Oil giants have been exiting their investments in Russia after the country initiated military action in Ukraine. The conflict has caused oil prices to soar as fears have increased regarding supply shortages. The exit from international oil firms is likely to cause prices to continue to rise, experts said.
“Oil giants are mostly falling in line and have signalled that as the crisis in Ukraine worsens, they will work towards ending ties with Russia…Russia is a key supplier of energy to the world and the abandonment of using their supplies will keep oil and gas prices heading much higher,” Edward Moya, senior market analyst for OANDA said.
Political pressure for economic ties to Russia to be cut has grown more intense over the past week as the conflict continues. Moya believes that pressure will likely grow on Total, a French oil and gas giant, to exit in line with announcements from fellow oil majors bp, Exxon, and Shell.
“Oil majors have been having a wonderful past few quarters as they have benefited from steady increase with crude prices. They have been able to buyback shares, raise dividends, and post record earnings, so the exit of Russia for many is a hit that they will be able to handle,” Moya said.
In the short-term, Russian producers are likely to be able to maintain production levels, Louise Dickson, oil markets analyst for Rystad Energy explained, but the medium to long-term outlook is significantly murkier.
“All else equal, in the short-term the Russian partners in the already-on-production projects would be able to maintain production levels, as much of the tech and know-how has already been invested,” Dickson said.
“But all else is not equal, of course, and the majors exiting is representative of the growing radio-activeness of Russian oil on the international market in general. If Russian oil is sanctioned, it will create a massive supply gap in the market (Russia produces about 11.1 million bpd of crude and condensate), of which about 4.5 million bpd is exported,” she added.
The real problem, Dickson explained, is that should sanctions on energy exports take place, then Russia’s ability to export to international markets would be cut off.
“The limited storage space for crude in Russia will cause upstream shut-ins, regardless of whether a major like BP or Exxon is involved in that particular field or project,” she said.
Furthermore, the economic impact of general sanctions on the Russian economy will likely result in less capital expenditure, higher inflation, and disruptions in raw materials, according Daria Melnik upstream analyst at Rystad. These factors have left Rystad with a negative estimation on Russian greenfields.
“It is difficult to give any quantitative estimates now as we are at the beginning of the conflict and new sanctions are being imposed every minute. Also, it is not clear what will happen with majors’ shares in Russian assets and associated production. We didn’t get any reaction from Russian operators,” Melnik said.
