How Oil Giants’ Bets on Russia, Years in the Making, Crumbled in Days

BP said it would divest its nearly 20% stake in Russian state-controlled oil producer

Rosneft.

Shell said it would end Russian joint ventures and get out of the now-halted Nord Stream 2 pipeline poised to carry gas into Germany. Exxon said it would shut down production from a massive oil-and-gas project it runs on Sakhalin Island in Russia’s Far East.

“We’ve effectively walked away from our business in Russia,” said BP nonexecutive director John Sawers at a Wall Street Journal CEO Council event last week. Mr. Sawers, former head of Britain’s foreign-intelligence service, added that the value of BP’s Rosneft stake, which carried a $14 billion book value last year, is currently “close to zero.”

The companies haven’t spelled out how they will extricate themselves from their Russian holdings or exactly how much they might lose, though some have provided ranges. That is because they still don’t fully know, given that escalating economic sanctions against Russia make it difficult, if not impossible, to find buyers for the troubled assets, said the people close to the companies. The assets at stake cumulatively were recently valued at more than $20 billion.

An

Exxon

XOM 3.09%

spokesman said it would have to safely discontinue operations in Sakhalin, then address the contractual and commercial obligations of the venture before it can exit, adding that those steps are under way. Spokespeople for BP and Shell referred to the companies’ previous statements about their exits.

The companies’ exit from the third largest oil producer complicates an already chaotic global oil market that is seeing prices rise over $120 a barrel. It could affect future supplies—these companies have helped Russia exploit its resources—and directly reduce the supply the Western companies produce themselves. Exxon’s shutdown in Sakhalin alone will remove nearly 230,000 barrels a day from global oil supplies. Biden administration officials have expressed concerns about the market impact of the companies’ exits in conversations with Exxon executives, said people briefed on the talks.

Close ties

The pullout by the oil companies—which have cultivated relationships with despots for decades to extract fossil fuels in the Middle East, Africa and other dangerous corners of the world—demonstrates how quickly legal, political and moral concerns have combined to make doing business with Russia a perilous prospect.

“It shows you what a breaking point this is,” said Nikos Tsafos, an energy expert with the Center for Strategic & International Studies in Washington.

Western oil companies had navigated prior rounds of sanctions against Russia, including after its seizure of Crimea from Ukraine in 2014. They forged close, if sometimes uneasy, ties with top Russian officials, and their executives sometimes served in ceremonial Russian posts, signifying the companies’ importance to Russia’s business with the outside world.

Former Exxon CEO

Rex Tillerson,

later U.S. Secretary of State under President

Donald Trump,

was awarded Russia’s Order of Friendship medal by Mr. Putin in 2013 in recognition of his role in the country’s energy sector. Current BP CEO

Bernard Looney

served alongside Mr. Putin and sanctioned oligarchs on the board of the Russian Geographical Society, which Emperor Nicholas I founded in 1845 to promote the country’s scientific research.

When BP announced plans to exit its Russian investments on Feb. 27, it said that Mr. Looney would vacate the society position and that he and former BP CEO

Bob Dudley

would no longer serve on Rosneft’s board, effective immediately. Mr. Looney, through a BP spokesman, declined to comment. Mr. Dudley declined to comment through a spokeswoman. Mr. Tillerson didn’t respond to a request for comment.

London-based BP was the most exposed to Russia, with roots there going back three decades. When Russia attacked Ukraine on Feb. 24, BP rushed to assess the impact and strategized over what to do, people close to the company said.

In a call with Mr. Looney the following day,

Kwasi Kwarteng,

the U.K.’s secretary of state for business and energy, made clear the British government was unhappy with BP’s Rosneft stake and expected BP to respond, the Journal reported earlier. BP announced its pullout following an emergency board meeting two days later, warning that the total impact could result in noncash charges of as much as $25 billion and that it would no longer count on dividends from the Rosneft stake, expected to exceed $1 billion this year.

BP broke the news to Rosneft’s CEO,

Igor Sechin,

a former KGB operative, on Feb. 27, according to the people close to the company. BP’s chairman, Norwegian businessman

Helge Lund,

spoke with him first followed by Mr. Looney, amid nervousness among top BP officials about how the Russian partners would react. Mr. Sechin and Rosneft didn’t respond to requests for comment. A BP spokesman declined to comment on behalf of Mr. Lund.

‘Unprecedented pressure’

They found Mr. Sechin surprisingly understanding, believing the U.K. had left BP little choice. “BP has come under unprecedented pressure from both the regulator and its shareholders,” Rosneft said on its website.

Mr. Sechin was later among the Putin loyalists whose assets were targeted by Western governments. On Thursday, French authorities said they had seized an imposing yacht named the Amore Vero belonging to a company majority owned by Mr. Sechin.

BP’s move put pressure on London-based Shell, whose board met the following day, Feb. 28, after a harried weekend of calls and emails to discuss options, people close to the company said. Mr. Kwarteng tweeted that he had spoken with Shell CEO

Ben van Beurden

about Russia. That evening, Shell said it would exit its joint ventures with Russian energy giant

Gazprom PJSC

and end its involvement in Nord Stream 2.

Shell owns a 27.5% stake in a major offshore gas project in Russia’s Far East that is 50% owned by Gazprom and, according to the companies, supplies around 4% of the world’s liquefied-natural-gas market. Its financing of up to €950 million ($1.04 billion) toward Nord Stream 2, stemming from a 2017 agreement with the pipeline’s Gazprom-owned operating company, is expected to be significantly written down, a person briefed on the matter said.

Germany put the pipeline on hold Feb. 22, and the Switzerland-based operator of the pipeline—now under sanctions—has laid off all employees. Shell had looked to Nord Stream 2 to expand and diversify its access to natural gas. The pipeline funding reflected closer collaboration with Gazprom but didn’t contractually guarantee Shell preferential access to gas from the pipeline, one of the people close to the company said. Shell said it has around $3 billion in noncurrent assets in its Russian ventures and that it expects to book impairments.

Shell continued some Russian energy relationships, buying 100,000 metric tons of Russia’s Urals crude oil at a bargain price on Friday, the Journal previously reported. After an outcry over the transaction, Shell said Saturday it would look for alternative oil supplies but couldn’t stop buying the oil overnight because Russia contributes such a big chunk of global supplies. Shell added it will donate profits from purchases of Russian oil to efforts to alleviate the humanitarian crisis in Ukraine.

Exxon initially remained silent as its peers announced their exits. The Texas company had been monitoring Russian troops massing at Ukraine’s borders for weeks and war-gamed multiple scenarios, said the people close to the company. But Exxon executives assessed that a full-scale invasion was unlikely, the people said.

Exxon, the largest Western oil company, had cultivated ties with Russia for decades. It had an agreement to exploit the oil and gas deposits off Sakhalin Island that had launched with great fanfare in 1996. Mr. Tillerson had developed a close relationship with Mr. Putin, inking a 2011 deal to invest $3.2 billion drilling for oil in the Russian Arctic. Mr. Putin at the time called it one of the most important investments involving Russia and the U.S., forecasting that the partnership could eventually spend $500 billion.

But in 2014, the Arctic project was blocked by sanctions on Russia that the U.S. and its allies imposed after the Crimea invasion. Exxon subsequently withdrew from at least 10 joint ventures with Russian entities. It stayed in Sakhalin, which was unaffected by the sanctions—until last week.

Exxon executives held frequent calls with Biden administration officials before and after the invasion, said people familiar with the discussions. As the Ukraine violence escalated, Biden officials inquired what impact there would be on oil prices if Exxon and others left Russia.

After BP announced it would exit Rosneft, a senior State Department official told Exxon executives the situation was deteriorating in Ukraine and would only get worse, one of the people said, encouraging Exxon to closely monitor actions its peers were taking. Administration officials repeatedly noted they couldn’t compel Exxon to take any action, some of the people familiar with the discussions said.

Exxon executives responded that the company was exploring all options but that a quick exit was impossible because Exxon operated the project and was responsible for safety and environmental measures.

Sakhalin shutdown

By Tuesday, March 1, Exxon CEO

Darren Woods

and other top executives had decided to shut down Sakhalin, the people close to the company said, alarmed by the invasion and determining Russia would likely become an international pariah, making it nearly impossible to operate there.

Navigating four time zones, Exxon executives prepared their Sakhalin partners at Rosneft, Japan’s Sodeco and India’s ONGC Videsh, for the likelihood that Exxon would shut down the project and exit the investment. Exxon executives conveyed that the shutdown would be deliberate, to ensure safety and environmental protections and to mitigate any market disruption.

Mr. Woods took the decision to Exxon’s board Tuesday afternoon, and the company announced the plan hours before President Biden’s State of the Union address. “We deplore Russia’s military action in Ukraine and are deeply saddened by the loss of lives and the needless destruction,” Mr. Woods said Wednesday at Exxon’s investor day. “We expect with time, the ability to continue to operate and sustain the integrity of those operations will degrade.”

Shutting down Sakhalin will be technically difficult. The operations sit in waters that can freeze in 6 feet of ice, and temperatures can fall below minus 40° Fahrenheit. Finding someone to buy the asset could prove challenging, as the market for Russian investments has evaporated. Exxon has estimated its value at about $4 billion. Production from Sakhalin has declined as the project has aged and currently represents about 3% of Exxon’s overall oil production.

France’s

TotalEnergies SE

is the only major Western oil company that has retained a significant presence in Russia, saying on March 1 it would no longer provide capital for new projects there but stopping short of ending existing ones. France’s finance minister discussed the matter with the company’s CEO several times last week, but didn’t pressure TotalEnergies to divest its assets in Russia, which isn’t required by the current round of sanctions, said people familiar with the discussions.

TotalEnergies referred to its statement last week that it wouldn’t fund new Russian projects. A person close to the company said it had no plans to sell off its assets in the country unless forced to do so by additional sanctions.

Chevron Corp.

has no operations in Russia but owns a 15% stake in a pipeline carrying oil from a Chevron project in Kazakhstan to tanker-loading facilities on Russia’s Black Sea coast. The U.S. company isn’t currently planning to exit that investment, according to a person close to the company. Chevron in a written statement said the pipeline is a key export route for oil used by consumers around the world.

Lawyers, accountants and outside advisers are working to determine how the oil companies can restructure their Russian holdings. They are exploring complex options for ring fencing them from ongoing operations—transferring the assets to separate corporate entities—while winding them down and trying to preserve as much value as possible, some of the people close to the companies said. Options include escrow accounts with shareholders named as beneficiaries and special-purpose entities walled off from continuing businesses.

Asset sales would be challenging, some of the people close to the companies said. One primary goal is to avoid ceding direct control to a Russian counterpart or otherwise inadvertently benefiting Russia, they said.

Threats from Russian officials that they will constrain foreign investors from selling Russian assets could give the Western companies legal remedies in international courts, lawyers said. Companies may have grounds to argue indirect expropriation, said Lucia Raimanova, a partner with Allen & Overy LLP who handles international commercial disputes.

But even that avenue to recoup losses looks tough, she said. “You are looking at a multiyear battle.”

—Timothy Puko and Nick Kostov contributed to this article.

Write to Jenny Strasburg at [email protected], Christopher M. Matthews at [email protected] and Emily Glazer at [email protected]