviously we will deal with it as it comes.”
Most oil companies have been reporting bumper profits because of rising oil and gas prices. European firms are using some of their profits to invest more in wind, solar, hydrogen and other forms of cleaner 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 give up control of its premier Russian liquefied natural