BP’s Russia exit to ‘jeopardise’ gains made by company on soaring energy prices

Businesses are expected to come under pressure to leave Russia amid its conflict with Ukraine, analysts say

More European and American companies are expected to come under pressure to exit their operations in Russia following the decision by British oil giant BP to abandon its stake in Rosneft. Reuters

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British energy company BP’s decision to exit operations in Russia is expected to hit the company’s share price and "jeopardise" gains achieved on the back of soaring energy prices, according to analysts.

BP on Sunday said it is abandoning its 19.75 per cent stake in the Russian oil giant Rosneft following Moscow’s decision to attack Ukraine.

The company’s chief executive Bernard Looney, as well as its former chief executive Bob Dudley, also resigned from the board of Rosneft “with immediate effect”. The decision is expected to cost BP as much as $25 billion, according to the company.

“It’s a huge deal as the two companies [have] worked closely together since 30 years and Rosneft stands for about half of BP's oil and gas reserves and a third of its production,” said Ipek Ozkardeskaya, senior analyst at Swissquote.

“The latest news will probably be a decent blow to BP’s share price and jeopardise the latest gains due to the soaring energy prices.”

London-listed BP swung to its highest profit in eight years last year on the back of higher energy prices. It reported a net profit of $12.8bn in 2021, compared to a loss of $5.7bn in 2020 as oil and gas prices surged due to a rise in demand and tight supply. BP’s share price was down 7.12 per cent at 5:15pm UAE time on Monday.

“The BP news also raises questions on how the other oil giants will react to the Ukrainian calamity. Will other oil companies like TotalEnergies or Shell dare make similar moves?” Ms Ozkardeskaya said.

France's TotalEnergies holds a 19.4 per cent interest in Novatek as well as other oil and gas projects in the country, according to its website.

The decision by BP to exit operations in Russia comes as the US and its allies in Europe moved to block some Russian banks from the Swift international payments system for its actions in Ukraine.

The countries also announced a slew of punitive measures to limit Russia’s ability to do business in dollars, euros, pounds and yen.

“Stricter rules around access to the international financial system could hurt international oil companies’ ability to receive dividends and other payments,” global consultancy Wood Mackenzie said. “Targeted sanctions against their Russian partners seem unlikely, but would present a much more profound challenge.”

Norway’s oil company Equinor also said on Monday that it will be withdrawing from its joint ventures in Russia. The company has been in Russia for over 30 years and entered a co-operation agreement with Rosneft in 2012.

“In the current situation, we regard our position as untenable,” its chief executive and president Anders Opedal said in a statement posted on Equinor's website. “We will now stop new investments into our Russian business, and we will start the process of exiting our joint ventures in a manner that is consistent with our values.”

At the end of 2021, Equinor had $1.2bn in non-current assets in Russia and the decision to exit operations is expected to affect the book value of its assets in the country and lead to impairments, the company said.

Russia is one of the world's top producers of oil and gas. In 2020, it produced about 10.2 million barrels a day of crude oil and natural gas condensate, placing it second after the US, with Saudi Arabia in third place, according to the 2021 BP Statistical Review of World Energy. Russia is also the second-largest producer of natural gas in the world.

“If the economic sanctions against Russia stick in the coming months, western companies may increasingly find it difficult to do business in the country and end up retreating in subsequent waves,” Vandana Hari, founder and chief executive of Vanda Insights in Singapore told The National.

More European and American companies could also come under government or shareholder pressure to “leave Russia or pare down their businesses in the country” following BP’s move, she said.

“This will hurt the Russian oil and gas sector hard — both in terms of its ability to bring back production in line with Opec+ easing its cuts and developing projects to develop new reserves.”

Local or Chinese companies could step in to fill the gap but it would be difficult to replace big oil companies because of their superior technology and financial strength, Ms Hari said.

Trevor Sikorski, head of natural gas and energy transition at London-based Energy Aspects, said BP is already under pressure to spend more of its capex on energy transition, and the latest decision will “hasten that move”.

“The major implication is for Russia’s energy sector, that will find it very difficult for the coming years to access western finance and technology — mostly important for any highly complex projects,” he said.