There is a risk that Russia could throttle back energy exports as retaliation for its economic isolation © Bloomberg

This article is an on-site version of our Energy Source newsletter. Sign up here to get the newsletter sent straight to your inbox every Tuesday and Thursday

Welcome back to another Energy Source.

The US Securities and Exchange Commission will demand that companies disclose their own greenhouse gas pollution and those from their energy suppliers — so-called scope 1 and 2 emissions.

And oil prices lurched higher again yesterday, amid news that the EU will discuss imposing its own restrictions on Russian oil. Also bullish: more attacks on Saudi oil infrastructure by Yemen’s Houthi rebels. Saudi Arabia warned that the kingdom couldn’t be blamed if more attacks disrupted global supply — comments taken to be a subtle call for more US support in Riyadh’s war against the Houthis.

The notion of sanctions are the topic of our first note, an opinion piece from Bill Farren-Price, a veteran oil market watcher and director at consultancy Enverus. The US’s sanctions on Russian imports, he argues, have “let the genie out of bottle”: other countries should beware similar measures in future.

Our second is on oilfield services. The big three providers all announced over the weekend that they were pulling out of Russia, just days after the FT reported on their continued presence there. Justin digs into western groups’ pullback from the country and what it could mean for the future of Russian energy.

Also, don’t miss my colleague Robert Armstrong’s piece, in his excellent Unhedged newsletter, about his interview with Citi’s oil bear, Ed Morse.

Lastly, our Energy Source Live conference in Houston is coming up on April 7. Sign up and come join us.

Thanks for reading. — Derek

Opinion: Ukraine and the weaponisation of oil

Bill Farren-Price is director of macro oil research at consultancy Enverus

Russia’s invasion of Ukraine and the resulting energy sanctions on the world’s second-largest oil producer will change the oil industry landscape, probably for good. Oil has become central to a post-Cold War arms race. But it is a destructive race to the bottom, where oil sanctions and supply shutoffs are the new levers of geopolitical power — the new big red button. It is a weaponisation of energy by oil consumers and producers that has been coming to the boil for years.

For big western oil consuming countries, sanctions against the largest oil producers came thick and fast over the past 30 years, from sanctions on Iraqi oil in the 1990s, to restrictions on Iranian crude exports over that country’s nuclear programme, to more recent limits on Venezuelan oil during the presidencies of Hugo Chávez and Nicolás Maduro. While western powers wielded oil sanctions to force political change, producers figured out that this was a lever they could also pull.

In most cases, oil supply management has been to the benefit of the global economy and the industry itself. Swift action to cut output by these producers in 2020 rebalanced markets and pulled oil prices off the floor, as Covid-19 ravaged demand across the world.

But these landmark production cuts are now in the rear-view mirror. Since mid-2021, Opec+ producers have increased output as global oil demand recovered. But they have collectively fallen short of their own production targets, allowing oil prices to creep higher and helping push inflation to multi-decade highs. Demands for more oil from the US and other big consumers have fallen on deaf ears.

Western energy sanctions on Russia, designed to choke off the revenue that will sustain its war in Ukraine, will take time to gain momentum. But as tensions multiply, the risk is rising that Russia could throttle back energy exports as retaliation for its economic isolation. Opec’s refusal to open the taps to replace lost Russian barrels — despite oil hitting multiyear highs — makes those producers complicit in this strategy.

There is a lurking danger in this overt politicisation of oil. By explicitly linking Russia’s war on civilians in Ukraine with its oil production, western powers are inviting that link to be made elsewhere. Producers with questionable human rights records will come under the spotlight. Maintaining international support for the Saudi/UAE campaign against Yemen’s Iran-backed Houthis and in favour of the internationally recognised government in Aden becomes more tricky. The genie is out of the bottle — carbon-conscious consumers will want to know not just how green their energy supply is, but what its ethics score is as well.

Russia oil company exodus

The post-Soviet era effort to bring western cash and expertise into Russia’s vast oil and gas fields has been thrown into reverse by Vladimir Putin’s invasion of Ukraine.

Over the weekend the big three western oilfield services firms — Schlumberger, Halliburton and Baker Hughes — said they were pulling back from Russia amid sharp public pressure to break with the country.

Myles and I reported days earlier that the services companies had tried to stay quiet on their Russia plans, even as the higher-profile western supermajors were forced to publicly backtrack from their Russian investments.

Where does this leave western involvement in Russia’s most important industry? Western oil companies have moved into two distinct camps.

The first group has pledged full withdrawal. BP was the most deeply intertwined with Russia, through its 20 per cent stake in state-backed Rosneft, but said it would exit the country altogether. ExxonMobil and Shell made similar commitments to pull out of their Russian projects. Among the services groups, which are crucial to getting western drilling technology into Russia, Halliburton falls into this camp.

The second group is trying to keep one foot in Russia. French oil major Total said it would “not provide capital to new projects”, but is sticking with its current Russian business, which includes a big liquefied natural gas export project. Schlumberger and Baker Hughes say they are “suspending” new investments, but will continue to do existing contracted work. This tack appears to leave ample space for the companies to re-engage with Russia if conditions on the ground change.

For now, US and European sanctions leave the door open for this latter group to continue operating in Russia despite governments saying they want to inflict economic pain on Moscow in retaliation for the invasion of Ukraine. In fact, western policymakers have said they are purposely trying to avoid measures that would disrupt supply — and send energy prices soaring at home.

However, Richard Nephew, a sanctions expert at Columbia University, told us that that could change as sanctions are further tightened.

“I would expect that the next thing we’ll start to see is a prohibition on current activity, or oilfield services that are being provided — so going after those Halliburtons and things like that,” he said. That may not be far off, he added.

There is also a third group of foreign investors. Big energy companies from Japan, India and China are so far not following western groups to the exits, and could play an increasingly central role in keeping large projects running. A consortium of Japanese companies and India’s state-owned ONGC Videsh, for instance, are large stakeholders in the Sakhalin-1 oil and gas project, which Exxon operates but says it is leaving.

One big question raised by the pullback of western groups is the effect it will have on Russia’s oil and gas production, which as the world’s largest petroleum exporter has significant implications for energy markets.

The answer is more subtle than you would think. Any notable hit to Russian production in the short term will stem from countries’ bans on importing crude, which in turn might force operations to slow down in Russia’s upstream — not the departure of western companies.

However, analysts are increasingly convinced that the loss of western investment and technology, along with a broader economic downward spiral, could start to eat away at Russia’s oil and gas industry over time.

Services groups from China or elsewhere could try to plug the gap. But western companies bring technical and operations prowess that has proven hard to replace in other sanctions-hit oil producers like Venezuela and Iran.

“We can’t help but think that current Russian oil production levels might start to come under pressure,” Taylor Zurcher, an analyst at the investment bank Tudor, Pickering, Holt & Co wrote in a note to clients.

(Justin Jacobs)

Data Drill

Americans are trying to live the high life on a budget as rising oil prices drive up the cost of flights and schools close for spring break.

Budget airlines Allegiant, Spirit, and Frontier saw a surge in activity on their apps compared to their full-service counterparts in recent weeks, according to Apptopia, an app intelligence company. 

Daily active users on budget airline apps averaged 15 per cent in weekly increases since mid-February while app activity for non-budget airlines dropped 3 per cent on average. Jet fuel prices have soared along with oil prices and remain up 31 per cent from a month ago, according to the International Air Transport Association. 

Ed Bastian, chief executive of Delta, told the Financial Times that higher fuel costs “will no question” raise prices for domestic and international flights. Multiple airlines including United, American and JetBlue have also trimmed forecasts. (Amanda Chu)

Line chart of Week-over-week percentage change in daily active users on airline app, US  showing More Americans are considering flights on budget airlines as oil prices rise

Power Points

Energy Source is a twice-weekly energy newsletter from the Financial Times. It is written and edited by Derek BrowerMyles McCormickJustin Jacobs and Emily Goldberg.

Moral Money — Our unmissable newsletter on socially responsible business, sustainable finance and more. Sign up here

Trade Secrets — A must-read on the changing face of international trade and globalisation. Sign up here

Get alerts on European companies when a new story is published

Copyright The Financial Times Limited 2022. All rights reserved.
Reuse this content (opens in new window) CommentsJump to comments section

Follow the topics in this article