By Clyde Russell

LAUNCESTON Australia (Reuters). BP (NYSE 🙂 has decided to sell its share in Rosneft, the world’s largest oil company. It is also the first public example of companies allowing Russia their business connections. This will have major implications on energy markets for both the short and long term.

The dramatic exit by BP of its 19.75% stake in Rosneft could result in a loss of $25 billion for the London-listed oil company. This is a steep price to pay to show that BP was doing the right thing to respond to Russia’s invading of Ukraine.

“I was deeply shocked and heartbroken by the events in Ukraine. I send my condolences to all of those who are affected. This has made us fundamentally rethink BP and Rosneft,” Bernard Looney (BP Chief Executive) said.

BP’s disengagement of 30 years of ties with Russia places pressure on all other Western oil giants to reevaluate their business relations.

Shell (LON 🙂 holds 27.5% ownership of Sakhalin-2 Liquefied (LNG), a plant located on Russia’s Pacific island Sakhalin. TotalEnergies (France) has a 19.4% interest in Novatek, 20.6% stake in Arctic LNG 2 and a 20.4% stake in Yamal LNG.

It is likely that other Western companies will seek to sell their Russian operations.

These operations will have the short-term consequence that Western companies won’t likely be able to lift any cargoes or LNG.

They won’t be able to buy, trade, or transport as much volume in the future.

It doesn’t mean the LNG and crude won’t get sold, delivered or shipped. However it makes it more difficult for Russian companies to sell and market cargoes previously taken by Western oil giants.

Factor in that some Russian banks have been removed from SWIFT’s international payment system, and it becomes even more complicated to trade Russian crude oil and LNG cargoes.

It does not matter that Western sanctions on Russia are directed at its President Vladimir Putin (and his circle), but energy commodities do not come under their purview. The majority of banks, brokers, oil companies, utility providers, shippers and bankers will likely conclude that doing business in Russia is too risky given the current situation.

Even if Russian companies try to keep trading with them, it is more likely that the process will be complicated.

It means export volumes will likely be lower because it takes longer for cargoes to be arranged. To encourage companies to do business with Russia in the future, Russia’s crude oil and its LNG prices, as well as likely coal, must be significantly less than other options.

STRUCTURAL CHANCES

These are long-term consequences for Russia’s exports of energy.

It may appear that it is impossible to live without Russia, which produces 10% global crude oil and provides 40% of Europe’s natural gasoline. However, it’s not likely that Russia’s energy exports will fall to zero.

Over time, however, Russian suppliers will be less sought after by buyers.

Over time, crude oil flows will be adjusted. Countries that feel ambivalent about Russia’s invasion of Ukraine (e.g. China or India) are likely to purchase more Russian oil. However, only if it is worth the cost.

Russian LNG and pipeline gas might be more difficult to replace over the short- or long-term.

Putin’s actions have likely been a wakeup call for European leaders. They are expected to seek short-term options such as purchasing more LNG from spot markets, trying to improve domestic natural gas output, and possibly postponing the retirements of both coal-fired or nuclear power.

Higher investment in renewables will lead to a reduction of dependence on Russian gas.

Putin’s invasion likely started an unstoppable process, regardless of Russia’s withdrawal from Ukraine or its military action.

Russia will likely experience changes to its energy exports. They may be structural and Moscow could become increasingly dependent upon a few major buyers. These buyers might not mind working with an authoritarian, likely unstable regime.

GRAPHIC-BP exits its Rosneft stake: https://tmsnrt.rs/3BUxzv3

These opinions are the views of the columnist at Reuters.