With sanction after sanction, future looks darker for Russia's oil industry

A week after a chorus of Western executives from Exxon Mobil, BP, Shell and other companies denounced Moscow’s violent onslaught in Ukraine and pledged to pull their companies out of Russian ventures, it appears the turbulence for Russia’s energy industry has only begun.

For the oil companies, three decades of carefully nurturing investments in what was always a difficult political environment is poised to quickly go by the boards. But the high point of Western involvement in Russia passed years ago, pushed along in part by outrage over Moscow’s annexation of Crimea in 2014.

The Russian oil industry, though, is likely to experience a wrenching reworking about how it does business in the coming weeks, months and even years. In the short term, this painful reckoning will come not so much because blue-chip oil companies are leaving, but because Russian oil and gas have suddenly become toxic to many buyers.

On Tuesday, President Biden announced a ban on Russian oil imports to the United States, a move aimed at further penalising Russia. Earlier in the day, Shell, Europe’s largest oil company, said it would stop buying the country’s oil and gas and “withdraw from its involvement in all Russian hydrocarbons.”

Until the invasion, Russian oil was a critical fuel in Europe and other markets, including the United States, where it made up about 7 percent of imports. Now, the Russian crude known as Urals is being sold either at steep discounts to Brent crude, the international benchmark, or not at all. Beyond the United States, other countries are considering whether to impose embargoes on Russian energy imports.

The question that the Russian industry immediately faces is whether to throttle back production. Russia has been producing about 10 percent of the world’s oil supplies.

“There is no reason to produce more oil if you cannot sell it,” said Tatiana Mitrova, an expert on the Russian industry and a fellow at the Columbia Center on Global Energy Studies.

Russian companies will be shopping for new buyers in Asia and other regions where the outrage over Ukraine is less pronounced. Mitrova said that over time, “there will be a massive orientation of oil and gas flows from European markets, first of all to China.”

Mitrova said Russia would accelerate expansion of existing oil and gas pipelines to China.

In the longer term, though, the future of the Russian industry, which bankrolls a large portion of the government budget, has turned cloudy. China, for instance, is a hard bargainer that pays only a fraction of the price for Russian natural gas that customers in rich European countries like Germany and Italy are now paying.

And the output of the vast West Siberian oil fields and other older operations that have sustained Russia as a world-leading oil producer for decades is in decline.

New fields being developed by Russia around the Arctic are “notable for their harsh operating conditions and higher costs,” according to a recent study by Energy Aspects, a research firm. In the past, Western companies have taken on difficult projects like offshore drilling and liquefied natural gas, or LNG, development while leaving the more plain-vanilla undertakings to Russian competitors.