Why Big Oil is doubling down on Putin's Russia.
Russia may have become an international outcast in the wake of its annexation of Crimea and continued destabilization of eastern Ukraine. But for one group of powerful multinationals, Russia these days is less pariah than promised land.
Big Western oil companies from BP to Shell have not just stayed the course in Russia in recent months -- many have essentially doubled down on oil and gas investments there and built even closer ties with Russian energy firms. Taken together, the deals could send billions of dollars flowing into the Russian economy just when Barack Obama's administration is trying to hammer it hard enough to persuade Russian President Vladimir Putin to reverse his annexation of Crimea and stop menacing eastern Ukraine.
"We've made clear that we'd be prepared to target certain sectors of the Russian economy if we see a significant escalation, including direct Russian military intervention in eastern Ukraine," White House spokesperson Laura Lucas Magnuson has said.
It's unclear how successful the American efforts will be if giant multinational energy firms continue investing in Russia. The deals are a boon to Putin and a blow to President Obama for reasons that go beyond mere dollars and cents. The Western companies that sign the agreements also bring much-needed technical know-how, which is critical to Russian efforts to tap oil and gas in an array of inhospitable sites.
"Basically, they are torpedoing whatever the United States and the EU are trying to do, which is rattle Putin's cage," said Fadel Gheit, an oil analyst with Oppenheimer & Co. in New York. "I'm very surprised the oil companies are going out of their way to assure Russia and Putin that they are going to do business as usual."
Indeed, international oil firms are flocking to do more business in Moscow despite international outrage at the annexation of the Crimean peninsula, fears about Russia's use of natural gas exports to blackmail Europe, and growing signs that Russia is trying to stir up tensions in eastern Ukraine as a prelude to a potential military incursion there.
The continued Western investment in Russia reflects the simple fact that the country's energy potential is simply massive, with still-untapped deposits of oil and gas in Siberia and the Arctic and a huge Asian market for energy exports just next door. The prospect of getting in on the ground floor of the opening of Russia's liquefied natural gas export market is especially attractive to many firms, which see demand for gas in China, Japan, South Korea, and India as a guaranteed market for years to come.
As a result, a parade of Western CEOs have made clear that they have no plans to end, or even delay, their joint projects with Russia. Shell Chief Executive Ben van Beurden, for instance, met with Putin at the latter's residence outside Moscow on April 18. According to Bloomberg, van Beurden told Putin that his company is "very keen to grow our position in the Russian Federation," including through fresh investments to increase the capacity of the Sakhalin offshore gas field and export terminal in Russia's Far East. Kelly op de Weegh, a spokesperson for Shell, told Foreign Policy that the company's commitment to Russia hasn't been diminished by recent events.
"Our strategy for working in Russia, in partnership with Russian companies, has not changed," op de Weegh said. "Russia is a country of great importance for Shell; it is a major hydrocarbons resource holder and a growing consumer market."
She added that the expansion of the Sakhalin liquefied natural gas terminal, which liquefies natural gas taken from offshore fields in sub-Arctic conditions, has been in discussions for years due to its importance as a supply point for the big and growing Asia-Pacific market.
BP head Bob Dudley, meanwhile, said on April 15 that "it's business as usual" in Russia, despite some angst among shareholders, and suggested that BP could serve as a bridge between Russia and the West. BP holds a 20 percent stake in Rosneft, Russia's state-dominated oil giant, which is worth about $13.6 billion.
Norway's Statoil also reaffirmed its desire to stay active in the Russian market and ink joint ventures with Russian oil firms, despite the crisis and the looming threat of further sanctions on Russia. Meanwhile, Exxon Mobil is quietly pressing ahead with plans to look for oil in the Arctic alongside Rosneft; it is also reportedly in talks to join Rosneft for oil deals in northern Iraq.
France's Total, for its part, recently underscored its commitment to the Russian market. That includes a sizable shareholding in Russian gas firm Novatek -- controlled by billionaire oligarch Gennady Timchenko, who was put on the U.S. Treasury Department's sanctions list after Russia's intervention in Crimea -- and a joint venture with Russian oil company Lukoil.
"When deciding to invest in Russia, we assessed the risk of doing so, including a degree of political risk," a spokesperson for Total told FP. "Despite the short-term context, we still consider it acceptable with a long-term vision, and we continue to do business in Russia alongside other Western companies."
Many Western oil firms note that, in the absence of tougher economic sanctions on Russia's energy sector, the Ukraine crisis by itself provides little disincentive to doing business with Moscow.
"We are following the situation in Ukraine closely, but our activities in Russia are not affected by the situation or the sanctions today. We will monitor the situation closely to ensure compliance with sanctions," said a spokesman for Statoil.
Magnuson, the White House spokesperson, said the administration expects "those companies to make their own assessments of the political, financial, and legal risks associated with exposure to Russia" due to the current crisis.
"But given the large capital flight we have seen out of Russia this past quarter, it's clear many companies are thinking twice about investing in Russia," she said.
In a way, Big Oil's rush to keep doing business in Moscow mirrors the continuing appeal of Russian nuclear energy despite all the fallout from the Ukraine crisis. Several European countries are looking to seal multibillion-dollar deals with Russia to build nuclear power plants, and so far the politics of the Ukraine crisis have not affected Russia's nuclear business.
Oil and gas exploration and production, like nuclear power, is a very long-term game: Most companies sign production agreements lasting 25 years or more. That helps insulate, to a certain extent, oil and gas production deals from short-term ups and downs in the geopolitical situation.
What's more, despite the latest political uncertainty, Russia's appeal to the oil and gas industry is especially bright compared with that of many other oil-rich regions of the world, the United States apart.
Latin American energy resources usually come with excessive political strings attached; legal and security issues still dog Iraq's oil renaissance, despite a recent surge in oil output; and a lack of infrastructure, prevalent corruption, and a sketchy security environment make many in the industry cautious about Africa's energy future.
Russia, in contrast, has seen steady Western investment in oil and gas for the last 20 years and the painstaking creation of long-standing business relationships between Russian energy giants and their Western peers.
"It would be very hard for me to see major foreign oil players, who have probably the best understanding of these geopolitical risks, backing away from any of those investments. If anything it would just open the door for someone else to come in," said Robert Abad, an emerging-markets portfolio manager at Western Asset Management.
Indeed, stock markets have not yet punished big oil companies for their Russian exposure. On the contrary, after a small dip in early February due to fears that the West would sanction Russia's energy sector, the energy giants' share prices have kept rising. Stock prices in Shell, Exxon, Statoil, BP, and Total are all flirting with 52-week highs, a reflection that most investors aren't pressing those firms to retreat from Moscow. That means big business may be shoring up Putin just as Washington is trying to knock him down a peg.
"The international oil companies are sending very, very bad signals to Putin and their own governments," said Oppenheimer's Gheit. "Basically they are taking Putin's side."
Jamila Trindle contributed to this article.