Russia’s recognition of two breakaway regions in eastern Ukraine could threaten important investments of Western oil giants and further drive up global energy prices in the next few weeks.
Since the closing days of the Cold War, Russia’s energy-based economy has become entwined with Europe’s. European energy companies like BP, TotalEnergies and Shell have major operations and investments in Russia. Though expansion of those holdings was largely halted after Russia’s 2014 annexation of Crimea, they remain important profit centers and could now be at risk.
Seeking to isolate President Vladimir V. Putin of Russia, President Biden and the European Union imposed new sanctions on the Russian government and the country’s political and business elite on Tuesday. The measures do not directly target the energy industry. That’s why oil and gas prices settled only modestly higher on Tuesday afternoon in New York.
But analysts said the energy industry could still be hurt if the crisis dragged on, particularly if Mr. Putin decided to send troops into the rest of Ukraine or sought to take control of the capital, Kyiv. Such aggressive action would most likely force Mr. Biden and other Western leaders to ratchet up their response.
European leaders are already taking aim at some Russian energy exports. Chancellor Olaf Scholz said on Tuesday that Germany would halt certification of the Nord Stream 2 pipeline, which is supposed to deliver Russian gas. The decision will not have an immediate impact on European energy supplies because the pipeline is not yet operating. But Russian gas shipments through Ukraine could be halted, especially if Mr. Putin’s troops push farther into Ukraine or if he cuts off gas to Europe in retaliation for Western sanctions.
Russia supplies one out of every 10 barrels of oil used around the world. After Western officials said Russian troops had entered eastern Ukrainian regions held by separatists, oil prices quickly jumped early Tuesday to nearly $100 a barrel, their highest level in more than seven years, before moderating.
Energy experts say oil prices could easily rise another $20 a barrel if Mr. Putin seeks to occupy more or all of Ukraine. Such an outcome would also cause huge problems for Western oil companies that do business in Russia.
“In that environment, the legal and reputational risk faced by Western energy companies operating in Russia will rise sharply,” said Robert McNally, who was an energy adviser to President George W. Bush and is now president of the Rapidan Energy Group, a consulting firm. “For oil markets, this means slower supply growth and even tighter global balances and higher prices in the coming years.”
TotalEnergies, which is based near Paris, owns nearly 20 percent of Novatek, Russia’s largest liquefied natural gas company, and Shell has a strategic alliance with Gazprom, Russia’s natural gas monopoly.
The Western oil company most involved in Russia is BP, which owns nearly 20 percent of Rosneft, the state-controlled energy company managed by Igor Sechin, who is widely considered a close Putin ally and adviser. BP’s chief executive, Bernard Looney, and its former chief executive Bob Dudley sit on Rosneft’s board with Mr. Sechin and Alexander Novak, Russia’s deputy prime minister.
Rosneft contributed $2.4 billion in profits and $600 million in dividends to BP in 2021, and has a secondary listing on the London Stock Exchange. About a third of BP’s oil production, or 1.1 million barrels a day, came from Russia last year.
BP executives have so far expressed calm. “We have been there over 30 years and our job is to focus on our business, and that is what we are doing,” Mr. Looney said in a recent conference call with analysts. “If something comes down the road, then obviously we will deal with it as it comes.”
Most oil companies have been reporting bumper profits because of rising oil and gas prices. European firms are using some of their profits to invest more in wind, solar, hydrogen and other forms of cleaner energy. But the current crisis could be a major distraction, if not worse.
Doing business in Russia has always been complicated, especially as Mr. Putin reasserted state control over energy, squeezing private investors.
Shell was forced to give up control of its premier Russian liquefied natural gas project on Sakhalin Island, in eastern Russia, to Gazprom in 2006. Shell retains a modest stake in the facility, and it appears to want to keep the door open to more business in Russia. Along with four other European companies, it helped finance the estimated $11 billion Nord Stream 2 pipeline to Germany.
TotalEnergies has continued investing in a $27 billion natural gas complex in the Yamal Peninsula, in the Arctic, that Novatek controls. The project sidestepped earlier Western sanctions by obtaining financing from Chinese banks. It began producing gas for European and Asian customers in 2017.
Share prices of BP and Total closed on Tuesday down more than 2 percent, and Shell was down about 1 percent.
Prospects for Western oil companies seeking to do business in Russia were once far brighter. Exxon Mobil, Italy’s ENI and other foreign oil companies teamed up with Rosneft in 2012 and 2013 to explore Arctic oil and gas fields.
But U.S. and European Union sanctions imposed after Russia’s seizure of Crimea forced many Western companies to stop expanding in Russia in part by limiting access to financing and technology for deepwater exploration.
Exxon formally abandoned exploration ventures with Rosneft in 2018, and took a $200 million after-tax loss.
Understand How the Ukraine Crisis Developed
How it all began. Antagonism between Ukraine and Russia has been simmering since 2014, when the Russian military crossed into Ukrainian territory, after an uprising in Ukraine replaced their Russia-friendly president with a Western-facing government. Russia annexed Crimea and inspired a separatist movement in the east. A cease-fire was negotiated in 2015, but fighting continued.
Russia’s interests in Ukraine. Russia has been unnerved by NATO’s eastward expansion and Ukraine’s growing closeness with the West. While Ukraine is not part of the European Union or NATO, it receives financial and military aid from the United States and Europe.
How the recent tensions began. In recent months Russia has built up a military presence near its border with Ukraine. U.S. officials say they have evidence of a Russian war plan that envisions an invasion force of 175,000 troops.
Failed diplomatic efforts. The United States, NATO and Russia have been engaged in a whirlwind of diplomacy to prevent an escalation of the conflict. In December, Russia put forth a set of demands, including a guarantee that Ukraine would never join NATO. The West dismissed those demands and threatened economic consequences.
The U.S.’s role. In February, the United States began warning that a full-scale invasion might be days away. Some 8,500 American troops have been placed on “high alert” for possible deployment to Eastern Europe, though President Biden has made clear that the United States would not send troops to fight for Ukraine.
Moscow asserts its power. On Feb. 21, President Vladimir V. Putin of Russia signed decrees recognizing two pro-Russian breakaway regions in eastern Ukraine and ordering troops to carry out “peacekeeping functions” in those areas. In an emotional speech announcing the move, the Russian president laid claim to all of Ukraine as a country “created by Russia.”
What is next? Mr. Putin’s actions appear to be laying the groundwork for wider intervention in Ukraine. But the economic damage of Western-imposed sanctions, and the death toll of a war, might be too great a cost for Moscow to stomach.
Ben Cahill, an energy analyst at the Center for Strategic and International Studies in Washington, said stiffer and broader sanctions could be coming.
“It’s possible new sanctions will try to stop Russia from moving into areas like hydrogen that are part of its long-term diversification,” he said. “Sanctions could make life difficult for foreign companies like BP and Shell if they target the oil field services sector and block equipment they need for operations in Russia.”
Russia is the world’s third-biggest oil producer and the second-biggest natural gas producer. So any crisis involving it is bound to roil energy markets and the global economy.
Besides Russia itself, Europe will feel the brunt of the pain. Nearly 30 percent of European gas supplies come from Russia at a time when reserves are small and prices high. Half of Russia’s five million barrels a day of oil exports go to Europe. A much more modest 700,000 barrels a day or so go to the United States.
But energy experts say the crisis would have been even worse about 20 years ago, before the United States unleashed huge amounts of oil and natural gas from the hydraulic fracturing of shale. Russia’s occupation of Crimea also encouraged Europe to build several large terminals it needed to import more liquefied natural gas, and many more are planned as American energy companies build terminals to export more gas.
“The crisis this year is not as bad as it could have been,” said Amy Myers Jaffe, an energy expert at the Fletcher School at Tufts University.
She added that Mr. Putin’s aggressive moves in Ukraine could backfire by eroding Russia’s importance as an energy supplier to Europe. “We’re going to see more of those steps and policies and an increase in renewables,” she said.
Still, European gas prices are roughly four times higher than a year ago, forcing consumers and businesses to pay more for electricity and heat. And the possibility of tapping into Russia’s vast energy resources is becoming less likely with every escalation.
“If Russia moves troops beyond their line of control, it is hard to imagine that any Western company will be permitted to do additional exploration and production in Russia,” said David L. Goldwyn, who served as a senior energy diplomat in the State Department under President Barack Obama.