What Do Escalating Russian Tensions Mean for BP?

As the U.S. steps up sanctions on more and more Russian companies, relations between Russia and the West have hit a new low. How will the escalating geopolitical situation affect the West's most Russian energy company?

Jay Yao
Jay Yao
Jul 22, 2014 at 12:35PM
Energy, Materials, and Utilities

In the energy world, geopolitical tension is an iron law. Many investors just take for granted that there will be periodic violence in the Middle East, or that some nations will nationalize oil assets as the price of oil increases. Geopolitical risk is just another cost of doing business, similar to how some wells may come out dry, or some geologies may be more challenging than expected. 

For most of the past decade, the geopolitical tension between Russia and the West has been low, and that resulting stability has produced a win-win scenario for both Russia and Western oil supermajors. With the help of Western energy companies, Russia has managed to develop more energy infrastructure and assets. Western energy companies, meanwhile, have managed to produce more oil and gas and grow their bottom lines.

Because of the Ukrainian situation, however, geopolitical tension between Russia and the West has been on the rise. The U.S. recently, for example, stepped up its sanctions on a multitude of Russian financial, energy, and weapons companies. To make matters worse, pro-Russian Ukrainian rebels are now suspected to have shot down a Malaysian passenger plane. While the exact cause of the crash is unknown, this incident could lead to even more sanctions.

Given that BP p.l.c. (NYSE:BP) owns 19.75% of Russian oil giant Rosneft, BP has significant exposure to Russia. What do rising geopolitical tensions between Russia and the West mean for BP? 

Short-run negative, long-run neutral
Well, in the short run, the rising geopolitical tension could cause BP's stock to languish. The market hates uncertainty, and the situation with Russia certainly counts as uncertain. Because of this, there could be more eager sellers than buyers of BP, and BP stock could remain range-bound or retrace.

As for BP's dividend, the rising geopolitical tension should not affect it. BP's dividend should be safe in the event that Rosneft cuts its distribution because BP has plenty of cash flow to compensate. Even though BP did pocket $456 million in Rosneft dividends last year,, BP is planning to sell approximately $10 billion in non-core assets by 2015. Furthermore, BP could always borrow money to fund its dividend while it waits for growth in operating cash flow to make up the difference. 

As for the long run, the rising geopolitical tension is unlikely to adversely affect BP's Russian operations because Russia and the West are joined at the hip. The West, specifically, cannot do without Russia's natural gas, which supplies 30% of Europe's gas demand, while Russia depends on the West for a significant part of its energy exports. Many of Russia's elite live in the West, while many Western companies consider Russia a promising growth market. Because of this mutual co-dependency, Russia and the West are unlikely to split, and the present damage can be repaired down the road. 

Moreover, even though the U.S. has imposed sanctions on Russian companies, Russia is unlikely to impose sanctions on Western energy companies such as ExxonMobil (NYSE:XOM) and BP because Russia needs Western technology and experience to unlock the oil and gas reserves in the Arctic. If those Western companies don't work in those areas, Russia could experience severe budget overruns and project delays in the Arctic, and this could harm Russia more than the current U.S. sanctions ever could.

The bottom line
Unless it gets notably worse, the geopolitical tension between Russia and the West will just be a blip on the radar in the long run. Over a long enough timeline, a lot of things cancel each other out: leaders leave office, decisions are reversed, animosities are forgiven, etc. 

Because of this, BP's long-term operations in Russia are unlikely to be adversely affected by the current tension.