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What Would Happen to Western Oil Companies if Russia Retaliated?
Hypothetically, if tensions were to continue to escalate between Russia and the West over Ukraine, and Russia retaliated against Western oil companies, what would be the effect? Would Western companies with Russian exposure such as ExxonMobil (NYSE: XOM ) , Royal Dutch Shell (NYSE: RDS-B ) , and BP plc (NYSE: BP ) plummet?
Meaningful retaliation is unlikely
I believe the most likely measures of Russian retaliation would be largely symbolic.
This is because Russia needs Western oil and gas companies. Western supermajors have technology and experience that Russian companies lack. Without the supermajors’ know-how, project expenses in the Arctic and Bazhenov Shale would be much higher and build times would be much longer.
As megaprojects such as the Kashagan show, project delays and cost overruns can be very damaging to their host countries.
If Russia’s Arctic projects don’t go smoothly, Russia’s future energy cash flows will be significantly lower. Because the energy sector accounts for two thirds of Russian exports and half the federal budget, any weakness in its energy sector will affect Russia’s overall finances significantly. The resulting financial weakness would arguably be worse for Russia than losing a warm water naval port.
Market doesn’t view Russian operations as very important to Western oil majors
With that being said, the world is not rational all the time. Unexpected things happen much more frequently than they should. Once certain lines are crossed, feedback loops make drastic actions much more likely.
If Russia were to meaningfully retaliate against Western supermajors, I don’t think shares of Western oil companies would be hit as hard as might be expected. This is because the market doesn’t view the Russian operations of oil supermajors as all that promising in the first place. When BP traded 50% of its Russian subsidiary TNK-BP for $12.5 billion in cash and 19.75% of Rosneft, many market participants said it would have been better for BP to get more cash upfront instead of Rosneft equity. When ExxonMobil announced that it would help Russia develop its vast Arctic reserves, the supermajor’s stock barely budged.
In short, even before the Ukrainian crisis, the market was already discounting a lot of geopolitical uncertainty in Russia. The market knew that the Russian opportunity was risky, and it priced shares to reflect that risk.
The bottom line
I don’t think Russia will meaningfully retaliate against Western oil and gas companies. If Russia were to retaliate, it would be much more likely to target Western companies whose products can be easily replaced, such as Pepsi.
I still believe that the Russian operations of Western supermajors are free long-term call options. If something bad were to happen, the stocks will not fall by much. If the market changes its mind about Russia, the stocks will rise by much more. Ultimately Russia needs the Western supermajors to help it develop its Arctic oil reserves. Major oil companies such as BP and ExxonMobil are the only companies with the right technology, experience, and budgets. The recent Ukrainian geopolitical event hasn’t changed this fact.
16 Comments on "What Would Happen to Western Oil Companies if Russia Retaliated?"
Makati1 on Tue, 8th Apr 2014 12:22 am
ah, fool again. As if the US has a monopoly on all tech and no other country is capable of anything without the Us.
Russia does not need Western countries tech, they already have it. And then there is China, waiting to jump in and help in return for oil and NG.
Didn’t this author notice that Russia has already threatened to freeze all Western corporations operating in Russia if the idiot in DC causes any more disruption?
I see major financial problems in the West if they continue their stupidity. Russia is NOT Iraq or Libya.
Plantagenet on Tue, 8th Apr 2014 1:06 am
Obama was foolish not to take action to warn Russia off their invasion of Crimea before it happened. His current policy of trying to drive Russia from Crimea by sanctions now that they are in possession of the territory is doomed to failure.
DC on Tue, 8th Apr 2014 2:00 am
You mean the invasion that occurred only in plants imagination? Yea, keep dreaming that your ‘obomber’ has any sort of mandate, much less right to ‘drive’ Russia from anywhere, let alone its own territories.
GregT on Tue, 8th Apr 2014 2:32 am
Plant,
Honestly, are you completely devoid of rationality?
Makati1 on Tue, 8th Apr 2014 2:44 am
It appears that some are the product of the Empire’s dumbed down, brainwashed ‘education’ system. If not, then it can only be the result of genetic inheritance or some brain damaging accident in childhood.
Boat on Tue, 8th Apr 2014 3:50 am
Yea so how many countries have oil and ng, but not the political system, people and the tec to exploit it.
Russia, Ukraine, Venezuela, Mexico, Iran, Nigeria, Iraq, Libya and on and on. Many other successful producing nations owe much of their tech to the US. Hardly a brain dead Empire.
A friendly Russia raises the price of their NG for their close neighbors. Did you know Canada, the US and Mexico all trade the cheap ng price amongst them? North America as a team are poised to compete well with the world in traded products the next decade or two.
A new 36″ pipe og ng to Mexico is next.
http://howlandcompanies.com/eagle-ford-natural-gas-major-pipelines-planned-to-expand-towards-mexico/
GregT on Tue, 8th Apr 2014 4:09 am
And while we continue to talk about which nation has the most oil, NG, tech, or the greatest political systems, our scientists continue to warn us about the consequences of the path that we are currently on. The only thing worse than brain-dead, is a dead-end for human civilization. But of course, the intelligent among us continue to believe that they are smarter than the people that we have trained to warn us of the dangers that we are creating.
Yup, all we need are more pipelines, more gas, more oil, more CO2, and more human beings. That will surely solve all of our problems. The next decade or two, will bring utopia, for mankind on earth. Why stop at a 36′ pipeline? Let’s quadruple it, and make it a 144″ pipeline. The bigger and the faster, the better.
rockman on Tue, 8th Apr 2014 12:26 pm
Makati – “As if the US has a monopoly on all tech and no other country is capable of anything without the US.” So true. I’ve made this point before: for the most part almost none of our high tech ops “belong” to ExxonMobil or any of the Big Oils. It belongs to the service companies like Halliburton and Schlumberger. I just explained this to a young lady yesterday: go onto any US locations where a well is being drilled or frac’d. The odds are good that the majority of the time you’ll not find one employee of the operator there. And if you happen to find one or two they’ll be sitting in a trailer watching out a window or from their car (which is where I’m usually located).
Makati can drill a well just like XOM anytime he wants: just hire the same consultants and service companies that Big Oil uses. What Big Oil has access to that Makati doesn’t is a freaking big pile of capex. LOL. Which is exactly what Russia needs from Big Oil: capex. Any Russian company can hire the same consultants and service companies that XOM does…they just need someone else to pay for it. Seriously: little ole Rockman can drill any well anywhere in the world without any help from Big Oil. All he needs is the phone numbers for Halliburton et al and a big pile of capex. Trust me: Halliburton doesn’t care if it’s an American company, a communist govt or a murderous dictator as long as the check clears the bank. LOL.
There is no loyalty, patriotism, etc. It ain’t personal…just business.
rockman on Tue, 8th Apr 2014 12:30 pm
Greg – “Why stop at a 36″ pipeline? Let’s quadruple it, and make it a 144″ pipeline. The bigger and the faster, the better.” You got your wish: the combined capacity of those future pipelines planned greatly exceeds that of your 144″ pipe. BTW flow capacity is far greater then the linear relationship you described.
Davey on Tue, 8th Apr 2014 12:41 pm
Snap the friggin whip Rock!!
rockman on Tue, 8th Apr 2014 2:50 pm
Davey – Despite being something of a smart ass about it I really am sympathetic towards folks concerned about the ecology of the planet. It’s just that I see virtually no chance of such concerns changing our path significantly.
GregT on Tue, 8th Apr 2014 3:02 pm
Personally, I would much rather see us slowly wean ourselves off of fossil fuels, and focus our ‘energy’ on alternate infrastructure. It most certainly does not appear that we are going to go that route though. I really hope that our scientists are wrong about the potential effects of a runaway greenhouse event, my kids’ lives are somewhat important to me.
rockman on Tue, 8th Apr 2014 4:15 pm
Greg – A nice wish but I don’t see it either. I was well tutored in climate change (though more on a geologic time scale) over 40 years ago. It’s not at all difficult for me to see the potential for significant changes from AGW. But I still have the same expectations that such knowledge will change the path we’re on.
Davey on Tue, 8th Apr 2014 4:40 pm
Rock, I’m the smart ass. Sometimes the 4 morning espressos set me on fire. Speaking of fires going to burn some native grasses. Talk about some carbon and AGW. Grasses are carbon neutral but a hell of a spike to the immediate environment for an hour!
Boat on Tue, 8th Apr 2014 5:06 pm
I expect huge developments in Mexico because the gulf refineries are in the Houston area, a short pipeline away. If fracking is as successful there as it is in the rest of Eagle Ford it will be a huge boon for the Mexican people. Once money is flowing the ridge of mountains that cuts through the middle of Mexico has some of the best wind in the world. Texas would be more than willing to help there. Of course Mexico has plenty of sun. With money comes better education,opportunities and lower population.
Once again Mexico gets their ng at the cheap rate like Canada and the US has in their captured market.
It takes an advanced well developed economy to make the clean advancements come to fruition. I can easily see North America going down that road at a more accelerated pace sooner rather than later.
rockman on Wed, 9th Apr 2014 1:44 am
Boat – Maybe…if the Chinese don’t beat us to it. I haven’t seen an update lately but a year ago the Chinese were having serious conversations with the Mexican gov’t and with other central/south American govt’s. They already started a very small pilot project exporting oil to China. Details remain to be seen but I suspect the Chinese will have an advantage with the new Mexican policies on foreign companies operating within their borders.