Western Oil Majors want to return to Russia

The Russian Direct Investment Fund has facilitated the return of American oil companies to the Russian market, following their previous exodus from the country. The decision has been met with a mixed response, with some companies leaving Russia with hostility, while others have been reluctant to exit. Notably, some companies have chosen not to leave the country, which may be indicative of a newfound stability in the industry. The question remains whether large international companies in the industry will be interested in returning to Russia and whether the country requires their participation at this time.
The Russian Direct Investment Fund, under the leadership of Kirill Dmitriev, has facilitated the return of American oil companies to the Russian market. However, due to the events in Ukraine, international concerns such as ExxonMobil, BP, Shell, Equinor, Eni, and several smaller companies, including those operating in the oilfield services sector, had to exit the Russian market.

As Igor Yushkov, an expert at the Financial University under the Government of the Russian Federation and the National Energy Security Fund (NESF), recalls, "The first joint ventures with Western companies fell apart back in 2014, when the US imposed sanctions after the annexation of Crimea, which prohibited Western companies from working on Russia's offshore fields and on fields with hard-to-recover oil. They were prohibited from financing, supplying equipment, etc."

He went on to outline the joint ventures between Russian and Western companies, highlighting Statoil, Eni, Shell and Total's involvement in developing offshore and hard-to-recover oil fields.Additionally, Igor Yushkov noted the proposed Arctic Alliance between BP and Rosneft, which was later replaced by a deal between ExxonMobil and Rosneft for the development of the Pobeda field in the Kara Sea.Furthermore, he mentioned the planned joint venture between Lukoil and Total for the development of the Bazhenova Formation fields.
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Therefore, for these companies to resume involvement in the projects, a number of factors must align simultaneously. Primarily, the US must lift the sanctions that prohibit the development of offshore fields and fields with hard-to-recover oil, as Yushkov asserts. "The Americans have never lifted sanctions in their history, but they can freeze sanctions by issuing a general license for exemption from sanctions. Consequently, it is more accurate to discuss the freezing of sanctions rather than their lifting," says the FNEB expert.
Secondly, the expert notes that Western companies will need to either commit to investing billions of dollars over several years in highly complex projects in the Bazhenov Formation and on the shelf, or develop their own technologies for shale deposit development and adapt them to Russian geological realities, or potentially both.There is always a risk that the next US president, or even the current one, could reinstate sanctions and jeopardise Western companies' investments if relations with Russia deteriorate. Consequently, the likelihood of Western investors returning to complex oil production projects in Russia appears low.Shareholdings in Russian companies:Not all Western giants have divested from Russian enterprises. For instance, BP retains a 19.75% stake in Rosneft, and Italy's Eni continues its involvement in Blue Stream. Additionally, five European companies that contributed to the financing of Nord Stream 2 have the option to recategorise this project on their balance sheets at any time.

The most notable departure was that of BP from Rosneft, with Rosneft's management repeatedly conveying their greetings to BP's shareholders, reminding them of their commitment, but never withdrawing from the company's capital. It is evident that BP is reluctant to relinquish its stake in Rosneft, as it is unlikely that they would be able to acquire the asset again in the future." – says Igor Yushkov.
In the opinion of the expert, it would be extremely challenging for ExxonMobil and Shell to resume their involvement in the Sakhalin projects unless they opt to acquire their stake at prevailing market terms. Shell's stake in Sakhalin-2 has already been transferred to Gazprom, and ExxonMobil's stake in Sakhalin-1 was acquired by Rosneft.

Furthermore, ExxonMobil may encounter difficulties in obtaining approval from Russia, even if sanctions are lifted, due to its behaviour during the exit from the project.The company blocked production at Sakhalin-1, withdrew its specialists, and it took time to resume operations.In contrast, Shell had the option to maintain its shareholding and renew the contract for product purchase, similar to the approach taken by Japanese companies, but it did not pursue this option.

"In my opinion, the most viable option for Western companies is for Russia to return the real market value of the assets they had in Russia, along with the dividends accumulating in special accounts.For instance, Shell's share in Sakhalin-2 was assessed, and Gazprom paid the market value of the money credited to a special account of type C, which effectively remained with the state. The state should then assess the negative impact of Shell on Russia, and this damage should be deducted from the value of the company's share in the project."

BP, which continues to be a shareholder of Rosneft, accumulates dividends in special accounts S. European Total Energies, which has an almost 20 percent stake in Novatek and exactly 20 percent in the Yamal LNG project, is in the same position.
Igor Yushkov has stated that in the event of a ceasefire on terms favourable to Russia, Western companies could receive fair compensation for their shares in Russian companies and return dividends.

He has also said that he would not like Western companies to return to any of our projects at all.

In light of the recent confiscation of Russian oil and gas company assets in several countries, and the hasty sale of those assets that were not confiscated, it is pertinent to question the necessity of Western companies returning to our oil and gas giants. Furthermore, the fate of the remaining assets remains uncertain. Additionally, claims are being made against our companies in Western countries, and these are being satisfied by local courts. Furthermore, there has been a transfer of some of the property of those companies on our territory to the property of other Russian companies by "offset". As Alexander Frolov, Deputy General Director of the Institute of National Energy and Editor-in-Chief of the industry media InfoTEK, points out, this has led to a number of issues.However, there are companies that would like to return to Russia, and Russian oilmen will definitely be glad to see them. These are oilfield service companies.

However, American majors such as Exxon Mobil and Chevron will likely exercise caution due to potential changes in US government policy in the next four years, which could result in further tightening of rhetoric towards the Russian Federation. Additionally, Exxon Mobil has already incurred substantial losses due to the loss of its share in Russian projects. In our opinion, the most probable outcome is the return of American oilfield service companies in the event of a successful resolution to the conflict in Ukraine," says Sergei Kaufman, an analyst at FG Finam.
"It is financially viable for oilfield service companies to continue operating in Russia, and they have taken various measures to ensure this, including transferring all Russian assets to local management, renaming them and entering into agreements on the possibility of buying back their assets," says Yushkov.

Of the "big four" oilfield service companies, only two have exited Russia: Halliburton and Baker Hughes. Weatherford and SLB (formerly Schlumberger) have maintained a presence in the Russian market. While Weatherford has reduced its participation by terminating some contracts, some sources indicate that SLB has assumed some of these contracts, and is even expanding its presence in Russia, which is advantageous given that the main competitors have exited the market.

Yushkov is confident that Halliburton and Baker Hughes will be willing to return, but he emphasises the need to lift sanctions that prohibit the supply of energy equipment to Russia and other restrictions that have hindered these companies' operations.

"Russia certainly needs the return of oil service companies. This will lead to an increase in the profitability of Russian oil companies. Currently, they are drilling multiple wells instead of a single, more technologically advanced well.

Igor Yushkov emphasises that while Russian companies excel in basic drilling and repair operations, Western service companies specialised in high-tech segments. Consequently, their absence has led to increased costs for Russian businesses. He also notes that there is no discussion of increasing production, as quotas set by OPEC+ do not present challenges in this regard.
The lifting of American sanctions in the industry is pivotal, and experts have expressed a degree of optimism. However, they have also warned against excessive optimism, stating that any lifting of sanctions would primarily affect those in the financial sector. This is due to the fact that Trump is averse to the impact of sanctions on the use of the dollar and its influence on the global economy.In the oil and gas sector, if sanctions are ever lifted, they are likely to be the last to be unfrozen. In the gas sector, there is no chance of sanctions being lifted, as the United States is planning to double its LNG exports up to and including 2028. Therefore, the United States will not do anything that will contribute to the restoration of pipeline gas supplies from Russia to Europe or the launch of Russian LNG projects, as these would be competitors of American LNG.