The Russians Have Come

by

Dave Harbour

Dear Reader: we always solicit new content, comment and facts from our highly knowledgeable and experienced readers — along with additions/corrections to our commentary.   Maintaining accuracy, with your help, is critical to the usefulness of our hundreds of thousands of pages of Northern energy archives spanning over 4 decades (See our internal 'search bar', upper right).  -dh

In yesterday's Memorial Day commentary, amid unhappiness in Ukraine, we again reminded ourselves that the former owners of Alaska have returned as Alaska North Slope (ANS) investors.  (We are also sensitive to US-Russian efforts to create an International park that could someday affect Alaska's commercial fisheries, energy and mining developers, Alaska Native Regional and Village Corporations, and free use of the Northwest Passage.)

One of our  foreign, Pacific Rim readers observed that the logical extension of Russian ANS involvement, under Alaska Statutes, could have the result of, at least indirectly, introducing Alaska to the current Russian – Ukrainian dispute.

Yesterday, we also heard from another NGP reader, James Halloran, a Trustee of the Ohio Oil and Gas Association who is an astute analyst and observer of energy matters.

He commented on the big, $400 billion China-Russian gas sale and pipeline agreement which would result in a $20 billion gas pipeline investment in China and a $75 billion investment in Russia — not counting the value of the gas sale.  (We also note the market power Russia and China will be able to exercise on Western support industries beholden to them for service, supply and logistical contracts.) 

Halloran said that, "We spent four years (1974-77) actively involved with the construction of the $1 billion (estimate) Trans Alaska Pipeline System, that eventually cost $8.9 billion. Factoring in inflation since the 1970s, we would estimate the Sino-Russian pipeline system is a comparable project, in terms of complexity and remote geography.  TAPS got done on time, but it had the finest engineering teams in the world, plus the resources of five major oil companies, to accomplish the task. We also think this is going to be a project worthy of keeping the popcorn ready for watching it unfold. It is instructive that the Russians insist on their part of the pipeline as costing 'at least' $55 billion."

Below, let's review current headlines helping readers connect some of the world-wide dots reflecting Russia's energy strategy.  In doing so, we recall the observation of our Pacific Rim reader yesterday about, "…ongoing interest in investing in Russia with the likes of Rosneft, notwithstanding the sanctions imposed upon Rosneft's CEO, Igor Sechin, personally.":

  • Evaluate Energy, by Ilda Sejda.  Recently, foreign companies have been moving into the Russian oil and gas sector at a rate that has never been seen before.

  • GE and OJSC Rosneft, a leader in Russia’s petroleum industry, today signed a memorandum of understanding (MOU) that lays the foundation for the two companies to jointly evaluate and develop commercial opportunities in oil and gas exploration and production in the Russian Federation.  The MOU was signed by John Krenicki, GE vice chairman and president and CEO of GE Energy; and Igor Sechin, president of Rosneft. 

  • Igor Sechin, President and Chairman of the Management Board, Rosneft and Dinesh Kumar Sarraf, Chairman of the Board of Directors, ONGC Videsh Ltd and Chairman & Managing Director, ONGC signed a Memorandum of Understanding at the St. Petersburg International Economic Forum, in the presence of Mr. Vladimir Putin, President of the Russian Federation. The Memorandum paves the way for the companies’ cooperation in subsurface surveys, exploration and appraisal activities and hydrocarbons production in Russia’s offshore Arctic.  (WEN by Joseph R. Fonseca​)

  • Rosneft and BP signed an agreement on Saturday to jointly explore for hard-to-recover oil in Russia, the first major deal for the state-run Russian oil company since the West imposed sanctions over Ukraine in March.  Rosneft chief executive Igor Sechin, a close ally of President Vladimir Putin, has been targeted by U.S. sanctions along with some other members of Putin's so-called inner circle following Russia's annexation of Crimea from Ukraine in March.​  (WEN by Joseph R. Fonseca​)

  • …at the 18th St. Petersburg International Economic Forum, Rosneft signed an Investment and Cooperation Agreement with North Atlantic Drilling Ltd. (NADL) and Seadrill Limited to form a long-term partnership aimed to develop Rosneft’s offshore and onshore projects until at least 2022.   (WEL by George Backwell​)

  • Venezuela's state-run oil firm PDVSA said on Saturday a $2 billion pre-payment from Russian oil producer Rosneft will be destined in part to develop its coveted Orinoco belt.  (WEL by Joseph R. Fonseca​)

  • A major gas deal between Russia and China could finally be sealed this week when Russian President Vladimir Putin visits China on May 20-21 and meets with President Xi Jinping.​ ​(Energy Daily, by Nick Cunningham)

  • Russia and Jordan's Shale Potential.

  • Russia and Iran's oil.

  • Yves-Louis Darricarrère, Total's head of Exploration and Production, said that his group is committed to expand its activities in Russia and forecasts the country becoming the largest contributor to its production by 2020.  Russia is key to Total's strategy of finding new reserves….  (WSJ, by Géraldine Amiel)

  • Here's the bottom line: in addition to the above, Reuters outstanding news team reports (by Vladimir Soldatkin; Editing by Lidia Kelly and David Evans), via Yahoo Finance, UK, that, "…Rosneft signed several deals at the St Petersburg International Economic Forum over the weekend, despite sanctions imposed on the company's chief executive Igor Sechin…," including:

    • "Rosneft and Union Cuba Petroleo (CUPET) signed Memorandum of Cooperation on projects in Cuba.

    • "Rosneft and United Arab Emirates' Mubadala Petroleum signed a cooperation agreement to "foster greater co-operation between the two companies in exploration and production".

    • "Rosneft and India's ONGC Videsh Limited signed a Memorandum of Understanding (MOU) for cooperation in exploration, appraisal and hydrocarbon production….

    • "Rosneft and PetroVietnam Oil Corporation agreed on key terms of long-term oil supplies to Vietnam…of up to 6 million tonnes a year via Russia's Pacific's Kozmino terminal in 2014-2039.

    • "Rosneft and Mongolia's NIC LLC signed a five-year oil products supply deal…for supply of more than 1.2 million tonnes of oil products from June 2014 to May 2019.

    • "Rosneft and Pirelli signed a Memorandum of understanding over marketing projects in Rosneft's retail network.

    • "Rosneft and Azerbaijan's energy firm SOCAR signed a joint-venture agreement…for oil and gas exploration and production projects including in Azerbaijan and Russia.

    • "Rosneft … said the memorandum foresees a possibility of installation of different Alstom's "solutions and products for power generation, industrial automation and emission control…."

    • "Rosneft signed long-term gas supply deal with Fortum.

    • "Rosneft signed gas supply deal with RUSAL, EuroSibEnergo and Russian Machines."

Our Comments On These Connecting Dots:

1.  Rosneft is an energy arm of the Russian bureaucracy.  While decision making can be swift and supported by the weight of Russia's authoritarian leadership, it can also produce stunning failures arising from a) the presence of political influence, b) the possibility if not the likelihood of graft and corruption, and c) the ultimately, and by definition, "unmanageable" movements of the free market.  

But Russia's grand energy strategy is not guaranteed.  What if its effort and enormous investments into 'managing the mode and means of world energy production' could become frustrated by a) new and more aggressive competition (i.e. shale); b) unexpected and expensive technical delays (i.e. China gas pipeline); or, c) a dramatic world economic decline and an accompanying decline in energy demand.  In that case, we believe Russia's current Ukrainian tantrum demonstrates its leader's propensity to adopt nationalism and imperialism as a means of confronting internal social and economic challenges.  Doesn't this propensity make Russia a very dangerous bear, indeed, to have as a bedmate or energy partner?

2.  Russia is one of the world's largest holders of natural gas and oil reserves.  However, this week's events shown above demonstrate a move to more effectively dominate world oil and gas supplies and supply/distribution chains.  The effect of such a growing monopoly (i.e. not forgetting China's equally aggressive oil and gas acquisition policy), is to make European and even Asian energy users less capable of acquiring reasonably priced and secure supplies from Russian (i.e. or Chinese) energy competitors.  This would ordinarily bode well for Alaska's remote energy reserves, but then we note Rosneft's presence there, too.

We believe that investment advisors, were they to counsel Putin, might say that, "Adding external oil and gas investments to your already large internal reserves of oil and gas has the effect of concentrating, not diversifying, Russian investments.  This increases the odds that with passage of time natural and artificial market forces could result in both massive national profits for Russia, and massive economic decline."  Other world powers, depending on Russia's contractual and military stability and non-aggression have reason — but not necessarily the insight or desire — to believe that they share the risk of Russia's concentration of energy investments.  Russia's growing energy market power can manifest itself as market strength; it can also result in the power to intimidate and create predatory pricing/supply policies, as we have witnessed in Europe.

3.  Some of the flood of deals Putin succeeded in achieving last weekend may have been too hastily organized to meet an artificial, strategic deadline.  Yes, he might have achieved some tactical benefit from stitching many of the world's largest oil and gas producers and support companies into a blanket of political and economic support.   The modern-day Prince Putin provided a very impressive display of government/industrial coordination and effectiveness.  However, history tells us that there are chinks in the armor that, as we describe above, may put the world at risk as Russia encounters unexpected bad results trickling from the impressive portfolio of Memoranda of Understanding (MOU).  

  • Take the deal with Argentina.  A major oil company, Repsol, found out not too long ago that Argentina is not a trustworthy partner, as we reported here.
  • Likewise, Argentina and other companies and governments involved in MOUs with Russia must trust in Russia's commitment to the 'Rule of Law', to living up to its contractual commitments.  This might take on more of a 'religious leap of faith' than normal 'due diligence' in light of how Russia is treating European customers depending on it for stable, secure supplies of energy.
  • With mounting aggressiveness, will Russia use the market power achieved through the weekend MOU and agreement signings to neutralize worldwide opposition to its dangerous designs on former and currently free Soviet republics?  For example, will General Electric supply gas turbines and other technology to the Sino-Russian gas pipeline…and feel obliged to use its significant political muscle in the United States and Italy to urge appeasement in the face of Russian aggression?  Will Total be inclined (or "encouraged") to advise the French and other governments on political matters affecting Russia, such as appeasement or increasing economic sanctions?

No, the Russians are not coming.  They are already here in North America, South America, Western Europe, the Middle East, Africa, Asia and points between.

Those "Points" of Russian presence are like dots on a map.

We hope readers will connect them and apply their own conclusions and strategies to their own corporate, state, provincial and national interests.

The Russians are chess masters.  Chess is the greatest game of strategy.  It can be played innocently for fun and brain development.   Its principles can also be used by expert players to outwit amateurs and more naive, less patient, less developed thinkers.  A cheater can also 'win' a chess game that would otherwise be lost to a superior player.

Partners and opponents alike should be equally nervous about the presence, in their midst, of a modern, Russian prince proclaiming friendship or planning retribution.

We believe that those noted above do not fully comprehend the dangerous game in which they are engaged, with a partner/opponent who embraces such unpredictable values and unexpected aggressive capability.

See our brief commentary tomorrow, "Playing By The Rules", matching the trustworthiness of two of the world's major energy leaders.


 

CWN Forum – Today, May 28th  

12:00pm-1:15pm, Dena'ina Center

Doors open at 11:30AM, program begins promptly at noon

Click Here to Register

On Wednesday, May 28th, Commonwealth North will hold the third of a three-part series discussing the State's plan to take a twenty percent equity share in a North Slope natural gas pipeline project. The Alaska Constitution states that, "The legislature shall provide for the utilization, development, and conservation of all natural resources belonging to the State, including land and waters, for the maximum benefit of its people."

-What does, "maximum benefit" mean?
-Should rural Alaskan's benefit from a project focused on the Railbelt?
-Should Alaskan's expect access to gas at below market prices?

Our panel will discuss the concept of ensuring the maximum benefit of Alaska's resources in the context of this historic, multibillion dollar investment in a gas pipeline project.  

The panel will include :

Gunnar Knapp, Ph.D., has been on the faculty of the University of Alaska Anchorage Institute of Social and Economic Research since receiving his Ph.D. in Economics from Yale University in 1981. Dr. Knapp has conducted a wide variety of research on the Alaska economy and Alaska resources, including in particular markets for Alaska seafood and management of Alaska fisheries resources. 

Marty Rutherford retired in 2010 as Deputy Commissioner, Alaska State Department of Natural Resources. Rutherford has extensive experience with 26 years in Alaska state government, much of it in various positions in the Department of Natural Resources. Marty is currently Special Projects Manager for the Anchorage Office of Linc Energy. 

Dermot Cole is a longtime Alaska reporter, columnist and author, based in Fairbanks. He has written extensively about Alaska and Alaska history for more than 35 years. A former reporter for the Fairbanks Daily News-Miner, his most recent book is "North to the Future: The Alaska Story, 1959 – 2009." Cole grew up in Pennsylvania and lived in Taiwan, Montana and Hong Kong before moving to Alaska in 1974. He is a graduate of the University of Alaska Fairbanks. 

Larry Persily will moderate the panel.  Persily is the federal coordinator for Alaska natural gas pipeline projects and a former deputy commissioner at the Alaska Department of Revenue.   

Click Here to Register for Next Week's Forum

Members, $20; Non-Members, $35

Thank you to our event sponsors! 

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