Shell is counting the cost of its retreat from Russia. The tally could be as high as $5bn, it said on Thursday. That will not faze investors. Rival BP’s writedowns could be five times as big. But Shell’s exit could be more complicated. It may also have a bigger impact on Russia’s future ability to exploit its energy assets.
Shedding a shareholding in a Russian company, as BP intends to do with Rosneft, is irksome. But it is simpler than walking away from operational assets. As much as half of Shell’s expected $4bn to $5bn of writedowns relates to partnerships with Gazprom, including its 27.5 per cent stake in the Sakhalin-2 liquefied natural gas facility.
The remainder includes a 10 per cent stake in the Nord Stream 2 pipeline project, $400mn worth of downstream operations and — as revealed on Thursday — up to $1.6bn of other items, such as unpaid contracts.
All that amounts to less than 2 per cent of non-current assets. It is less than a quarter of the writedowns made in 2020, the first year of the pandemic. But the relatively modest financial impact this time understates the significance of the withdrawal.
Though Shell was strong-armed into ceding majority control of the Sakhalin-2 gas project in 2006, its expertise remained crucial. Gazprom, which has focused on pipeline exports, has limited LNG knowhow. The Russian gas group will also lose access to advanced equipment if it is withdrawn by Shell in line with sanctions.
Shell will not cut and run. Safety is paramount, it says. The retreat will be made in stages. Even then, Gazprom should be able to keep production going if there are no big problems, says the Oxford Institute for Energy Studies. In the medium-term, as equipment needs to be replaced, the project’s performance could be still undermined.
The west’s reliance on Russia for energy far outstrips Russia’s dependence on western expertise and equipment. But when it comes to LNG, the dependence is not entirely one-way.