Tuesday, February 15, 2011

Exxon follows BP into Russian Exploration

The World Economic Forum in Davos was the location where ExxonMobil announced its joint venture with Rosneft to explore the Black Sea for oil. The two energy giants are combining forces to explore a deepwater trough off the coast of Krasnodar. During the exploratory stage, the two companies will split the costs 50-50, but Exxon will pay 66 percent during the development stage. The geologic formation, known as the Tuapse Trough, is estimated to hold 7.2 billion barrels of oil or its equivalent. http://www.themoscowtimes.com/business/article/exxon-rosneft-sink-1bln-in-black-sea/429894.html Exxon has committed itself to drilling two wells in the area, according to Hurriyet. ExxonMobil has been in Russia a number of years, as 30% owner of the consortium that has developed the Sakhalin-1 project.

The $1 billion deal was signed on January 27. Russian Deputy Prime Minister and Rosneft Chairman Igor Sechin remarked, "Cooperation with ExxonMobil once again underscores our commitment to the principles of transparency and vision of the Russian energy industry as a part of an integrated market place." The St. Petersburg Times reports that the consensus is that Sechin is sincere; Rosneft is looking to a global future, and to achieve that goal requires Western partners.

Rosneft has now signed deals with both BP and ExxonMobil, and Shell's CEO Peter Voser says that he is also in talks with company concerning a possible partnership. Energy analyst Matthew Hulbert writes in European Energy Review that such deals represent the start of a mergers & aquisitions frenzy in the upsteam sector in Russia and other countries, as a result of the Exxon oil spill in the Gulf. Traditionally "safe" locales such as the United States have been demonstrated to carry large, potential financial risks. This is forcing the majors to look at other locations that were previously rejected because of the political risk.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.

Saturday, February 12, 2011

Kyiv Pulling Away from Moscow

When Viktor Yanukovych was elected President of the Ukraine, Western officials decried the end of the Orange Revolution. Yanukovych had been supported by the Kremlin, and one of his first acts was to extend Russian basing rights for the Black Sea fleet at Sevastapol. Moscow had purchased the extension by reducing the price of natural gas for 2010 by $3 billion. In the competition for control of the "near abroad," Ukraine had slid back into the pro-Moscow column.

National interests are more enduring than Presidential administrations, however. Russian attempts to control Ukraine's politics by manipulating energy supplies have pushed Yanukovych into a more independent course.

Under the administration of the Western-leaning Viktor Yushchenko, Gazprom cut off supplies to the Ukraine on 1 January 2006. Charges flew about official corruption, bribes, Ukrainian stealing of gas supplies, and pricing irregularities. European countries downstream complained that their gas supplies were also being affected, and Gazprom resumed deliveries the following day.

In March 2008, Russia reduced gas flows to Ukraine by 50% in another pricing dispute. Gas supplies were returned to normal before European powers could complain, but the incident underlined that Gazprom's tactics in 2006 were not an isolated incident.

The biggest supply interruption came in January 2009. In Europe, the cancellation of gas deliveries for several days led to increased support for the Nabucco pipeline; in Ukraine, the supply interruption helped convince voters that their energy supplies could only be insured by the election of a pro-Moscow candidate to the presidency--Yanukovych. Despite the election of Yanukovych, however, Moscow has threatened to build the South Stream pipeline to supply Europe without passing through Ukranian territory. This would leave Ukranian gas supplies hostage to Gazprom's whims, since future supply interruptions to Kiev would not have an effect on European countries.

Disputes with Moscow were not limited to natural gas. The Odessa Brody oil pipeline was designed for a South-North flow, supplying Central Europe with Central Asian oil. The pipeline was built without any guarantee as to who would fill the pipeline. Finally, Russian oil companies agreed to fill the line but only if the flow were reversed and used to bring Russian oil to the world market. A line that had been built to add to European energy independence was instead an instrument of increasing energy dependence.

Recently, as previously reported in this blog, Moscow and Minsk have had a number of policy disputes--including the price of oil deliveries to Belarus. Taking advantage of the situation, Venezuela stepped in and agreed to supply Belarus with four million tons of oil a year for two years. The oil would be transported via the Odessa Brody pipeline, with the direction of flow reversed to its originally-planned direction.

At the World Economic Forum in Davos, Yanukovych attacked the Kremlin for its efforts to make Ukraine dependent for its energy needs. He said that Russian plans to build natural gas pipelines directly to Europe were politically motivated, not economically. He then signed agreements with Azerbaijan to use the Odessa Brody pipeline to ship Caspian oil to Europe (1.5 to 3 million tons per year), and to provide natural gas to Ukraine.

Yanukovych attacked the South Stream project, pointing out it would cost $25 billion dollars. He said that upgrading the current pipeline through Ukraine would only cost $5 billion. "If this is a way to exert pressure...serious questions arise about how we should build our relations." http://www.themoscowtimes.com/business/article/yanukovych-seals-gas-deal-with-baku/429999.html

Moscow obtained a great prize in extending its lease on the Sebastapol base, but the Ukranian Supreme Court may yet declare the agreement contrary to the Ukranian constitution which forbids foreign bases on Ukranian soil. There are no indications that such a judicial decision is even being contemplated, but Moscow's heavy-handed energy policies is putting its recent gains in influence in jeopardy. Ukraine's position remains in flux as its president confronts the demands of Ukrainian national security interests.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.

Thursday, February 10, 2011

Battle of the Billionaires

The BP-Rosneft share swap that opens up a large swath of the Artic for oil exploration is under judicial challenge. BP's non-Rosneft partner in Russia is the joint enterprise TNK-BP. Major shareholders in the latter company are in a consortium, known as AAR, and they include Alpha Group's Mikhail Fridman as well as fellow oligarchs German Khan, Viktor Vekselberg and Leonard Blavatnik. These shareholders claim that the BP-Rosneft deal is in violation of the TNK-BP agreement that gives the partnership the right of first offer for any BP projects in Russia. AAR has filed a lawsuit in the High Court of Justice in London, who issued an injunction against the deal until March while the court examines the facts of the case.
Analysts do not believe that the oligarchs want to halt the Rosneft deal, especially since it has the blessing of the highest levels of Kremlin leadership. Instead, the legal challenge is designed to obtain concessions from the company or the government. Chris Weafer, chief strategist at UralSib, said either TNK-BP wants access to the new production, or AAR wants the government to buy their shares of TNK-BP. http://www.themoscowtimes.com/business/article/billionaires-take-bp-deal-to-court/429896.html
TNK-BP's legal counsel has notified David Peattie, one of BP's representatives on the TNK-BP board, that he was in breach of his duties because he had participated in the negotiations with Rosneft. TNK-BP said if Mr. Peattie did not refrain from future talks, that TNK-BP would begin legal action against him. In the meantime, the partners have announced that they will block the final dividend payment to BP if the controversy is not resolved. http://www.theaustralian.com.au/business/news/aars-russian-billionaires-consider-stopping-18bn-dividend-payout/story-e6frg90o-1225997210246
The stakes involved in the controversy are huge. Russian Deputy Prime Minister and Chairman of Rosneft, Igor Sechin, estimates that the initial blocs Rosneft-BP will explore may hold 35 billion barrels of oil and 10 trillion cubic meters of gas (equivalent to 63 billion barrels of gas). http://www.europeanenergyreview.eu/index.php?id=2731 If these estimates are correct, the field holds roughly one third more oil and gas than the North Sea, and would increase Russian gas reserves by 25%.
Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.

Allegations of Transneft Corruption to Get Its Day in Court

Amid name-calling and countercharges, Transneft's minority stockholder Alexei Navalny is getting his day in court. Navalny, as readers of this blog know, has accused Transneft of stealing $4 billion from the construction of the East Siberia-Pacific Ocean (ESPO) pipeline.

Navalny, who writes a blog on official corruption, was dismissed by many in Russia as a gadfly. His charges were not taken seriously. The Russian Duma refused to forward a request to the Prosecutor General to investigate, claiming that Transneft's actions were approved by the government. But at the close of 2010, Russian Prime Minister Vladimir Putin called for treating the charges with respect: "It has to be checked. Let the prosecutors and other controlling bodies look into it ," he said. http://www.oilandgaseurasia.com/news/p/0/news/10226

Transneft immediately went on the offensive. Its president, Nikloai Tokarev, admitted that there had been problems and shortcomings with the ESPO project, "But they were discovered independently by Transneft itself. All of the information was dispatched to the appropriate agency," and the company was able to recover $333 million from contractors. http://www.themoscowtimes.com/business/article/transneft-blasts-4bln-information-campaign/428838.html

Tokarev also engaged in some name calling, comparing Navalny's charges to those of a village idiot who has been paid 3 kopeks to shout slanders through the town. He also charged that Navalny was acting as an agent of an (unnamed) foreign power who were opposed to ESPO's construction. He said several foreign governments had tried to stop ESPO's construction, and had even financed social and ecological groups opposed to the pipeline. Tokarev was joined in his charges by Transneft spokesman Igor Dyomin who called Navalny a Nazi. In reply, Navalny said satirically, "They call me a village idiot, and then they call me a Nazi. I wonder if they are going to comment on the Transneft report that I've published? OK, I'm Nazi, but where is the stolen money?" http://www.themoscowtimes.com/news/article/transneft-slams-foreigners-and-nazis/429276.html

Despite Transneft's protestations, however, on 7 February 2011 the Moscow Arbitration Court held preliminary hearings on Navalny's lawsuit, and requested Transneft transcripts of their board of director meetings for 2009 and 2010. http://www.themoscowtimes.com/business/article/navalnys-suit-vs-transneft-goes-to-court/430532.html Transneft's arm is long, however, and Russian federal prosecutors are launching a federal investigation into Navalny, to determine if charges should be filed against Navalny for allegedly threatening to have a state timber manager fired unless the manager awarded a contract to Navalny's preferred firm. The contract resulted in a loss to the state of over $34,000. The federal investigation came as a surprise, because the same charges had been investigated previously by the regional governor and dismissed. http://www.bloomberg.com/news/2011-02-08/russia-may-pursue-criminal-inquiry-into-whistle-blowing-lawyer.html

Putin's decision to have Navalny's charges investigated appears to have caught the Russian energy moguls by surprise, but it appears they have not stopped trying to pressure him into dropping charges.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.

Oettinger Wants United Energy Policy

Representatives of the European Union have issued a call for better coordination among its members on energy. Following a one day meeting in Brussels on February 4, the representatives issued a joint statement calling for coherence in "relations with key producer, transit and consumer countries." The New York Times reports that European energy commissioner Gunther Oettinger (left) is expected to present a formal proposal in June that would give the European Commission the power to negotiate with energy producers on behalf of EU members. http://www.nytimes.com/2011/02/05/business/global/05energy.html

Centralization of European energy policy is something that the United Kingdom has been trying to achieve for at least two years. In a Wikileak/State Department cable dated 26 January 2009, the Foreign and Commonwealth Office's Deputy Head of Energy and Climate Change, Thom Reilly, said that Russia was trying to divide the European Union by lobbying individual members--especially those countries that are reliant on Gazprom for energy needs. Reilly said that the EU had become very concerned about Russia as a dependable energy provider after the 2009 Ukraine-Russia energy crisis. Despite the fact that Gazprom has a monopoly control over the gas pipelines in Russia, Reilly said the EU did not have the appetite to use European anti competitive measures to force Gazprom to become more market friendly. "Conditions are not right" to take the fight directly to Russia, said Reilly. http://www.telegraph.co.uk/news/wikileaks-files/london-wikileaks/8305130/BRITISH-LONG-VIEW-ON-CASPIAN-GAS-BALL-IS-IN-EUROPES-COURT.html

While a unified European position would help the consumer countries negotiate with energy providers, member states' suspicions of giving Brussels more authority may doom this proposal before it is even launched.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.