Our Take: Breaking Up Is Hard to Do

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Western majors that have vowed to sever their energy ties in Russia following its invasion of Ukraine will shed light on any progress they have made when first-quarter earnings season gets under way this month. Taking hefty write-downs on the balance sheet will signal that companies are serious about pulling out of Russia’s upstream and phasing out other exposure to the country, but implementation will move at glacial pace as the conflict and Western actions make any asset sales highly complicated, if not impossible in the near term.

  • In a trading update last week, Shell said it expects to book a post-tax impairment of $4 billion-$5 billion in January-March by ending its operations in Russia, which include the Sakhalin-2 LNG project and the Salym Petroleum Development joint venture alongside Gazprom Neft.

  • Its Nord Stream 2 partners Engie, OMV, Wintershall Dea and Uniper are each set to write off up to almost €1 billion ($1.1 billion) in loans to the Russian gas pipeline project and accrued interest.

  • They aren’t the only ones heading for a costly divorce. Shell’s fellow UK major BP earlier put the carrying value of the 19.75% stake in state-controlled Rosneft it has pledged to offload at around $14 billion at end-2021, while Exxon Mobil — which has acknowledged its withdrawal from the Sakhalin-1 joint venture needs to be “carefully managed” — recently valued its Russian assets at over $4 billion.

  • We do not see budding buyers for these once-coveted footholds in resource-rich Russia stepping out of the shadows anytime soon. Even Russia-friendly Chinese national oil companies look to be treading carefully with stringent sanctions in play, as Sinopec and partner Sibur have placed their $10 billion petrochemicals project in East Siberia under review.

  • Furthermore, any sales will need to be signed off on by Russia’s government and large-scale dollar or euro transactions with a Russian buyer will require approval from Russia’s central bank, which has imposed restrictions on outflows of hard currency and could insist on payment from its frozen foreign currency reserves overseas.

  • French major TotalEnergies, which had deployed $13.7 billion of capital in Russia — in gas producer Novatek and two LNG projects — by the end of last year, stands out as not having announced a withdrawal. Yet the company could come under further pressure to pull out after compatriot Societe Generale — one of Total's core banks — this week ceased its own activities in the country and Novatek Chairman Leonid Mikhelson came under UK sanctions.

  • Western majors can take heart from the fact that SocGen managed to find a buyer for its stake in Rosbank in the shape of the Russian lender's former owner Interros Capital, controlled by oligarch Vladimir Potanin. Less encouraging, however, will be SocGen’s admission that it is taking a €3.1 billion financial hit on the sale.

Corporate Strategy , Earnings, M&A, Gas Supply
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