The decision by many multinational corporations to exit Russia, after decades of engagement between global business and Russia’s state-dominated economy, indicates that investors can no longer rely on the regime in Moscow to enforce the rule of law.
Russian President Vladimir Putin, once regarded as a modernizing autocrat, is clearly driven by personal obsessions rather than any rational cost-benefit calculation, and although Russia has always been a risky environment for business, even the most experienced international companies have had enough.
In Russia’s all-important hydrocarbon sector, BP and Shell have signaled their intention to sell their assets, including shares in a vast energy development project on Sakhalin Island off Russia’s Pacific coast, shares in the state oil giant Rosneft and stakes in other joint ventures.
Illustration: Constance Chou
Global energy companies will have to look elsewhere for the next generation of resource development projects, and that search will have major implications for the broader transition away from hydrocarbons.
The global energy transition has only just begun. The world is to continue to need about 100 million barrels of oil per day for at least the next two decades, along with a growing volume of natural gas.
The Middle East and North Africa still offer the best prospects for new discoveries, despite the continuing challenges of working in countries such as Iraq and Libya.
More generally, oil and gas assets are likely to increase in value, and there is a good chance of new mergers-and-acquisitions activity in the industry.
However, within Russia, new risks are likely to discourage future investment and unnerve investors in other, less visible sectors.
Economic chaos, rising inflation and a government liable to retaliate against Western sanctions would pose major challenges. Assets are likely to be written down, affecting the strength of some corporate balance sheets. Insurance charges for those working in Russia are likely to become prohibitively expensive.
More Russians might seek to leave the country, taking with them whatever funds they have and increasing the flow of money into safe havens around the world.
Putin is mistaken if he thinks the exodus of BP, Shell and others will not impede the Russian oil and gas sector’s longer-term development.
Over the past 20 years, advanced technology from abroad has helped Russia’s old state-controlled energy sector identify and develop new resources, and improve its efficiency and performance.
If Russia’s energy sector is to remain viable, it would need far more investment in oil and gas, transmission systems, and pipelines to access new markets in the east.
Without the presence of the world’s premier international energy companies, it would be difficult, if not impossible, for the sector to attract the funds it needs.
There would also be consequences for Europe, where Putin’s invasion has moved energy security to the top of the political agenda.
Germany, once happy to tolerate its dependence on Russian suppliers, is now seeking to diversify its energy sources, even reconsidering extending the life of its three remaining nuclear power plants.
This is good news for the liquefied natural gas business — which handles more than half of internationally traded gas — and, potentially, for the nuclear energy sector.
As nuclear power generation offers domestically produced supplies of electricity that are immune to international market volatility, it could come to be seen as the key to avoiding dangerous energy dependencies. Small, modular nuclear reactors, like those being developed by Rolls-Royce, should become more attractive in the UK, parts of Europe and around the developing world.
However, the industry would face a setback if the fighting in Ukraine causes any serious damage to the country’s nuclear facilities.
Although the pressure to move away from gas is likely to intensify in Europe, demand is expected to continue to grow in many other parts of the world.
In a climate of energy insecurity, direct state-to-state-backed transactions are likely to prevail. China is leading this process, but it is hardly the only power with an incentive to build more links with producers in the Middle East, Africa and elsewhere.
Following a gas deal with Russia early last month, the events of the past few weeks are likely to trigger a reassessment by China of its increased reliance on Russian supplies — mostly from Siberia and Sakhalin — as has happened in Germany.
At the same time, policies to combat climate change are likely to be assigned a significantly lower priority. While increasing the supply of renewables also advances energy security, the extensive public spending required for investment in projects might need to be postponed. With rising energy prices driving up retail bills, governments would not want to impose the additional costs of the green agenda on their constituents.
Russia’s war in Ukraine brings opportunities and risks. Investment in natural resources — food, minerals, energy — remains as necessary as ever.
A renewed cold war might limit the features of globalization that have defined the past 30 years, but economic life goes on. Nothing in the current situation has changed the global economy’s underlying dynamics: growth driven by an ever-rising population (almost 10,000 per hour) and the continuing spread of prosperity, particularly in Asia.
For all the complications and losses caused by what is happening in Ukraine, these will continue to be the fundamental forces driving the energy sector.
Nick Butler, a visiting professor at King’s College London, is founding chair of the Kings Policy Institute and chair of Promus Associates.
Copyright: Project Syndicate
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