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Russian oil: a slippery substance

Mark Rice-Oxley, Guardian
Moscow’s thin coating of petrodollar wealth may wash off all too easily
…As one Russian telecoms CEO told me: “Russia is up from its knees and is trying to assert its position in the world, both politically and economically. This giant is waking, and he is trying to get up. Not everyone can accept that.”

Of course, it’s the oil money as much as the KGB man that has roused the sleeping giant. Inside the Kremlin, the reasoning is that, with all those lovely petrodollars, Russia can pretty much do what it wants. It no longer needs partnerships, allies, foreign investors or western joint venture partners. Now Russian capital is looking to reverse two decades of investment flow. It wants to take on the world, to buy assets overseas.

Peskov was unashamed about the hazards western investors such as BP, Shell and, more recently, Peter Hambro have been experiencing. “In 2006, we don’t any more need to attract western companies to come here and explore our gas and oil,” he said. “We have lots and lots of money and we don’t know what to do with it.” (You could start with some new carpets.)

That’s all very well. But here’s the $64,000 question for Russia: what happens when oil prices are no longer $64, but $40 or even $25? It’s an irony not lost on Russians that the biggest thing to have changed in the country in six years actually happened thousands of miles away, on international energy markets.

When I was last here, oil prices scudded listlessly around the $10 mark. The state was weak and the exchequer went bankrupt – just as it did, more or less, in the late 1980s, ruining Gorbachev’s perestroika experiment. So what happens when oil prices fall again, as sooner or later they inevitably will? What happens when the Kremlin once again finds it needs a bit of love and affection – not to mention cash – from western investors.

Alexander Reebok doesn’t even want to think about it. As a developer of one of the snappiest malls in all Moscow, where lunch costs £200 and a shirt sells for triple that, he has done better than most out of the Russian boom. “If oil prices fell to $15,” he shudders, “then we would definitely feel it.”
(11 Dec 2006)
And if oil prices jumped to $100? -BA

Russia to Create Giant Company to Control Oil and Gas Production at Sea Shelf — Paper

Russian daily Kommersant reported on Monday, Dec. 11, that the meeting of the Russian Security Council chaired by President Putin on Saturday developed a new strategy to give the government control of oil and gas extraction on the Russian sea shelf. The strategy calls for an end to joint-venture projects with foreign companies and renewed focus on Russia’s homegrown strengths.

The paper reported that the Russian authorities may combine state-controlled giants Gazprom, Rosneft and Zarubezhneft into a single government monopoly that would take over the shelf production. This means new inspections and headaches for foreign operators already working at the Russian shelf off the coast of Sakhalin Island in the Far East. The two best-known projects in the area are led by Royal Dutch/Shell and ExxonMobil. The projects are developed within the framework of production-sharing agreements signed in 1990s.
(11 Dec 2006)
Submitter LH writes: “Another example of energy-nationalism, Russian style.”

Shell Offers to Sell Stake in Russian Project to Gazprom

Andrew E. Kramer, NY Times
The Russian government’s campaign to tighten control over the country’s energy industry claimed its first prize from a foreign energy company today, when Royal Dutch-Shell offered to sell a major stake in its $20 billion Sakhalin Island oil and gas project to Gazprom, the state-controlled natural gas monopoly.

Shell’s chief executive, Jeroen van der Veer, made the offer after government regulators began a flurry of regulatory actions against the project, known as Sakhalin 2, threatening to freeze work there by revoking permits on environmental grounds.

Gazprom said it would study Shell’s offer. Analysts said a deal could be reached as soon as the end of the month. Terms of the offer have not been announced.

…Vitaly Y. Yermakov, research director for Russian and Caspian energy at Cambridge Energy Research Associates, said that Shell, like other international oil companies, was being forced to retrench in Russia 15 years after the country first opened up to foreign energy investment.
Still, he said, Shell was not being squeezed out entirely: “If you compare something with zero, something is always better. They would have zero if this project were frozen.”
(11 Dec 2006)
Related article at MosNews, about which submitter LH writes:

The pressure on Royal Dutch Shell has reached the breaking point and Gazprom seems ready to take over Sakhalin-2. Presumably is it just a matter of time before the Kremlin turns its full attention to ExxonMobil’s Sakhalin-1 project.

Chinese demand growth continues (for oil and everything else too…)

Heading Out, The Oil Drum
As we look at the world market for fuels, one of the major growth areas in demand continues to be China. And, given their considerable potential impact on which product goes where and from what resource, in the future, it is interesting to put a few news items together and see where the wind is blowing.

One could start by noting that China’s economy has been growing at 10.7% this year about 2.7% above the initial target of 8%, a number that has also been set as the official rate for next year, at this point. And while there are some publicity stunts, such as trying to stop private cars driving for a day, that will both highlight the current reported consumption of 8.7 mbd by those cars, it will also highlight the benefits of public transportation, one can assume that the current trend of higher than official growth rates may well continue.
(7 Dec 2006)
In the comments, Alfred Nassim posts a very interesting article from The Financial Times: India and China are the only real Brics in the wall:

Few concepts have gained more currency among business people and politicians in recent years than the idea of the Brics – the giant, emerging economies of Brazil, Russia, India and China, whose weight and influence is supposedly changing economic and political realities. Grouping the four, however, obscures a simple fact: while the rise of China and India represents a real shift in the power balance, Russia and Brazil are marginal economies propped up by high commodity prices. This difference has profound implications.

The fundamental difference between China and India on one hand and Russia and Brazil on the other is that the former are competing with the west for “intellectual capital” by seeking to build top-notch universities, investing in high, value-added and technologically intensive industries, and utilising successful diasporas to generate entrepreneurial activity in the mother country. Chinese officials, for example, are committed to developing 100 world-class universities, with a focus on science and engineering; India boasts one of the most dynamic information technology sectors outside the US. Both countries face challenges but they are taking the steps necessary to generate sustainable economic growth.

Russia and Brazil are benefiting from high commodity prices but are not attempting to invest their windfall in long-term economic development….

Russia: How Long Can The Fun Last?

Jason Bush, Business Week
Consumers are flush. Foreign investment is up. Then there’s the government interference—and corruption
…Some also wonder whether the expansion can be sustained. There’s little doubt that a major driver of the newfound bounty is oil and other natural resources. Without the runup in commodity prices, economic growth would have been two to three percentage points lower during the last three years, estimates the Organization for Economic Cooperation & Development. Developing countries, meanwhile, don’t have a very good track record of using windfall profits from commodity booms to lay the foundations for sustainable growth.

To his credit, Putin has used much of the cash to build up financial reserves. Russia has created a $90 billion fund—equivalent to 9% of gdp—to protect against a drop in oil prices. Fiscal policy remains tight, with the Kremlin expecting a budget surplus equal to 7% of GDP this year. And Russia is well ahead of most other resource-rich countries in its economic development, with a long tradition of education, science, and industry. Now, its tech companies are starting to give India’s outsourcing sector a run for the money.

…Economists warn, however, that high oil prices have bred complacency. The OECD cautions that economic reforms have largely stagnated. Worse, corruption and bureaucratic interference continue to impede business:
(7 Dec 2006)