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As Russia’s Isolation Grows, Oil Companies Caught in Middle

By Nick Cunningham | Sun, 20 July 2014 00:00 | 5

The confrontation between Russia and the West took a turn for the worse with the downing of a Malaysian airliner on July 17, and that could spell trouble for several major oil companies operating in Russia.

Just one day earlier, U.S. President Barack Obama slapped sanctions on Russia over its ongoing role in the destabilization of Ukraine. The sanctions prohibited American banks from issuing loans with a maturity of over 90 days to four key Russian companies – Rosneft, Novatek, Gazprombank, and VEB.

“Because Russia has failed to meet the basic standards of international conduct, we are acting today to open Russia’s financial services and energy sectors to sanctions,” U.S. Treasury Official David S. Cohen said in a press release describing the agency’s actions.

The sanctions tightened the economic noose on the Russian economy by targeting companies in Russia’s energy sector. Up until now, western sanctions largely targeted individuals in the Russian elite, freezing their assets or issuing bans on American companies from doing business with them. But with oil and gas accounting for over 50 percent of revenues for the Russian state, if Obama wanted sanctions to have any bite, he had to escalate the campaign by going after Russia’s energy sector.

Until the July 16 announcement, the major western oil companies operating in Russia shrugged off their effects. Companies like BP, ExxonMobil, and Royal Dutch Shell defied White House pressure to avoid doing business with Russia.

They made a big bet on the likelihood that their billion-dollar projects would not be affected by the deteriorating relationship between Russia and the West.

But the markets took the latest round of sanctions much more seriously than their previous iterations. Rosneft saw its share price decline by 6.2 percent the day of the announcement, and Novatek was off 11.5 percent.

And western companies were not safe either. BP lost $4.4 billion in its market value on July 17. BP owns a 19.8 percent share of Rosneft, Russia’s state-owned oil company that was singled out by Obama’s sanctions. Nearly one-third of BP’s global oil production – or 1 million barrels per day – comes from its investment in Rosneft.

Related Article: In Russia’s Crosshairs, Ukraine Revives LNG Plans

ExxonMobil also has massive business plans with Rosneft. The two companies are drilling a $300 million well in Siberia, and next month they plan on drilling a $700 million well in the Russian Arctic, the country’s most expensive in history. ExxonMobil and Rosneft have also agreed to jointly develop an LNG export terminal on Russia’s Pacific coast. The Houston-based ExxonMobil has thus far maintained that the projects will be unaffected by sanctions, but that has been thrown into doubt after the U.S. Treasury Department’s latest move.

On July 18, Zacks.com, a market research firm, warned investors against putting their money into companies with exposure to Russia, including ExxonMobil.

Russian President Vladimir Putin scoffed at the sanctions, saying that they will merely hurt American energy companies. “This means that U.S. companies willing to work in Russia will lose their competitiveness next to other global energy companies,” Putin said. “So, do they not want it to work here? They are causing damage to their major energy companies.”

With financing likely to be increasingly hard to come by for Russia’s major oil and gas companies, several of them are looking east for access to lending. As The New York Times notes, Russian energy companies are becoming more dependent on Chinese finance to pay for their capital-intensive projects. Partly, this is due to China looking for more Russian energy, but it is also because Russia sees the door slowly closing on access to western banks.

The rift between Russia and the West is bound to worsen after in the aftermath of Malaysian Airlines Flight 17 being shot down by a surface-to-air missile in pro-Russian rebel territory. And the cumulative effect of recent sanctions could be minor compared to what may be coming. The U.S. could issue far-reaching sanctions, and the incident could help European Union leaders overcome their hesitation over inflicting damage on the Russian economy.

The international community has called for a full investigation, but right now, all roads appear to be leading to Moscow. Perhaps fearing the fallout from the incident, Putin called for a cease fire in Ukraine.  

Swept up in the international crisis are the major oil companies – BP and ExxonMobil – who fear their bottom line taking a big hit from Russia’s growing isolation.

By Nick Cunningham of Oilprice.com

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Nick Cunningham
Company: Oilprice.com

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Leave a comment

  • Lee James on July 21 2014 said:
    Nick's assessment of trade with Russia seems right on.

    For me, the Putin question used to be, "are we doing business with the devil?"

    I will say with some certainty now that we are. And this pkane crash follows on the heals of long-standing, broad questions about our reliance on fossil fuels.

    How far are we willing to go, socially, financially and environmentally? Putin just kind of brings things to a head.

    We need to develop alternatives to fossil fuels just as fast as we can.
  • Tom Blazek on July 21 2014 said:
    As we don't seem to have any real leadership in Washington regarding support for Freedom and Democracy; the task may be left to major corporation management. Its way past time to pull away from Putin and is secret dirty little war against Ukraine. Do we have any real leaders in industry?
  • Lee James on July 21 2014 said:
    Hello Tom,

    In thinking about your question as to whether we have any real leaders in industry, I would have to say no.

    The sole purpose of large corporations is to maximize shareholder profit. Any leadership of the type I think you are thinking of will have to come from shareholder advocates and citizens.

    Since corporations are driven by profit, I'm hoping their risk management analysis will guide them in "doing the right thing."

    The problem with relying on risk management to guide the oil business is that risk is high all over the place. The world is a mess, affecting foreign supply and shipping, and domestic petroleum is increasingly expensive to extract -- especially if you factor in social and environmental consequences.

    As you could probably see from my earlier comment, I consider fossil fuels in general to be high risk. That Putin's regime runs almost exclusively on petroelum revenue (that and armaments) makes partnering with Russia on petroeum all the more problematic.

    Shareholders and the public need to take a stand. We must rely a lot less on fossil fuels.

    Tom, I'm with you on the US need for leadership. We're too divided politically and corporate power is no help. I think we need to be very deliberate in voting, and that includes how we spend each and every household dollar -- spending is voting too!
  • Tom Blazek on July 21 2014 said:
    Lee thank you for your comments. -Spending is Voting!

    I sold my Exxon stock after Putin's Crimea invasion and takeover, and I will not purchase anything labeled Exxon or BP. (I view them as "Putin's Pals".)

    I'd love to see the Exxon Tiger flex its real mussels. Do you think Putin would like to wrestle somebody his own size?

    I bet there are 289 Dead People out there who would like to know the answer to that question!

    Corporations need to decide how long they are willing to do business with the embodiment of Hitler.

    Our President got it wrong when he chided Romney about "the 1980's calling and wanting their foreign policy back". His timing was just a little off. I'm afraid that it's the 1930's that ARE CALLING, and they want their World War Back. It's Time to wake up, much more than profit is on the line, I'm afraid that Freedom and World Peace is on the line. I'm proud that our President, the defender of Freedom and Liberty, has contributed McDonald's Happy Meals; (MRE's) to the defense of Freedom in Ukraine. We should all sleep better tonight!

    What are our "Leaders" in Washington doing, hiding under their desks?
  • Arkadiy on July 22 2014 said:
    Hi Nick,

    you write: "The rift between Russia and the West is bound to worsen after in the aftermath of Malaysian Airlines Flight 17 being shot down by a surface-to-air missile in pro-Russian rebel territory".

    Do yu have the proofs?! Did you see the sat pictures from Pentagon?!
    I just ask you to answer "yes" or "no", please! If yu have the access to
    the proofs.

    You know, the explosion of missile "Buk-1" MUST DESTROY the plane totally
    in the air. But it did not happen! The Boeing should have 8-10 tonns of kerosine.
    So it should be burned out as well! And it did not happen as well!
    How come?

    Nobody has the answer on these questions. But you blame "pro-russian separatists"

    In 2001 Ukraine shot down the Russian civilian plane TU-154 flying from Israel by missile S-200 and Kiev did rejected this fact.

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