The Great Russian Energy Divestment
Big Oil finally grows a spine – to China’s delight
Western oil majors are fleeing Russia. Having bankrolled Moscow’s bellicose expansionism for years, Big Oil has finally taken the moral high ground. A fire sale of meaty assets looms, creating a golden opportunity for state-owned Chinese enterprises. Sanctions and divestments look set to trigger a great transfer of wealth from Western capital holdings to the People’s Republic of China.
There is a view going around that the West’s response to Russia’s brazen assault on Ukraine will herald a new world order. The opposite could be true: it will entrench the current one.
The Russian banking system is collapsing under the weight of Western sanctions. The Russian state will deservedly become a financial pariah for many years, perhaps a generation, for its abominable actions in Ukraine.
The slew of divestment announcements of recent days comes amid punitive sanctions meted out by Western powers against Moscow. These actions could push Russia further into China’s orbit and undermine petrodollar hegemony. Here’s how it’s unfolding.
While the EU and US have been at pains to carve energy transactions out of the scope of sanctions, the mere possibility of being entangled is enough to bring most Western energy executives out in a cold sweat.
Witness how oil traders are self-sanctioning Russian oil – now a toxic commodity. This can be explained by extreme risk-aversion, confusion about what is legally permitted, fears of reputational damage, or moral objections.
It is the latter – moral objection – that international oil companies (IOCs) have cited as their main reason for divesting Russian holdings. European energy major BP moved first, vowing to dump its 19.75% stake in Russia’s biggest oil producer Rosneft. Equinor and Shell soon followed suit.
US supermajor ExxonMobil is to “discontinue operations” at the Sakhalin-1 LNG project and apparently hand its operated stake to Rosneft. Even Swiss trading house Glencore, not renowned for ethical business practices, is reviewing its alliance with Rosneft.
European energy companies are writing off their investments in Gazprom’s Nord Stream 2 pipeline. Shell intends to “end its involvement” in the project, to which it loaned an estimated €1 billion in 2017. Uniper, Wintershall Dea, Engie and OMV also loaned similar sums. Wintershall on Wednesday wrote off its financing of the project. Nord Stream 2 AG, the developer of the project, has reportedly filed for bankruptcy, which the Gazprom-owned shell company has not denied.
TotalEnergies has so far resisted calls to divest its Russian projects. These include significant stakes in the Yamal and Arctic LNG 2 projects developed by privately owned Russian LNG export pioneer Novatek. This defiance is attracting scrutiny.
NGOs are calling on financiers to disassociate themselves with the company. Moreover, the French government is probing Engie and TotalEnergies over their Russian business links. Exiting Russian LNG would blow a big hole in TotalEnergies’ LNG trading portfolio, which sits at the heart of its energy transition strategy.
Cry me a river
Western energy companies were swift to condemn Russia’s warmongering, but the moral objection rings rather hollow. CEOs who signed off on many Russian oil and gas investments after the 2014 annexation of Crimea now say they are invariably shocked and outraged by appalling events in Ukraine.
ExxonMobil reluctantly walked away from its lucrative Arctic oil joint venture with Rosneft under threat of US sanctions post-Crimea. Unencumbered by this threat, European energy companies bankrolled Nord Stream 2 in 2017 and ploughed into Russian oil opportunities. Equinor acquired Russian onshore acreage in 2020 and furthered various other deals with Rosneft as recently as last September.
In its 2020 annual report, BP highlighted Rosneft’s efforts to reduce carbon and methane emissions and promote “sustainable development and social investment, including biodiversity”. When BP unveiled its new strategy to reduce oil production 40% by 2030 on the road to ‘net zero’, it said the Rosneft stake was key to financing a pivot into renewables.
But the invasion “represents a fundamental change”, BP chair Helge Lund said this week. It certainly does; BP was apparently profiting from Rosneft’s activities refuelling Russian tanks. There’s no way to spin that to ESG investors.
“Russia has one of the largest and lowest-cost hydrocarbon resource bases in the world and its resources play an important role in long-term energy supply to the global economy.” – BP Annual Report 2020
When a resource-rich region becomes a no-go zone for Western investors, China fills the void.
China National Petroleum Corporation (CNPC) took over TotalEnergies’ stake in the South Pars gas megaproject in Iran in 2018 when the US re-imposed sanctions on Iran. China actually increased its Iranian crude oil purchases under sanctions, propping up the hardline Islamist regime in Tehran. A similar story played out in Venezuela, where China is by far the biggest creditor to the crisis-ridden socialist country.
Russia’s newfound membership of the global pariah club points towards greater Chinese control over Russian resources. Since there are no obvious buyers for the many investments now being jettisoned by Western IOCs, this clears the way for the likes of CNPC, CNOOC and Sinopec to grab a bargain.
The value of the Russian hydrocarbon licences, projects and infrastructure being written off probably span to tens of billions of dollars, if not hundreds. These could feasibly change hands for a single renminbi. China is already a huge investor in Russia and its state-owned champions would surely welcome the opportunity to expand their footprint for next to nothing.
Russia is an increasingly important supplier of oil, gas and LNG to China. Gazprom and CNPC boosted long-term Russian piped gas exports to China via the Far Eastern Route on the eve of the invasion, and intensified cooperation in the midst of war.
“It makes sense for China to ramp up their Russian exposures” by acquiring Western project stakes, a senior LNG industry source tells Energy Flux. This would allow both sides to “build alternative to US dollar or SWIFT payments”.
The volume of Russia-China trades settled in greenbacks has fallen markedly as the result of a concerted campaign. Western sanctions and divestments could help China achieve its aim of accelerating the demise of the US dollar’s role as the default currency for settlement of oil trades.
The US and EU are waging economic warfare against Russia by freezing Russian central bank overseas assets and expelling some key banks from the SWIFT international payment system. Locking Russia out of the western financial system amounts to weaponisation of the global reserve currency, which is having the desired effect of causing widespread panic and a run on Russian banks.
The severity of these measures puts Russia in a tight spot. To shore up liquidity, a logical response would be to sell Russian oil to Chinese companies in exchange for gold. Since Moscow is not in a good negotiating position, this could see Russian oil heavily discounted in gold-priced trades, resulting in a big boost to the gold price. This benefits both China and Russia, which hold around 1,950 tonnes and 2,300 tonnes of gold in reserve, respectively.
Unsurprisingly, China declined to join Western sanctions against Russia. But that’s not to say the two sides are allies. There is mistrust, and Moscow will want to avoid becoming beholden to Beijing in the same way that Caracas and Tehran are today. Also, Ukraine is a One Belt One Road signatory and Russia’s invasion threatens to destabilise OBOR-sponsored economic activity in the war-torn region.
Bitcoin and other cryptocurrencies offer another potential sanctions workaround. US senators have demanded Treasury secretary Janet Yellen explain how she intends to close that loophole, although Russia-China cooperation in crypto would seem to be tricky after Beijing kicked bitcoin miners out of the country.
In any eventuality, China will want to extract heavy concessions from a weakened Russia in return for its ongoing support during the Western economic siege. Taking over highly valuable Russian energy assets at the dawn of what is shaping up to be a prolonged tightening in global oil and gas markets would cement the Sino-Russian relationship — and embolden Beijing.
Spurning Russian resources on moral grounds is better late than never, but it will not be free of consequences. China’s growing dominance of global trade patterns has already weakened US economic hegemony and ruptured the old neoliberal world order. Beijing will not spurn an opportunity to exploit Russia’s self-inflicted economic exile to strengthen its hand on the global stage.
Seb Kennedy | 3rd March 2022 | Energy Flux
Recommended further reading
Russia eyes sanctions workarounds in energy, gold, crypto – The Olympian
Russia’s attack on Ukraine represents a demand for a new world order – Gail Tverberg
Russia central bank freeze may hasten ‘peak’ world FX reserves – Reuters
The Petroyuan is no Russia sanctions buster – Coindesk
Putin’s war kills China’s Eurasian railway dreams – Foreign Policy