Oil majors always used to be masters of risk. While many industries focus on safer expansion, gradually shifting beyond markets they know, oil and gas companies would drill in all corners of the Earth, investing billions of dollars in the hope that returns on new projects would be worth billions more. Whether in Arctic regions or countries plagued by war or instability, no territory was out of bounds for the oil prospector looking to strike it big.
Recent events in Russia have shown there are limits to how much risk these companies are willing to carry in their operations in 2022. Following Russian President Vladimir Putin’s decision to invade Ukraine, ExxonMobil and Equinor announced they would dispose of their upstream operations in Russia, which in both companies’ cases includes a number of joint ventures with Russian state oil companies, as well as future expansion plans.
Shell has said it will exit its upstream joint ventures with Russian state energy company Gazprom, end its involvement in the now-suspended Nord Stream 2 gas pipeline, close all petrol forecourts in Russia and no longer accept Russian oil in its refineries. Most significantly, BP will exit its 19.75% stake in Rosneft, which accounted for around a fifth of BP’s profits in 2021, and will involve costs of up to $25bn, said the company.
French oil giant TotalEnergies has also condemned the invasion and promised no new investment in Russia. The company is under pressure to announce its own exit, but has so far resisted calls to leave operations that represented 16% of the company’s global oil and gas production in 2021, reported the Financial Times at the start of March.
What does all of this mean for the energy transition and humanity’s hopes of reaching net zero? In the long-term, it could have a real impact on Russia’s plans to extract hydrocarbons. “Russia is going to lose access to financing, expertise and technology,” says Allen Good, an energy analyst at financial services company Morningstar. “A lot of these fields are ageing, and I think in the long term it could definitely affect their ability to continue to produce oil and natural gas at the level they are producing today.”
Yet, analysts spoken to by Energy Monitor were reticent to suggest the exits represent a significant shift in strategy for the oil companies themselves. “Moves by the oil majors are part of a broader picture of companies severing economic ties with Russia that goes beyond energy, and should be considered in that context,” says Euan Graham from the think tank E3G. Good adds that for most of the companies that have exited, Russia “simply wasn’t an important enough fight”, given both the level of scrutiny companies operating there are now under and the fact that they have more important upstream activities elsewhere.
However, even if the exodus does not represent any material change in strategy, it does reflect the high level of scrutiny energy companies are under. “It is clear that the social license of these companies is on the line this year,” says Graham.
This intense scrutiny was also present in earlier calls for a windfall tax on UK North Sea oil and gas profits after high energy prices meant operators raked in near-record profits, shows data from research company Wood Mackenzie. While commentators on the right labelled the proposals “economically illiterate”, reporting in the Guardian described the tax as “morally and economically clear”. A clip of high-profile TV presenter Jeremy Kyle becoming convinced of the tax’s value went viral in the UK.
These events come on top of the gradual escalation of ESG pressure on corporations in recent years. In 1971, just 1% of General Motors shareholders in the US backed an investor resolution to withdraw from South Africa over its apartheid policy; now shareholders are successfully voting for climate action at big oil companies. ESG funds now account for 10% of worldwide fund assets, reported Reuters in December 2021, with a record $649bn pouring into ESG-focused funds in the first 11 months of 2021, up from $542bn the previous year.
Empty words or real impacts?
However, does this increasing scrutiny – evident in Russia and elsewhere – translate into anything meaningful for the energy transition? Not necessarily. For starters, says investment manager and consultant Wolfgang Kuhn, “there is always a buyer” for assets that are disposed of, even if publicly listed majors are no longer interested.
He adds that, in his view, the oil majors have “long forfeited any social license to operate”, given their history of climate change denial and slowness to react to the climate crisis.
E3G’s Graham notes that – despite their net-zero pledges – divestments in Russia are hardly contributing to a rapid transition from fossil fuels to renewables. Oil majors only invested around 4% of their capital in renewables in 2021, and only 1% in 2020, according to the International Energy Agency. Oil majors’ net-zero pledges remain problematic, say analysts; Eni and Shell’s strategies, for example, would require a forest larger than Bulgaria to offset emissions by 2030, while TotalEnergies and ExxonMobil’s pledges fail to completely cover emissions from products (in Exxon’s case, this excludes around 90% of its emissions).
Then there is the risk that positive PR around the oil majors' exodus from Russia could have the undesirable consequence of distracting from ESG failures elsewhere. When Shell released a statement saying, “We are sorry”, after it bought a tanker of Russian crude oil in the early days of the war, Ajit Niranjan, a freelance climate reporter, asked the apposite question: “[H]as a fossil fuel executive ever used these words when talking about climate change?”
Helen Wiggs, from the campaigning organisation ShareAction, suggests the rush to leave Russia could have resulted from the fact that, as investors continue to escalate their strategies to divest from oil and gas, oil majors are very keen “not [to] give investors any additional reason to divest” by remaining in Russia.
There are also broader concerns that a climate-sceptic political reaction to the war in Ukraine could outweigh any positive climate impacts of the oil company exodus. Wiggs says she is “worried about an ESG backlash as the cost of transition hits a cost of living crisis”, at a time when climate science nonetheless shows we do not have any time to delay the energy transition.
'A glimpse of what is possible'
The war in Ukraine is now in its third week and it remains unclear how long it will stretch, or how far the ripple effects of economic measures imposed on Russia will spread. The exodus of oil companies does offer glimmers of hope for the energy transition, however. For one, it shows oil companies are “paying the price of exposure to oil and gas”, says Graham. More diversified companies like Equinor, or indeed the completely diversified Ørsted, will be less affected.
Romain Ioualalen, from the NGO Oil Change International, adds that international cooperation on sanctions provides a “glimpse of what is possible” when governments act decisively and use all of the policy tools at their disposal to address a crisis. Just a few weeks ago, he says, “nobody would have imagined BP walking away from investments that equal over 30% of its oil and gas production in a matter of days” – but now the conversation has changed: “Imagine what is possible if governments applied this same level of focus and pressure to the climate crisis, where action to save lives is no less urgent.”