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Shell to exit Russian gas ventures

Shell Ben van Beurden, chief executive officer of Royal Dutch Shell, speaks during the 26th World Gas Conference in Paris, France, June 2, 2015.    REUTERS/Benoit Tessier
Shell CEO Ben van Beurden said the company is 'shocked by the loss of life in Ukraine'. Photo:Benoit Tessier/Reuters

Shell (SHEL.L) said it would exit its joint ventures with Russian energy giant Gazprom, a day after BP (BP.L) announced it would divest its nearly 20% stake in Russia’s state-controlled producer Rosneft (ROSN.ME).

The decision means that Shell will pull out of its 27.5% stake in the Sakhalin II liquefied natural gas facility, its 50% stake in the Salym Petroleum Development and the Gydan energy venture

In the wake of Russia’s invasion of Ukraine, the oil company will also terminate its involvement in the Nord Stream 2 pipeline project, in which it holds a 10% stake worth $1bn.

The 1,200km pipeline under the Baltic Sea had already been put on hold by Germany.

Read more: Ukraine to auction war bonds to fund armed forces

“We are shocked by the loss of life in Ukraine, which we deplore, resulting from a senseless act of military aggression which threathens European security,” chief executive officer, Ben van Beurden, said.

“Our decision to exit is one we take with conviction,” said van Beurden. “We cannot — and we will not — stand by.”

The value of Shell’s ventures in Russia is around $3bn (£2.2bn), according to company financial statements.

The associated costs will be marked on its balance sheet later this year.

“Shell has been left with little alternative but to divest from its Russian joint ventures as any delay would have seen political and public pressure intensify. It’s so important that the company isn’t seen to be putting profits first given the atrocities being committed in Ukraine,” Craig Erlam, senior market analysts at OANDA, told Yahoo Finance UK.

“The costs of such a move will naturally be extremely high and there’ll be a huge amount of uncertainty around how it will be managed. But acting early will ultimately be to the company’s benefit. And as we’ve seen after BP's decision, the impact on the share price is reasonable.”

Shell's share price is steady at 1,966p. Chart: Yahoo Finance UK
Shell's share price is steady at 1,966p. Chart: Yahoo Finance UK

Shell did not say whether it would seek to sell its stakes or write them off.

“The immediate share price impact has been limited, supported by some extent by the ongoing strength of the oil price, which is up by 29% in the year to date. The company expects that the decision will lead to impairments and is currently evaluating the financial implications,” Richard Hunter, head of markets at Interactive Investor told Yahoo Finance UK.

Read more: BP to offload stake in Rosneft and take $25bn hit

“However, those are not likely to be on the scale suffered by BP, and despite the announcement Shell shares remain ahead by 21% in the year to date.”

Business minister Kwasi Kwarteng congratulated Shell on its decision in a tweet, imploring UK companies to continue to pile pressure on to Russia.

Jamie Maddock, equity analyst at Quilter Cheviot, told Yahoo Finance UK that Shell's exit will not have a huge impact to the company's ongoing business.

“In total, Shell’s Russian exposure is around 3% of adjusted earnings and represents a similarly modest component of the group’s operating cash flow. So an exit is fairly immaterial to financials and not disruptive to the ongoing business.

“And while Shell has less exposure to Russia than BP, it’s the business fundamentals that really count and that’s where Shell also has an edge on BP.

“Shell has much more favourable levels of free cash flow over dividends in which there is potential upside to distributions. Shell has lower balance sheet leverage and leverage to higher long-term LNG prices. Once more, Shell has a more modest energy transition plan relative to BP so is less constrained around renewable volume targets.”

Shell's decision follows that of BP, which announced that it would offload its 19.75% stake in the Russian state-owned oil firm Rosneft, which will result in charges of up to $25bn.

Decisions by BP, Shell and Norway’s Equinor (EQNR) to cut ties with their Russian partners have increased the pressure on the likes of TotalEnergies (FP.VI), ExxonMobil, Trafigura and Glencore (GLEN.L) to do the same.

Watch: Shell joins BP exiting Russia over invasion