It’s shocking to see western oil giants abandon tens of billions of dollars of investment in Russia — stakes in projects with Gazprom, Rosneft and Novatek that wouldn’t have happened if not for generations of executives expending sweat and blood to negotiate directly with Putin.
Shell’s former CEO Jereon Van Der Veer was personally berated by Putin in 2005 for cost overruns on the Sakhalin II gas project. BP’s CEO Robert Dudley fled Russia in 2012 amid drama over the sale of TNK-BP to Rosneft. Christophe de Margerie, the former CEO of TotalEnergies died when his business jet crashed upon takeoff from Moscow, hours after he met with Russian partners.
TotalEnergies says it will hold on to its 19% stake in gas producer Novatek, but not fund any capital calls. The other majors look set to just walk away from more than $40 billion in assets. BP will take a charge of $25 billion. Exxon’s loss on Sakhalin I will be around $4 billion.
It’s effectively a handover to Putin, who could nationalize the abandoned positions, or sell to an image-insensitive buyer — perhaps Petrochina.
Russia will feel the loss of Big Oil know-how, says analyst Pavel Molchanov of Raymond James, but “insofar as there will be impact on Russia vis-a-vis cost of capital or technology capabilities, it will be felt over a period of years, rather than right away.”
Of more immediate impact, oil traders have enacted a defacto embargo on cargoes from Russia. Analysts report that 70% of Russian crude exports are effectively blocked, amounting to 2.5 million barrels per day (bpd), because counterparties refuse to trade. American refiners Valero Energy VLO , Parr Pacific and Monroe Energy (owned by Delta Airlines) are among those who have announced voluntary bans. A few months ago Russian oil from the Urals was trading at a premium to benchmark Brent crude. Trader Trafigura was reportedly unable to find any buyers for a Urals cargo, even at a $22/bbl discount to Brent, which traded thursday at $118/bbl, highest in nine years.
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Energy buyers are scared of shortages. Europe is now paying $50/mmbtu for natural gas — ten times the prevailing U.S. price (equivalent to $300/bbl oil). And yet despite the intense demand, the U.K. rejected delivery of an LNG cargo this week because it was carrying Russian gas. Even coal demand is exploding, up 50% in two days to $400 per ton as European power plants seek to replace the 60% of coal they source from Russia.
Some politicians want to go farther than voluntary embargoes and self-sanctioning. “Ban the oil coming from Russia. I’m all for that,” said House Speaker Nancy Pelosi on Thursday. Senators Lisa Murkowski, Joe Manchin and Elizabeth Warren are pushing a bill to do it.
The Biden administration is pushing back. White House spokesperson Jen Psaki said Thursday that Biden’s “objective has been to maximize impact on Russia while minimizing impact to us and our allies and partners,” she said. “We don’t have a strategic interest in reducing the global supply of energy, as that would raise prices at the gas pump for the American people.” An embargo on Russian oil would bring a very real risk of driving global oil prices to $200 a barrel (the 2008 record of $147/bbl is $182 in today’s dollars, says Energy Aspects). This would send gasoline prices upwards of $9 per gallon, crippling the global economy.
Biden organized the release of 60 million barrels from the world’s strategic petroleum reserves, which is helpful, but only a couple weeks worth of normal Russia exports – “a proverbial drop in the bucket,” notes Molchanov.
Russia’s 5 million barrels of daily exports might not sound like that much relative to a 100 million bpd global market. But right now, with the world waking up from the pandemic, supply is already having a hard time keeping up with demand for gasoline, diesel and jet fuel.
What about OPEC? Even the cartel doesn’t seem to have much more to give. The group (plus Russia) has been recently increasing their output quotas — returning to the market supplies that had been throttled back during the pandemic.
And yet Matt Stephani, president at Cavenal Hill Investment Management, finds it concerning that this week OPEC met for just 13 minutes and offered no plans for boosting oil output beyond its current 28 million bpd, which is about 700,000 bpd below quota. Incentivized by current runaway prices, says Stephani, oil countries must already be maximizing output — and will be hard pressed to replace rejected Russian volumes.
Even if the Kingdom is not able to ramp up much from its current 10.1 million bpd, Saudi Arabia’s Crown Prince Mohammed bin Salman announced Thursday that he was keen to help by mediating peace talks between Putin and Ukrainian President Volodymyr Zelensky.
American frackers are starting to wake up. In the U.S. now 740 rigs are drilling, up 60% in the past year. Still half of what it was before Covid. It’s only natural that during the pandemic oil producers cut back on all investments, and minimized costs, just to survive. In the past year the frackers have enjoyed their longest period of sustained profitability in more than a decade. And they’re loathe to risk ending the good times by overinvesting again. CEO Scott Sheffield of Pioneer Natural Resources PXD had said previously that not even $150/bbl oil would persuade him to boost output from their Permian basin fields by more than 5%. But this week he had a “mindset change” and now says he’s thinking about growing 10%. Pioneer is off 2% from five-year highs set earlier this week.
Exxon promises enough growth from the Permian as well as offshore Guyana to make up for the loss of Sakhalin I, on an island in Russia’s far east, where they’ve been producing since 2005 in partnership with Rosneft, India’s ONGC Videsh and a Japanese consortium. According to Enverus, the project has been generating 220,000 bpd of oil.
If a short-term risk of blockading Russian oil is shortages and inflation, there’s also a longer-term risk, to the value of the U.S. dollar. Right now the global oil trade is almost entirely denominated in dollars. But for years China, Russia, Iran and Venezuela have been dreaming of “de-dollarization.” Removing Russia’s oil trade from the SWIFT financial transfers system could speed that evolution, and in time remove a big chunk of demand for dollars.
To be sure, a dollar already buys a lot less petroleum than it used to. Average U.S. gasoline prices are up $1 in the last year to $3.73 a gallon.