Petroleum Review - Editorial - October 2004
Eyeing the bear as blame game starts
For the last three years Russia has provided the largest incremental non-Opec crude volumes (520,000 b/d in 2001, 642,000 b/d in 2002 and 845,000 b/d in 2003). It is likely to do so again this year, probably adding 700,000 b/d.
At the moment the signals coming out of Russia are mixed and ambiguous, with a slightly sinister tone starting to creep in. The destruction of Yukos at the hands of the Russian taxman appears to be proceeding apace. Petroleum Review learns from Russian industry insiders that the destruction of Yukos is now seen as inevitable. The latest report is that the licences for Yagansk - Yukos' primary production asset - may be revoked. If this were to happen, the company would be reduced to the secondhand value of the pumps and pipelines in the oil fields. UFG/Deutsche Bank analysts now value Yagansk at $1bn-$2bn if stripped of its licences (less than its immediate tax liability) but at $15bn with them.
Could this happen? We don't know, but the signs are not encouraging. Both President Bush and ex-Russian President Boris Yeltsin have warned President Putin that he is risking democratic reforms in Russia with his recent decisions on increased powers for the security services and the Kremlin appointment of regional governors. However, Putin's strong-man approach to both internal security and the oil oligarchs appears to be highly popular with the Russian people.
Russia's latest move has been to merge the state-owned oil company Rosneft with the partially privatised gas monopoly Gazprom. As a result, the state will have majority control of this new energy behemoth.
Putin has always indicated that he wants to rebuild the power and prestige of Russia as quickly as possible. As its has been reported that his higher degree was in the economics of natural resources, a reasonable guess would be that resource exports are seen, by him, as the key to rebuilding Russia in general and Kremlin power in particular. In this context, higher energy taxes; control of oil exports via the state-owned pipeline monopoly Transneft; recreation of a state-controlled energy major in Gazprom-Rosneft; the destruction of Yukos (the most western of all the Russian oil companies); and the aggressive use of nit-picking rules about licences and production permits as ways to control company activity would all seem to add up to a deeply statist, central control model.
Following the same logic, the central appointment of regional governors blocks the route used by several oligarchs, whereby they got themselves elected as governors of obscure provinces and then used their wealth to bring in investment in exchange for (often self awarded) tax and permitting priviledges.
To western commentators hoping that after a rough start Russia would become progressively more democratic, capitalist and protective of private ownership, this all looks rather negative. To the average Russian - who has no useful experience of democracy, capitalism or even legally-defensible personal ownership rights - this looks like a strong leader bringing back order and stability. For the oil industry, it brings the challenge of how to do business with the new autocracy.
To date, only BP has really taken up the direct investment challenge. For some time Gazprom has cast covetous eyes on BP's Kovytka gas field in eastern Siberia. Now there are rumours of possible rescinding of BP's licence for the field. Is this a particularly brutal form of negotiation to cut Gazprom in? Or is it the first move by the new state-controlled oil and gas behemoth? What happens to Kovytka could be the touchstone for what happens in Russia. It may also determine for how long Russia remains the main source of non-Opec growth.
The blame game
Most agree that recent oil discovery has been disappointing, that there is a lack of new capacity and a dangerously small margin of spare capacity. Candidates for blame include - lack of investment by Opec, lack of investment by the oil companies, lack of exploration by oil companies, synchronous economic recovery, rapid demand growth in China and the US, financial markets requiring unreasonably high and quick returns inhibiting investment. There is some truth in all these, but the real question is if we are in a lack of spare capacaity hole, how do we get out?
Chris Skrebowski
The opinions expressed here are entirely those of Chris Skrebowski, Editor of Petroleum Review, and do not necessarily reflect the view of the EI.
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