Western oil majors have quit Russia altogether, taking billions of dollars in vague impairment charges on Russian energy assets, and now comes the hard math. This morning energy giant Shell Plc said that it will write off between $4 and $5 billion in assets in a first-quarter 2022 outlook.
Thursday's announcement provides investors with an early glimpse at the costs of fracturing global supply chains for oil majors following Shell's decision to exit Russia after the invasion of Ukraine.
"For the first quarter 2022 results, the post-tax impact from impairment of non-current assets and additional charges (e.g. write-downs of receivable, expected credit losses, and onerous contracts) relating to Russia activities are expected to be $4 to $5 billion," Shell said.
"These charges are expected to be identified and therefore will not impact Adjusted Earnings," it continued.
The charge surpasses the company's earlier estimate of $3.4 billion worth of oil-producing assets in Russia.
More details about the impairment charges will be announced in Shell's first-quarter earnings report on May 5. Shell also said that its cash flow would be hit by "very significant working capital outflows as price increases impacting inventory have led to a cash outflow of around $7 billion."
Previously, BP Plc said it would exit its 19.75% stake in the Russian oil company Rosneft. The move could cost BP at least $25 billion. Shell's shares trading in London were down nearly 2% on the news.
Commenting on Shell's move is Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, who told CNBC, "despite the eye-watering costs, the share price should continue to stay reasonably resilient given the divestment far outweighs the reputational damage which could be caused had it not pulled out."
Western oil majors operated in Russia for several decades as both world regions cooperated on energy production. However, the Ukraine conflict has driven a wedge between Moscow and Washington/Brussels as the old world order crumbles and a new multipolar world emerges.
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The losers will be the Western oil majors who came under pressure from their governments to abandon Russia. Shell is expected to write down between $4-$5 bn in assets while BP which has a 19.75% stake in Rosneft could sustain a $25 bn loss.
Moreover, it is very probable that Russia won’t allow them to sell these assets to non-Russian entities. Therefore, Rosneft and the Russian government will buy these assets on the cheap.
This is exactly what happened to ExxonMobil when it was forced to ditch its assets in a joint project with Rosneft in the Arctic after the US imposed sanctions on Russia in the aftermath of the annexation of the Crimea in 2014. Rosneft went ahead with the project on its own successfully.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London