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The case against divestment from Russian oil


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Welcome back to Energy Source.

Russia’s war in Ukraine continues to fuel soaring oil prices. Brent crude briefly topped $116 a barrel during trading yesterday, the highest level since June 2008.

Analysts see little relief on the horizon with markets pricing in a significant disruption to Russian oil supply. For now, Russian oil is being kept off the market through “self-sanctioning” as banks and traders avoid the country’s crude to protect their reputations and out of fear of any sanctions that may be coming. Nobody wants to get stuck with a $200mn cargo of Russian oil they can’t sell. Similarly, nobody wants headlines that they’re funding Russia’s war effort.

The Biden administration has tried to quell oil’s rally by insisting it did not intend to target the flow of Russian energy. But as efforts to punish Vladimir Putin gather pace, that has come into doubt. President Joe Biden left the door to those sanctions open yesterday, saying “nothing is off the table” in response to questions about the possibility of embargoing Russian oil.

At the same time, the Opec+ alliance of oil producers, which includes Russia, isn’t stepping into the breach. It said yesterday it is sticking to plans to slowly add production back to the market. The International Energy Agency-led effort to release 60mn barrels of oil from government-held strategic stocks was almost immediately dismissed by traders as insufficient. Goldman Sachs argues that the only thing left to dampen prices will be when oil gets expensive enough that consumers start cutting back, which isn’t likely until prices rise yet further.

On to today’s issue. First up, Antoine Halff, chief analyst at Kayrros and part of the team at the Center on Global Energy Policy at Columbia, argues that the recent corporate exodus from Russia could have some unwanted long-term consequences. Next, Derek highlights some of what Biden did not address on energy in his State of the Union speech. Finally in Data Drill, Amanda looks at new polling showing that most Americans want to tackle climate change, though are wary of completely breaking with fossil fuels.

One last note, Myles and I will be here in Houston for CERAWeek next week, arguably the premier stop on the energy industry conference circuit. We are always keen to meet ES readers, so please do get in touch if you will be there as well.

Thanks for reading.

How the gas and oil sector can actually help Ukraine

The oil and gas industry has a reputation for cosying up to brutal regimes, but in the wake of Russia’s invasion of Ukraine the sector has gone farther than some western governments in confronting Moscow. While the architects of the latest sanctions on Russia have taken care to carve out exceptions for fossil fuels, several oil majors have said they will leave the country of their own accord.

But is it what Ukraine — and the world — really need? In the short term, the majors’ move seems better designed to shield their own reputation than to fend off the invasion. Longer term, their departure may actually be a negative for the climate, while also making it less likely for democracy to take hold in Russia.

It is no coincidence that the first majors to announce their exit from Russia — BP, Equinor and Shell — have also been among the most ambitious in planning their “net zero” transformation. The events in Ukraine occur amid serious misgivings about the role of oil and especially natural gas in the energy transition. Leaving Russia lets companies kill two birds with one stone: avoid the reputational cost of association with Putin and simultaneously accelerate their transition away from fossil fuels.

This is not doing Ukraine any favours. As quick as their decision to leave Russia may have been, implementing it will take time. Ukraine cannot wait for the companies’ lengthy disentanglement. What is needed now is economic “shock and awe”. Divesting multi-billion-dollar stakes in Russian oil and gas doesn’t help with this.

The longer-term benefit of the majors’ exit from Russia seems equally doubtful. The International Energy Agency has made it clear that even in a deep decarbonisation scenario, the world will need vast amounts of oil and gas. As the fuel mix goes greener, we will need gas to manage the huge variability of renewable supplies — at least until breakthroughs in electricity storage are finally achieved. Russian gas will be especially desirable from a climate standpoint given its existing infrastructure and huge potential for methane emission reduction.

Whatever the outcome of the current crisis may be, it is likely to be deeply transformative. In light of the unpopular war, the possibility that a democratic Russia might emerge should not be ruled out. Ensuring good oil-and-gas stewardship would help set a nascent Russian democracy on stable socio-economic ground.

For all these reasons, leaving high-quality Russian oil-and-gas assets in the hands of less responsible actors at fire-sale price could be counter-productive.

Unlike divestments, withholding Russian oil imports has immediate impact. Here too, industry participants are ahead of the game. The usual Russian crude buyers have been “self-sanctioning.” Oil traders saddled with long-term Urals contracts reportedly can’t find buyers for their barrels, even at deep discounts. If this continues, they will run out of storage and production will have to be cut. This may already be happening.

How long Russia can withstand a collapse in oil exports remains to be seen. Importers can make do at least for some time with drawdowns from strategic and commercial stocks and more fracking in the US. Even in a best-case scenario, though, the economic aftershock may be severe. But stopping Russian oil flows can be done now and doesn’t require rushing for the exits.

Antoine Halff is a research scholar at the Center on Global Energy Policy at Columbia University and chief analyst at Kayrros.

The forgotten section in Biden’s State of the Union speech

Russia is demolishing parts of Ukraine, crude and petrol prices are surging, American oil consumption is barrelling higher, global temperatures and carbon emissions continue to rise, and Joe Biden’s clean energy revolution has stalled. The president could have drawn the line between all this when he addressed Congress on Tuesday, but didn’t.

We wondered if he left out a bit of his speech that could have pleased everyone, from demanding sanctions on Russian oil, to the US domestic fossil fuel boosters, to the climate advocates worried that Biden has dropped them.

It might have looked like the below, with a section slipped in just after Biden promised that the release of more oil from the strategic petroleum reserve would “help blunt gas prices here at home” . . .

“But my fellow Americans there is one thing regimes like Putin’s, or Saudi Arabia’s, depend on: our willingness to keep buying fossil fuels.

At the same time, there’s a reason the planet is still warming so quickly: our willingness to keep burning fossil fuels.

Folks, [whisper on] these are linked [whisper off]. And we’re in our own battle now: to restore the global order and also take the critical steps to save our planet. [Pause for applause.]

I want Congress to help me make it easier to build wind turbines and install solar panels. Get ‘er done! [Pause for applause. Salute the Squad members in the upper tier.]

But listen up! I also want Congress to make it easier to build pipelines from the huge shale gas reserves of Pennsylvania to New England, so we never need to import gas from other countries like Russia, or burn oil — oil! — to keep the lights on. [Pause for applause, scour audience for Pennsylvania lawmaker Conor Lamb.]

And I have a message for Texas, our own domestic energy superpower. We need your help. [Point at Senator Ted Cruz.] Keep building all those turbines and solar arrays. Have you seen these things? They’re huge! [Return to text!] They are your future, Texas. And Houston, we have a problem — it’s our climate, and your brilliant engineers can help solve it.

But make your oil and gas as clean as can be, because we are going to need more of it in the short term too. [Pause for applause from Republicans and Joe Manchin.] Climate change is my priority. But we need to be pragmatic too. It is better for the oil and gas we will still need during this transition to come from places that don’t use the income from selling these fossil fuels to fund wars. [Soak in whoops from Republicans and Manchin. Pump fist to chants of “U.S.A.”.]

And tonight I am announcing that we are imposing sanctions on all oil exports from Russia. Vlad, the world doesn’t want your oil! [Ignore departure from chamber of Chinese ambassador.]

The oil price will rise and so will pump prices. But these are costs that the world can bear and that we have a moral duty to bear, if we are to conquer our addiction to the oil that finances tyrants like Putin and the fossil fuels that threaten to destroy our environment.

Folks say this will make me unpopular. We might even lose the presidency. [Talk over shouts from Representative Lauren Boebert.] Maybe. But I have more respect for voters than that. It was a Republican president who said America was “addicted to oil”. Well, it’s time for this generation and this Democrat president to deal with it. Go get’ em!” (Derek Brower)

Data Drill

The majority of Americans think the US should take action on climate change, but don’t want a complete break from fossil fuels, according to a new report.

A Pew Research study found that almost 70 per cent of Americans support the US taking steps to become carbon neutral by 2050, but only a third believe the US should phase out fossil fuels completely.

The study also found that most US adults think the federal government should encourage the production of wind and solar, and about half support the government’s push for electric vehicles.

But when it comes to US climate responsibilities abroad, support dwindles. While most Americans support US participation in international climate efforts, less than 40 per cent think the US has a financial responsibility to help poorer countries build renewable energy sources.

The study comes the same week as the IPCC report, which the UN secretary-general António Guterres used to call out developed countries for stalling on climate finance, and Biden’s State of the Union address, where he touched briefly on clean energy tax credits and EV incentives. (Amanda Chu)

Bar chart of  showing Majority of Americans support the US taking steps to become carbon neutral, but they don't want a complete break from fossil fuels

Bar chart of % of US adults by political affiliation   showing Only 39 per cent of US adults think the US has a responsibility to help developing countries build renewable energy

Power Points

  • Russia’s invasion of Ukraine highlights the geopolitical faultlines in raw material markets.

  • Facebook, Under Armour, and other big companies say climate change is increasing their bottom line, our colleague Patrick Temple-West writes in FT’s Moral Money newsletter.

  • Climate change is taking a physical toll on agricultural workers, prompting calls for new legislation and workplace protections.

  • Devastating floods in Australia cast uncertainty on the insurance sector.

  • Frustrated and disillusioned, climate scientists are preparing to go on strike. (NYT)

Energy Source is a twice-weekly energy newsletter from the Financial Times. It is written and edited by Derek Brower, Myles McCormick, Justin 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



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