Russia’s incursion into Ukraine is terrible for its oil companies

Russian president Vladimir Putin on Feb. 22 ordered “peacekeeping” forces into two regions of Ukraine that are contested by Russia-backed separatists, escalating a military standoff that has been gathering steam for months. While the US and its allies finalize economic sanctions against Russia for the incursion, the energy market is already reacting to the possibility that Russian oil and gas exports could be disrupted.

The price of oil is close to $100 per barrel, its highest point in seven years. But that’s cold comfort to Russian oil and gas companies, which are paying a steep price for their country’s geopolitical strategy while their rivals around the world reap record profits.

The Ukraine incursion is making oil more expensive

The current situation in Ukraine is likely adding a premium of almost $10 per barrel to the oil price, said Salih Yilmaz, senior oil analyst for Bloomberg Intelligence. But even if the conflict is resolved quickly, prices are likely to linger around $90 for the foreseeable future due to growing global demand and production shortfalls from Organization of Petroleum Exporting Countries (OPEC) nations.

US sanctions are unlikely to directly target the Russian energy sector. But on Feb. 22 German officials suspended the opening of Nord Stream 2, a new pipeline meant to deliver Russian gas to Europe. Further US sanctions are likely to target banks. That would limit energy companies’ access to finance, especially since the biggest state-owned companies, Rosneft (oil) and Gazprom (gas), rely on business partnerships with US and European oil majors that could be curtailed by sanctions. On Feb. 21, the value of Rosneft shares crashed 25%; Gazprom and independent gas producer Novatek fell more than 10%.

Producers in the US, Europe, and the Middle East will be in line to fill the deficit if Russian exports are cut off, although Yilmaz warned they would be unlikely to be able to fill it completely even if negotiators in Iran succeed in hammering out a nuclear deal that allows Iranian oil back into the market.

Shares of Equinor—a Norwegian company that is Europe’s number-two supplier of gas—hit a record high on Feb. 22; those of Saudi Aramco hit a record on Feb. 21. Europe has also been stepping up shipments of liquified natural gas from the US.