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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The New Wave of Renewable Fuels

In 2021, the makeup of renewables has also changed drastically. Technologies such as solar and wind are no longer novel, as is the idea of blending vegetable oils into road fuels or switching to electric-based vehicles. Such ideas are now entrenched and are not considered enough to shift the world into a carbon neutral future. The new wave of renewables focus on converting by-products from other carbon-intensive industries into usable fuels. Research into such technologies has been pioneered in universities and start-ups over the past two decades, but the impetus of global climate goals is now seeing an incredible amount of money being poured into them as oil & gas giants seek to rebalance their portfolios away from pure hydrocarbons with a goal of balancing their total carbon emissions in aggregate to zero.

Traditionally, the European players have led this drive. Which is unsurprising, since the EU has been the most driven in this acceleration. But even the US giants are following suit. In the past year, Chevron has poured an incredible amount of cash and effort in pioneering renewables. Its motives might be less than altruistic, shareholders across America have been particularly vocal about driving this transformation but the net results will be positive for all.

Chevron’s recent efforts have focused on biomethane, through a partnership with global waste solutions company Brightmark. The joint venture Brightmark RNG Holdings operations focused on convert cow manure to renewable natural gas, which are then converted into fuel for long-haul trucks, the very kind that criss-cross the vast highways of the US delivering goods from coast to coast. Launched in October 2020, the joint venture was extended and expanded in August, now encompassing 38 biomethane plants in seven US states, with first production set to begin later in 2021. The targeting of livestock waste is particularly crucial: methane emissions from farms is the second-largest contributor to climate change emissions globally. The technology to capture methane from manure (as well as landfills and other waste sites) has existed for years, but has only recently been commercialised to convert methane emissions from decomposition to useful products.

This is an arena that another supermajor – BP – has also made a recent significant investment in. BP signed a 15-year agreement with CleanBay Renewables to purchase the latter’s renewable natural gas (RNG) to be mixed and sold into select US state markets. Beginning with California, which has one of the strictest fuel standards in the US and provides incentives under the Low Carbon Fuel Standard to reduce carbon intensity – CleanBay’s RNG is derived not from cows, but from poultry. Chicken manure, feathers and bedding are all converted into RNG using anaerobic digesters, providing a carbon intensity that is said to be 95% less than the lifecycle greenhouse gas emissions of pure fossil fuels and non-conversion of poultry waste matter. BP also has an agreement with Gevo Inc in Iowa to purchase RNG produced from cow manure, also for sale in California.

But road fuels aren’t the only avenue for large-scale embracing of renewables. It could take to the air, literally. After all, the global commercial airline fleet currently stands at over 25,000 aircraft and is expected to grow to over 35,000 by 2030. All those planes will burn a lot of fuel. With the airline industry embracing the idea of AAF (or Alternative Aviation Fuels), developments into renewable jet fuels have been striking, from traditional bio-sources such as palm or soybean oil to advanced organic matter conversion from agricultural waste and manure. Chevron, again, has signed a landmark deal to advance the commercialisation. Together with Delta Airlines and Google, Chevron will be producing a batch of sustainable aviation fuel at its El Segundo refinery in California. Delta will then use the fuel, with Google providing a cloud-based framework to analyse the data. That data will then allow for a transparent analysis into carbon emissions from the use of sustainable aviation fuel, as benchmark for others to follow. The analysis should be able to confirm whether or not the International Air Transport Association (IATA)’s estimates that renewable jet fuel can reduce lifecycle carbon intensity by up to 80%. And to strengthen the measure, Delta has pledged to replace 10% of its jet fuel with sustainable aviation fuel by 2030.

In a parallel, but no less pioneering lane, France’s TotalEnergies has announced that it is developing a 100% renewable fuel for use in motorsports, using bioethanol sourced from residues produced by the French wine industry (among others) at its Feyzin refinery in Lyon. This, it believes, will reduce the racing sports’ carbon emissions by an immediate 65%. The fuel, named Excellium Racing 100, is set to debut at the next season of the FIA World Endurance Championship, which includes the iconic 24 Hours of Le Mans 2022 race.

But Chevron isn’t done yet. It is also falling back on the long-standing use of vegetable oils blended into US transport fuels by signing a wide-ranging agreement with commodity giant Bunge. Called a ‘farmer-to-fuelling station’ solution, Bunge’s soybean processing facilities in Louisiana and Illinois will be the source of meal and oil that will be converted by Chevron into diesel and jet fuel. With an investment of US$600 million, Chevron will assist Bunge in doubling the combined capacity of both plants by 2024, in line with anticipated increases in the US biofuels blending mandates.

Even ExxonMobil, one of the most reticent of the supermajors to embrace renewables wholesale, is getting in on the action. Its Imperial Oil subsidiary in Canada has announced plans to commercialise renewable diesel at a new facility near Edmonton using plant-based feedstock and hydrogen. The venture does only target the Canadian market – where political will to drive renewable adoption is far higher than in the US – but similar moves have already been adopted by other refiners for the US market, including major investments by Phillips 66 and Valero.

Ultimately, these recent moves are driven out of necessity. This is the way the industry is moving and anyone stubborn enough to ignore it will be left behind. Combined with other major investments driven by European supermajors over the past five years, this wider and wider adoption of renewable can only be better for the planet and, eventually, individual bottom lines. The renewables ball is rolling fast and is only gaining momentum.

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Market Outlook:

  • Crude price trading range: Brent – US$71-73/b, WTI – US$68-70/b
  • Global crude benchmarks have stayed steady, even as OPEC+ sticks to its plans to ease supply quotas against the uncertainty of rising Covid-19 cases worldwide
  • However, the success of vaccination drives has kindled hope that the effect of lockdowns – if any – will be mild, with pockets of demand resurgence in Europe; in China, where there has been a zero-tolerance drive to stamp out Covid outbreaks, fuel consumption is strengthening again, possibly tightening fuel balances in Q4
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