Easwaran Kanason

Co - founder of NrgEdge
Last Updated: November 5, 2016
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Business Trends
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On the surface, Vladimir Putin’s current Russia is projecting an image of strength – see its belligerent attitude in the Ukraine, in Syria and its willingness to assert itself politically in a way that hasn’t been seen since the Cold War. Behind the scenes though, the country is hurting where it hurts the most: money. The persistence of low oil prices has deprived Putin of the petrodollars that used to be spent lavishly, ballooning the national deficit to its widest level in six years. Now, logically, if Russia could agree to co-operate with OPEC on a supply cut, then the situation alleviates itself, but OPEC is a nest of myopic vipers at the moment. And desperate times call for desperate measures.

In this case, it calls for the Russian government to sell its stakes in some of the country’s prized corporate jewels. Its 10.9% stake in diamond miner Alrosa was sold off for US$759 million in July, while its 50.08% stake in Bashneft seemed a done deal but in-fighting over the state-linked players interested have delayed that sale. Now, Russia is offering up 19.5% of Rosneft, the most valuable company in Russia and its largest oil producer. 

Currently owned by the Russian state (69.5%, with BP owning 19.5% after Rosneft purchased TNK-BP in 2013), the sale could fetch as much as US$11 billion, going a long way to plug the deficit. Russia’s ability to raise debt in the international capital markets are severely limited after sanctions were imposed post-Crimea, forcing it to rely on its quickly-depleting sovereign wealth funds, exacerbated by the weak ruble. Cutting spending is an option, but politically unpopular. A sale makes sense, but also a U-turn for a country previously gung-ho about nationalisation. But now, as Putin says, ‘the Russian government has no need to hold such large stakes.’ Up next after Rosneft could be state holdings in Transneft, Russian Railsways, Rostelcom, Zarubshneft and the VTB bank.

Complicating the situation is that Rosneft itself, along with most other Russian state-linked firms, are under sanctions imposed by the US and Europe. Although technical possible since the proceeds going to the government not the company, it would not be a good look for companies like Chevron or ExxonMobil to participate, given the rhetoric in the West. Instead, Russia will look at India and China for interest, keeping it within the BRIC club. Indeed, this fits in synergistically. Rosneft has plenty of oil, with the largest reserves of any listed company. China and India need plenty of oil, with India in particular trying to play catch up to secure upstream assets. Rosneft has also just purchased 49% of India’s Essar Oil, part of its ambition to expand internationally. 

If Indian or Chinese investors believe that they will gain control by purchasing part of Rosneft, they should banish that thought. The Russian government will retain a controlling stake – 50% plus 1 share – a policy that will repeat in other sales. This is a sale borne out of absolute necessity; Russia or rather Putin has no intention of relinquishing control over Russian industry. In fact, it might end up being a total family affair - Rosneft might simply purchase the stake from the Russian state holding company Rosneftegaz in something akin to a private share buyback, or other domestic players like Lukoil might step up. Bizarrely, Rosneft itself is still the frontrunner to purchase the stake in Bashneft.

It’s a game of mix and match with one objective: Russia needs cold hard cash and these companies either have it, or will pave the way to get it. But Putin is not about to give up control for that cash. 

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September, 21 2019
Your Weekly Update: 16 - 20 September 2019

Market Watch  

Headline crude prices for the week beginning 16 September 2019 – Brent: US$69/b; WTI: US$63/b

  • Global crude oil prices surged at the start of the week as news that a successful drone strike on the Abqaiq processing plant and the Khurais oil field in Saudi Arabia took out over half of the Kingdom’s crude production capacity
  • Brent prices jumped above US$70/b at one point on fears on global supply disruption, but abated as President Donald Trump authorises the release of US strategic petroleum reserves to cover the market
  • Initial fears that the Saudi Arabian crude output would be crippled for months proved to be extreme, with Saudi Aramco announcing that some 70% of capacity at Abqaiq had been restored within days
  • But more worryingly is that this incident escalates the risk of a full-blown military confrontation with Iran; the US was quick to accuse Iran of the attack, citing data on the attack, which was denied by Iran
  • Yemen’s Iran-backed Houthi rebels claimed responsibility for the attack, although initial results of a Saudi investigation pointed to the weapons originating from Iran
  • For now, crude oil prices have retreated as the risk of widespread supply disruption abated, but tensions are still high in the region
  • This comes after President Trump signals that he was considering easing sanctions in an apparent thaw in the US-Iran relationship; this opportunity now appears to have evaporated
  • Saudi Arabia’s new oil energy minister, Prince Abdulaziz bin Salman, made a positive impression at the recent OPEC+ meeting, with errant members of the group signalling that they were now ready to adhere to the supply deal
  • In Venezuela, the oil crisis continues as ongoing US sanctions now mean that the country cannot find enough vessels to transport its crude, as shippers fear losing insurance coverage if they transport Venezuelan oil
  • Iran has released the UK-flagged Stena Impero vessel that it had impounded, a lone bright spot in a region now clouded by geopolitical tensions
  • Against this backdrop, the US active rig count recorded yet another fall, losing five oil and seven gas rigs for a net drop of 12 to a new total of 886 rigs
  • With the shock of the Saudi drone attacks abating, crude oil prices are retreating back to their previous range – US$60-63 for Brent and US$56-59/b for WTI – as the impact of global supply was minimised; another attack, however, might cause a more permanent shift in prices


Headlines of the week

Upstream

  • Equinor has received consent from the Norwegian Petroleum Directorate to continue operations at the Tordis and Vigdis fields through 2036 and 2040, respectively, extending the life of the North Sea fields by 34 years
  • BP has announced that it will deploy continuous measurement of methane emissions for all future oil and gas projects in a bid to reduce emissions
  • CNOPC and Niger have agreed to collaborate on a 1,892km pipeline to carry oil from Niger’s Agadem rift basin to port facilities in Benin
  • The South African government is tabling a new law that will allow the state to take a free stake of up to 10% in all new oil and gas ventures, hoping to capitalise on a surge in upstream interest after Total’s Brulpadda discovery

Midstream/Downstream

  • As the IMO deadline for low-sulfur marine fuels approaches, refiners have begun stockpiling supplies of very low-sulfur fuel oil to ensure adequate supply; this includes Japan’s Cosmo Oil that aims to begin supplying VLSFO to the domestic marine market by October 2019
  • IndianOil’s Gujarat refinery stated it ready to produce 12,900 b/d of VLSFO by October while its Haldia refinery will start producing 5,500 b/d of VLSFO by December; this should be adequate to cover the India’s marine fuel demand
  • India is considering selling a stake in BPCL, the country’s second largest refiner, to an international firm to boost competition in downstream fuel retailing that has historically been dominated by state firms
  • Valero Energy and Darling Ingredients are launching the first renewable gasoil plant in Texas, focusing on producing renewable diesel and naphtha
  • In the UK, Essar Oil’s Stanlow refinery aims to increase its diet of US crude from a current 35% to 40%, leveraging on cheaper American oil
  • The after-effects of Russia’s contaminated crude through the Druzhba pipeline continues as Total issues a tender to sell 1.3 million barrels of tainted Ural crude through Rotterdam after failing to process it

Natural Gas/LNG

  • Poland has won a ruling from the EU courts to reduce Russian control over the key EU Opal pipeline that carries Russian gas from the Nord Stream link to Germany, preventing Gazprom from using most of Opal capacity in a bit to increase energy security for Eastern European countries
  • Vitol and Mozambique’s state player ENH have set up a new joint venture in Singapore to capitalise on trading opportunities for LNG, LPG, and condensate
  • Australia’s Liquefied Natural Gas Ltd and Delta Offshore Energy will supply gas from the Magnolia fields to an LNG-to-power project in Bac Lieu, Vietnam
  • Eni’s Baltim South West gas field offshore Egypt has started up production, only 3 years after discovery, producing an initial 100 mscf/d of gas
  • US gas player Sempra is looking to take FID on its Energia Costa Azul LNG project in Mexico’s Baja California region by the end of 2019
  • Egypt has announced that it expects to receive first natural gas from Israel by end-2019 through the East Mediterranean Gas pipeline, with initial supplies of 200 mscf/d that will rise to 500 mscf/d by 2020
  • The Independence floating LNG terminal in Lithuania – built to reduce the Baltic region’s dependence on Russian gas – is set to receive its first-ever cargo from Siberia, likely from Novatek’s LNG projects in Yamal
September, 20 2019
Financial Review: Second-Quarter 2019
Key findings
  • Brent crude oil daily average prices were 9% lower in second-quarter 2019 than in second-quarter 2018 and averaged $68 per barrel
  • The 117 companies in this study increased their combined liquids production 4.6% in second-quarter 2019 from second-quarter 2018, and their natural gas production increased 5.0% during the same period
  • Nearly half of the companies were free cash flow positive—that is, they generated more cash from operations than their capital expenditures
  • Dividends plus share repurchases were nearly one-third of cash from operations, slightly lower than the six-year high set in first-quarter 2019

Distributions to shareholders via dividends and share repurchases amounted to nearly 33% of cash from operations


See entire second-quarter review

September, 20 2019