BP Exits Russia with Potential $25B Loss, More Companies to Follow

Sanctions against Russia from the US and other European countries continue to stack up by the day following its invasion of Ukraine last week. The fallout of Moscow’s action has also led to western corporations exiting or considering breaking off relationships.

British multinational oil gas firm BP announced on Sunday that it was exiting its $14 billion investment in Russian giant Rosneft. This sudden divorce is further evidence of the uncertainty Kremlin’s invasion has caused in the energy business. Last week saw huge swings in oil and gas prices when the attack began last week. 

According to reports, oil surged to $105 per barrel before dropping off. Meanwhile, European gas also spiked by almost 69% before falling to 40%.

BP Committed to Exit Russia Despite a Potential $25B Loss

BP’s divorce from Rosneft is estimated to cost $25 billion and will see the British company lose half of its oil and gas reserves. It will also be a financially complicated affair, with Rosneft losing half of its $14 billion value as evaluated by BP last year. 

Looming sanctions mean BP’s CEO Bernard Looney may have to write off the entire sum due to an evident lack of buyers. This, combined with another $11 billion in foreign exchange losses previously reported, would see BP lose at least $25 billion this year. Looney expressed his shock at the unfolding events in Ukraine, describing his company’s decision as the right thing to do.

“I am deeply shocked and saddened by the situation unfolding in Ukraine. It has caused us to fundamentally rethink BP’s position with Rosneft. I am convinced that the decisions we have taken as a board are not only the right thing to do, but are also in the long-term interests of BP.”

Projections show that the company’s net debt would climb from 25% of the total capital of 2021 to 28%. Looney also loses $2 billion off the $40 billion in EBITDA he expects by 2025 to fund the company’s renewable energy expenditures.

Meanwhile, BP’s move signals the end of one of the West’s most significant investments in Russia. The deal was deemed politically important that Russian President Vladimir Putin and then-British Prime Minister Tony Blair attended the contract signing ceremony in 2003. After the proceeding, Putin described the BP-Russia agreement as a sign of the favorable trends in Russia’s business climate.

So far, BP’s partnership with Rosneft has been a mixed blessing. Ever since the British company’s TNK-BP joint venture collapsed in 2013,  it has been left with a $12 billion cash pile and equity interest. Because it owns a fifth of one of the world’s largest oil firms, BP increased its output by 1.1 million barrels per day last year. This resulted in a $2.7 billion profit before interest and taxes. Despite this, several investors were wary about Rosneft because of its close ties to the government. 

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Shell to Follow BP’s Exit Next

The wake of BPs announcement has seen several companies indicating they will divest their joint ventures in Russia. Equinor, the Norwegian-owned energy company announced a similar move yesterday alongside Norway’s sovereign wealth fund.  The Australian sovereign wealth fund has also said it will reduce its exposure to Russian-linked companies.

Consequently, the spotlight has turned to other big players within the energy sector including Total energies, Exxon, and Shell. These companies have huge stakes in Russia and are now under pressure to take a stand against Moscow following widespread sanctions. Out of them, Shell has already committed to exiting the region.

This wave of investment withdrawal is another front in the campaign to isolate Moscow’s economy. Western allies have closed their airspaces to Russian airlines while also restricting its banks from the SWIFT financial system. The result of these sanctions has seen the Russian economy tank with the Rouble following MOEX’s lead and plummeting. Yesterday, the Rouble fell almost 30% against the dollar, causing the central bank to increase its main interest rate to 20% to keep it afloat.

Interestingly, Moscow may have prepared for these sanctions by legitimizing the use of cryptocurrencies. However, Ukraine seems to be benefiting the most from digital assets as it receives financial assistance through cryptos. 

Do you think more companies will continue to divest their interest in Russian companies regardless of what it costs? Let us know your thoughts in the comments below.