November 4, 2011
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№ 9 (September 2011)

Editor's Letter

Rosneft Gets Access to U.S. Projects Out of Deal with Exxonmobil

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Pat Davis Szymczak

   The biggest news to hit those who follow the Russian oil and gas industry this month is without a doubt the tie up between Rosneft and Exxonmobil. But my casual read of the mainstream press tells me the pundits missed something.
There’s a lot of crowing in the media about the significance of this new “foreign investment” in Russia. In fact the deal will in the short term represents a “foreign investment” by Russia in the United States.

   To get into the Russian Arctic with Rosneft, Exxonmobil is letting Rosneft into U.S. projects in tight oil onshore and in developments offshore in the Gulf of Mexico. Long term Rosneft will benefit from the technology transfer those joint projects represent. And long term it will apply those technologies – and Exxonmobil’s money – to develop Rosneft projects in the Russian Arctic.
Russia is not a beggar nation and it’s state oil companies are aggressively taking advantage of opportunities to work globally alongside other national oil companies and the independent majors.

   TNK-BP is another example: it is about to close on a deal offshore Viet Nam and is already working in Venezuela. Gazprom has global trading offices throughout the world. Zarubezhneftegaz is in India. And you’ll find Russian companies including Lukoil, Gazprom, Tatneft, Novotek and others active in Africa.

   Ironically, Exxonmobil now will go down in history as the international major that stamped a “seal of approval” on Rosneft’s acquisition of Yukos assets. It has been widely reported that one of the reasons Rosneft wanted involvement with a “blue chip” foreign company was that it wanted to dispel any clouds that may still hang over the nationalization of Yukos.

   If the army of lawyers that work for big American or British companies were to review Rosneft documents and approve an agreement for the companies working together, that would, as a practical matter, set things right. That was among the reasons Rosneft initially approached BP and it was one of the reasons it couldn’t make a deal with TNK-BP – TNK-BP is a Russian company. Rosneft needed a totally foreign company – like BP – to do the legal due diligence. When BP had to stand down, Exxonmobil was brought into the picture.
On another topic, did you see the World Bank study of various “recession” scenarios. After having just returned from the United States, I think it is more or less certain that a second wave of the “crisis” is rolling towards us. But the question is how bad will it be? And how will Russia cope?

   Russia’s leaders talk a lot about diversifying the economy beyond commodity exports – particularly gas and oil exports. When the global economy is growing, Russia, as a “petro dollar” state, does exceptionally well. But when the demand for energy contracts during a recession, Russia doesn’t do so well.

   Thankfully, the World Bank’s “worst case scenario” foresees oil prices sliding to $60 a barrel. Which isn’t a disaster really because the Russian government projects it budget on the assumption that prices will be around $60 a barrel. Still, the World Bank predicts that if oil prices go that low, Russia could enter a recession and  unemployment could rise to 7.5 percent.  Again, this is “worst case” and not so likely to be so extreme because any drop in energy demand would be gradual and not all in one go.

   But it is something to think about. Anyone who knows Russian history knows that in Russia “big is beautiful” particularly if we’re talking about a big state. Russian citizens expect the state to take care of them – that was the case under the Czars and it was the case under the Soviets. Though this “big state” attitude is taking root now in my homeland – the U.S.A. – there are still people of many nationalities, who, like myself, believe that the most healthy economies are build on small and medium size private business. This is actually the big ideological debate going on right now in U.S. politics.

   A few months ago, I was invited to co-chair a conference in Moscow, which had a very large attendance of Gubkin Oil&Gas University students present. I asked the students if they would raise their hand if they could visualize themselves as the owner in 20 years of a small or medium size business – a technology consultancy, equipment manufacturer, small independent producer. Really, I wanted to understand if any had a dream of having their own business or of innovating something.

Only one student raised their hand.

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