What Would Happen to Western Oil Companies if Russia Retaliated?

Hypothetically, if tensions were to continue to escalate between Russia and the West over Ukraine, and Russia retaliated against Western oil companies, what would be the effect? Would Western companies with Russian exposure such as ExxonMobil  (NYSE: XOM  ) , Royal Dutch Shell  (NYSE: RDS-B  ) , and BP plc  (NYSE: BP  )  plummet?

Meaningful retaliation is unlikely
I believe the most likely measures of Russian retaliation would be largely symbolic. 

This is because Russia needs Western oil and gas companies. Western supermajors have technology and experience that Russian companies lack. Without the supermajors' know-how, project expenses in the Arctic and Bazhenov Shale would be much higher and build times would be much longer.

As megaprojects such as the Kashagan show, project delays and cost overruns can be very damaging to their host countries.  

If Russia's Arctic projects don't go smoothly, Russia's future energy cash flows will be significantly lower. Because the energy sector accounts for two thirds of Russian exports and half the federal budget, any weakness in its energy sector will affect Russia's overall finances significantly. The resulting financial weakness would arguably be worse for Russia than losing a warm water naval port.

Market doesn't view Russian operations as very important to Western oil majors
With that being said, the world is not rational all the time. Unexpected things happen much more frequently than they should. Once certain lines are crossed, feedback loops make drastic actions much more likely.

If Russia were to meaningfully retaliate against Western supermajors, I don't think shares of Western oil companies would be hit as hard as might be expected. This is because the market doesn't view the Russian operations of oil supermajors as all that promising in the first place. When BP traded 50% of its Russian subsidiary TNK-BP for $12.5 billion in cash and 19.75% of Rosneft, many market participants said it would have been better for BP to get more cash upfront instead of Rosneft equity. When ExxonMobil announced that it would help Russia develop its vast Arctic reserves, the supermajor's stock barely budged.  

In short, even before the Ukrainian crisis, the market was already discounting a lot of geopolitical uncertainty in Russia. The market knew that the Russian opportunity was risky, and it priced shares to reflect that risk. 

The bottom line
I don't think Russia will meaningfully retaliate against Western oil and gas companies. If Russia were to retaliate, it would be much more likely to target Western companies whose products can be easily replaced, such as Pepsi.  

I still believe that the Russian operations of Western supermajors are free long-term call options. If something bad were to happen, the stocks will not fall by much. If the market changes its mind about Russia, the stocks will rise by much more. Ultimately Russia needs the Western supermajors to help it develop its Arctic oil reserves. Major oil companies such as BP and ExxonMobil are the only companies with the right technology, experience, and budgets. The recent Ukrainian geopolitical event hasn't changed this fact. 

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