Shell and BP were among the first to pull out of Russia - and now the bills are starting to come in

Western companies were quick to announce their full departures from Russia or a suspension of operations in the country – and now the bills are starting to come in.

Among the first to pull out of what is fast becoming a pariah state were the UK oil majors BP and Shell and, in terms of the financial hits being taken in the retreat from Moscow, they are facing the most pain.

Shell today made an attempt to put a number on that by warning that it faces write-downs of between $4-$5bn after exiting Russia.

Its interests there were substantial and included a 27.5% stake in Nord Stream 2, the now redundant new gas pipeline linking Russia and Germany; and its 27.5% stake in Sakhalin-2, the giant offshore gas field in Russia’s far east that supplies about 4% of the world’s liquefied natural gas.

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These ventures were previously valued in Shell’s accounts at $3bn. Now, though, the company has concluded the cost will be higher of exiting these investments and other actions including stopping buying Russian crude, closing its petrol stations in the country and closing its aviation fuels and lubricants businesses in Russia.

The higher sum also takes account of the fact that Shell may not now be paid some money it is owed in Russia. It is this latter issue that is thought to be chiefly behind today’s upwards revision.

While shares of Shell – which have risen by 31% since the beginning of the year and are just under 10% since the beginning of the war – initially fell by 2%, the good news, so far as investors will be concerned, is that the charges will not impact adjusted earnings for the first three months of the year.

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That is largely because, thanks to higher oil and gas prices, Shell’s trading profits for the first three months of the year are likely to be “significantly higher”. The company said its indicative refining margin widened from $6.55 per barrel during the final three months of 2021 to $10.23 per barrel during the first three months of this year.

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Less encouraging was news concerning Shell’s cash flow from operations (CFFO).

The company said: “CFFO is expected to be negatively impacted by very significant working capital outflows as price increases impacting inventory have led to a cash outflow of around $7bn.

“Reflecting the unprecedented volatility in commodity prices prevailing up to the end of the quarter, material additional movements could be seen in CFFO from margining effects on derivatives, changes in inventory volumes and in accounts payable and receivables.”

This was a reference to the fact that, with oil prices so volatile, Shell has – like other energy traders – been obliged at times to put up more cash in so-called ‘margin calls’ due to movements in the value of derivatives contracts they use in hedging.

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Shell also provided a little more colour on the way it is exiting Russia. The company was criticised for buying a cut-price cargo of Russian crude from the oil trader Trafigura, just days after it announced it was pulling out of Russia, subsequently apologising and promising to hand any profits from the transaction to the humanitarian relief effort in Ukraine. Today it said it had not renewed longer-term contracts for Russian oil and would only do so under explicit government direction.

But it added: “We are legally obliged to take delivery of crude bought under contracts that were signed before the invasion. The current volatile state of oil markets and the ongoing efforts to reduce term volumes of Russian sourced feedstock, may mean this formula will be updated on quarterly basis in 2022.”

What was missing from today’s announcement was any information on what Shell plans to do with its stakes in Sakhalin-2 and Nord Stream 2. It is unclear whether Shell plans to try to sell these assets or simply hand them over to their joint venture partners.

That is also a question being asked of BP which, reportedly, is trying to find a buyer for its 20% stake in the Russian state-controlled oil producer Rosneft. State-backed China National Petroleum Corp and Sinopec of China and India’s Oil & Natural gas Corp and Indian Oil Corp are all said to have been sounded out.

In the meantime, BP and Shell’s relatively speedy moves in announcing their exits from Russia – and the speed with which they have sought to put a number on the accompanying financial hit that they will both take – stand in stark contrast to the sluggish response from the likes of France’s TotalEnergies and Austria’s OMV, both of whom have yet to commit to a full exit from Russia or to put numbers on how much this will cost them.

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