Analysis – While Russia avoids energy sanctions, oil majors are fleeing but TotalEnergies is staying

FILE PHOTO: The logo of French oil and gas company TotalEnergies is pictured at an electric car charging station in Courbevoie
FILE PHOTO: The logo of French oil and gas company TotalEnergies is pictured at a charging station and gas station for electric cars in the La Defense financial and business district in Courbevoie near Paris, France, June 22, 2021. REUTERS/Gonzalo Fuentes

March 5, 2022

By Shadia Nasralla, Benjamin Mallet and Michel Rose

LONDON (Reuters) – France’s TotalEnergies looks lonely as it sticks to its Russian investments during a mass exodus of Western oil majors from the country following its invasion of Ukraine, even though no sanctions have forced such divestitures.

“For existing assets, the company says it will respect European sanctions regardless of the consequences. But right now there are no energy sanctions,” said a source familiar with TotalEnergies’ mindset.

TotalEnergies has a forward-looking position in Russia heavily focused on liquefied natural gas (LNG), with interests in the yet-to-be-built $21 billion Arctic LNG 2 project, as well as the Yamal producing LNG operation.

As the world tries to cut carbon emissions, oil companies are turning to LNG to replace the more polluting coal and oil. TotalEnergies first bought a stake in Russian gas producer Novatek for $4 billion in 2011, gradually increasing its stake to just under 20% by 2018.

“The company cannot divest assets overnight unless sanctions force it to do so. You have to take your time to think,” the source said.

The French government declined to comment on specific companies and Russia. French President Emmanuel Macron, who convened members of a Franco-Russian forum on Tuesday, did not ask TotalEnergies or French companies to leave Russia, two participants told Reuters. Among those present was Patrick Pouyanne, Chief Executive of TotalEnergies.

In contrast, the British government immediately welcomed Shell and BP’s decision to leave Russia. Chief Executive Officer Bernard Looney told employees that BP “could not reasonably proceed in Russia given the conflict in Ukraine,” according to a company source.

Billions of dollars in threatened writedowns are piling up for the companies that have announced they will abandon their Russian assets: BP, Shell, Equinor and Exxon Mobil. There are currently few potential buyers for the holdings and operations they are leaving in Russia.

The share prices of the companies that left Russia have performed better than TotalEnergies in the past few days.

Chart – TotalEnergies stock underperforms:

“We see a possible exit of TTE as much more complicated than for competitors,” said RBC equities analyst Biraj Borkhataria

On Wednesday. “We see Russia as strategically important for TTE, especially for its LNG business.”

TotalEnergies aims to serve 10% of the global LNG markets by 2025 with 50 million tons per year. According to RBC, Russia will account for 6 million tons of Yamal and another 4 million tons of Arctic LNG 2 once it is operational.

Reuters could not confirm the total returns on investments by oil majors in Russia, which do not regularly release asset and country-by-country financials. Nevertheless, it was clear that BP, for example, had already recovered its investments.

When former US President Donald Trump imposed sanctions on Iran, TotalEnergies also stuck with its investment in a major gas field and only dropped it after failing to receive a sanctions waiver from Washington in 2018.

Media reported at the time that Pouyanne told Trump that continued investment could help Iran’s democratic progress.

In 2021, TotalEnergies’ cash flow from Russia was $1.5 billion. It declined to give further details about its Russian investments and previous years’ cash flows.

Meanwhile, BP faces a writedown of up to $25 billion for dumping Russia and losing annual dividends from Rosneft, which fluctuate between about $300 million and $780 million, according to quarterly results.

But the cash flow it’s received from Russia over the years might ease that pain.

In 2003, BP and Russian investors founded TNK-BP, in which BP invested $8 billion. Over the next decade, BP received around $19 billion in dividends.

In 2013, Rosneft bought BP’s stake in TNK-BP for around $12 billion in cash and Rosneft stock, which has yielded BP over $4 billion in dividends.

Shell, an early partner in Russia’s first Sakhalin II LNG plant, sold half of its 55 percent stake to Gazprom for $4.1 billion in 2007, two years before the project went online.

Net revenue in 2021 from Sakhalin II and its Salym oil fields, which began full production in 2006, was $700 million, it said. Tax reports showed that the cumulative revenue from Russia was around US$384 million in 2020, US$455 million in 2019 and a loss of US$16 million in 2018.

Shell pointed to hurts from its Russian exit and said it has around $3 billion in long-term assets. A Shell spokesman declined to provide any further details.

As for Exxon Mobil, which closed the door on its $4 billion assets in Russia and triggered a possible writedown, since 2005 the company has benefited from operating large offshore oil and gas fields near Sakhalin Island.

Exxon hasn’t broken down its investments in Russia and declined to comment on a possible write-down. But CFO Kathryn Mikells said Wednesday that exiting Russia’s oil and gas business would save 1% to 2% in profits.

“They will all have difficulties repatriating future earnings from Russia. One difference between them is that since Novatek is privately held, TotalEnergies can argue that they have fewer direct ties to the government. The question is how long this argument can last,” said Jefferies equity analyst Giacomo Romeo.

“In terms of investment value, direct investments in LNG facilities such as Sakhalin, Yamal and Arctic LNG differ from investments in companies such as Rosneft and Novatek. Chinese or Indian investors might be interested in investing in LNG plants if the price is low enough and there is enough non-contracted volume.”

(additional reporting by Ron Bousso, Sabrina Valle, writing by Shadia Nasralla; editing by David Gregorio) Analysis – While Russia avoids energy sanctions, oil majors are fleeing but TotalEnergies is staying

Caroline Bleakley

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