Oil and gas companies face a limited and depressed market for their Russian energy interests and operations, even more so after President Joe Biden announced a U.S. ban on Russian oil and gas imports on Tuesday, and the United Kingdom said it would ban imports as well.
Not only is there the danger of a potential sale being ensnared in the growing web of global sanctions on Russian entities and individuals, but broad restrictions on the country's financial sector will also make it tougher to be paid for any sale, attorneys say.
Even taking multibillion-dollar write-downs doesn't absolve energy companies of the legal obligations and liabilities of their Russian assets as long as they remain listed owners of those assets, making it difficult for the industry to simply wash its hands of Russian interests.
"It's great to signal you want to get out as sort of a gesture to the world that you're not going to continue doing business," said Ryan Purpura, a Reed Smith LLP oil and gas partner who does transactional work throughout the industry. "But it's just not as easy as flipping a switch and saying, 'We're done today.'"
Dozens of oil and gas companies have either formally announced that they're ceasing or scaling back their activities in Russia or are reportedly taking such steps. The companies include global giants like BP PLC, which will shed its stake in Russian state-backed oil company Rosneft, and Exxon Mobil Corp. and Shell PLC, which are pulling out of joint ventures backing massive oil and gas projects whose partners include Rosneft and state-owned gas giant Gazprom.
But attorneys say the playbook for divesting Russian oil and gas assets is still being written, and companies must navigate conflicting legal obligations in the U.S., U.K., European Union and Russia. That includes potentially overlapping sanctions regimes imposed by the U.S., U.K., EU and allies, as well as moves by Russia to restrict companies from sending cash abroad or foreign investors from taking cash out of the country.
"In the best of times, you're focusing on reps and warranties and the quality of the assets," said Mike Burke, an Arnall Golden Gregory LLP partner who works on cross-border transactions and U.S. sanctions compliance issues. "But in this circumstance, there's a ton of questions. Who's the ultimate beneficial owner of my partner? Who's the ultimate beneficial owners of a potential purchaser? How am I going to get money out?"
Identifying and brokering a deal with a buyer that isn't potentially subject to sanctions will be a major challenge, attorneys say. And there's an extra degree of difficulty for companies putting together a sale if they are currently partnering with any individuals or entities potentially subject to sanctions.
"If you have a sanctioned party who's involved … either in the transaction or who has an ownership stake in a JV, there's some serious concern about whether a negotiated resolution that preserves the highest value for the U.S. or European company might involve some transfer of value to that sanctioned party that could expose the [company] to enforcement risk," said Mike Lowell, who chairs Reed Smith's global regulatory enforcement group.
It all adds up to a shallow pool of potential buyers and pennies on the dollar for sellers. Any time limits to complete a sale or other obligations imposed by the U.S. Department of the Treasury or other sanctions enforcer as part of any wind-down orders will give buyers even more leverage, experts say.
"It's possible that a [Treasury] general license that authorizes wind-down activity might apply," said Harry Clark, who chairs Orrick Herrington & Sutcliffe LLP's international trade and compliance group. "But it might not, and if it does, it's going to be time-limited, and it might not give you enough time."
Even if companies are able to strike acceptable deals for their Russian assets, it won't be easy to close those deals, attorneys say. For starters, sanctions are blanketing much of Russia's financial sector, which will make financing any potential transaction a challenge, much less moving any potential payments through Russian bank accounts.
"What we're seeing is, even if it's permitted … it may be very hard to find a U.S. or a European bank to do the business, just because they don't want to take the risk on it," said Bass Berry & Sims PLC member Thad McBride, who works on international trade and sanctions compliance issues. "So the financial piece is going to be, at least, very challenging practically, if not legally."
McBride said it won't be easy to find a law firm willing to work on a deal, either.
"We love money, but we don't want to get in trouble and go to jail," McBride said.
If oil and gas companies can't find buyers for their Russian operations, they may simply sit on them, or cease any financial support and completely write down their value. But that doesn't make for a clean break, attorneys say,
"When you have a corporate joint venture partner, and you own an equity interest in something … even if you, on the books, write it down, you still have it, and you still have the obligations and potential liabilities that come with ownership of that interest," said Purpura of Reed Smith. "You can't just say, 'All right, we don't want to do business with you anymore,' and walk away."
Purpura said companies will find it equally tricky to disavow oil and gas assets they own because it raises issues that include how real property interests are affected.
Navigating global sanctions aren't the only issue oil and gas companies have to worry about as they look to leave Russia. Attorneys say companies will have to make clear and detailed disclosures to investors and securities regulators outlining any financial and environmental, social and governance, or ESG, consequences of leaving the Russian market. Those disclosures will also have to detail any potential risks of that exit, such as sales of assets or equity stakes failing to pass muster with sanctions enforcers or the Russian government.
Failing to do that opens the door to investor suits over misleading disclosures as well as pressure from activist shareholders, said Burke of Arnall Golden.
"On the one hand, you can't just go and file and say, 'Everything we have in Russia is worth nothing and we're writing the whole thing off,' because that's the other end of it," Burke said. "But you've got to be on the conservative side of realistic."
In many respects, oil and gas companies looking to exit Russia are still flying blind, attorneys say. The war and retaliatory sanctions are less than two weeks old, and until Tuesday's ban of oil and gas imports by the U.S. and U.K., the sanctions had largely avoided Russia's energy sector.
But if Tuesday's bans are any indication, sanctions will only grow more demanding, not less, which makes the exit path for energy companies more fraught, attorneys say.
"It's only moving one way: to more isolate Russia from the world economy," Burke said.
--Editing by Jill Coffey.
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