In response to Russia’s invasion of Ukraine, British energy giant BP announced on February 27, 2022 that it sell its nearly 20% stake in Russian energy giant Rosneft. BP’s rival Shell is also withdraw from all operations in Russiajust like the American energy giant ExxonMobil and the state-controlled Norwegian company, Equine.
These breakups won’t come cheap. BP’s stake in Rosneft is worth $14 billion. In various projects, Shell has approximately $3 billion in assets in Russia. ExxonMobil has more 1,000 employees and more than $4 billion in assets the. A withdrawal will inflict significant financial blows on all of these companies.
Western energy companies have been investing and operating in Russia for a long time – more than 30 years for BP and more than 25 years for ExxonMobil. They are used to managing international political risks.
In my opinion, Russia’s invasion of Ukraine completely changed the cost-benefit analysis of Western energy companies doing business in Russia. I searched foreign direct investment by multinational companies in emerging markets for more than two decades and have closely followed the investments of Western energy companies in Russia. I expect other Western oil majors, like the French company TotalEnergiesare also likely to withdraw from Russia and that it may be many years before these companies re-engage there.
Big risks, big gains
Foreign investment in Russia has never been easy. For example, in 2003, BP and a consortium of Russian companies oligarchs formed the TNK-BP joint venture, which became one of Russia’s largest oil producers. However, disputes arose over the company’s direction, operations, and international expansion.
The situation became so tense that Bob Dudley, then director of TNK-BP and later CEO of BP, was forced to flee Russia in 2008. To settle disputes, BP sold its 50% stake in TNK-BP to Rosneft in 2013 for $12.5 billion in cash and a nearly 20% stake in Rosneft.
Shell became involved in the early 1990s in Sakhalin-2 project to develop natural gas reserves in the Russian Far East and built Russia’s first liquefied natural gas facility there. As the project neared completion in 2006, at a cost of more than $20 billion, Shell and its Japanese partners were forced to sell a 50% share to Russian natural gas giant Gazprom for 7.45 billions of dollars because Putin’s government was not happy with the easy terms previously offered by the Yeltsin administration.
During crises like these, Western energy companies weighed the potential gains and costs of operating in Russia and concluded that staying was worth it. It’s easy to see why: Russia is holding 24% of the world’s natural gas reserves. It has comprehensive pipeline networks in the west to bring natural gas to European countries, and large reserves in the east that are close to some of the world’s hungriest energy markets, including Japan, South Korea South and China.
For years, Western energy companies viewed compromising with the Russian government as part of the cost of doing business there. As long as the expected gains exceeded the costs, they stayed.
Russia’s invasion of Ukraine changed these calculations. Now, oil major executives must assess the possible wider damage to their corporate reputation and to relationships with governments, shareholders and other interest groups in their home countries if they remain in Russia. Unlike controversies within the energy industry, invading an independent sovereign nation is far too high-profile a development for corporations to ignore.
Academic research shows that there is a positive correlation between socially responsible behavior and the financial performance of companies. Simply put, companies that do good tend to do well financially. The invasion of Ukraine represents a critical change in Russia’s business environment. As BP Chief Executive Bernard Looney said on February 26, the unfolding situation in Ukraine “has caused us to thoroughly rethink BP’s position with Rosneft.”
In particular, Western energy companies that are now siding with the Russian government can be seen as undermining their own government’s sanctions and helping to fund Russia’s war in Ukraine. Russia owns 40% of BP’s Russian partner, Rosneft; the company’s CEO and Chairman of the Board, Igor Sechin, is Former Russian Deputy Prime Minister and close ally of Putin. Shell’s main partner in Russia is Gazprom, the public natural gas giant.
To maintain their corporate reputations and their relationships with key interest groups, BP, Shell, Equinor and ExxonMobil have clearly decided that it is important to completely, immediately and publicly cut their ties with Russia. Current and former CEOs of BP resigned from Rosneft’s board on February 27, three days after the start of the invasion, “with immediate effect.”
As the Western world imposes harsh and supportive sanctions on Russia in areas ranging from finance for aviationWestern governments have avoided sanctioning energy exports from Russia, seeking to protect their citizens from price spikes. Nevertheless, if Western energy companies stay in Russia and continue to partner with Russian state-owned companies, they could be seen as undermining the Western response. Indeed, the decision to exit BP would have been taken under British government pressure.
None of these companies have many viable potential buyers for their Russian holdings. Russian companies, facing sanctions, lack the resources to acquire assets from foreign investors, and other Western energy companies are unlikely to pursue them. The only potential investors are private equity firms that are less scrutinized than publicly traded companies, or companies from countries that are not joining Western sanctions against Russia.
The Russian energy sector is highly dependent on technologies from Western companies, especially for hard-to-recover oil projects and offshore projects. BP, Shell and ExxonMobil will leave significant technology gaps that may be difficult for newcomers to fill.
Business leaders are used to making high-level strategic decisions that require weighing costs and benefits. What has changed the calculus for Western energy companies is the broad potential for damage to their companies’ reputations and their relationships with various interest groups if they remain in Russia. Obviously, managers cannot limit benefit-cost calculations to specific investments. Their overall business reputation can be worth billions of dollars.
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