Putin, Trump warm ties key to Russia’s oil sector growth plans

A mural depicting a winking Vladimir Putin taking off his Donald Trump mask is painted on a storefront of the Levee bar in New York City. PHOTO | AFP 

By GEORGE WACHIRA

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Summary

• One can clearly see why President Vladimir Putin was so keen to have a government in Washington that would be ready to discuss lifting of the Crimean sanctions.
• It was Trump and not Hillary Clinton that would be best placed to enter into negotiations to reverse previous sanctions.
• Being a country over-dependent on the volatile oil and gas commodity markets, Russia will most likely remain a lesser global economic power with reduced capacity to influence global trade.

Over the past year Russia has variously featured in the US political arena, especially over its implicit support for Donald Trump’s presidency, and many have wondered why.

It is when President Trump finally appointed an oilman, Rex Tillerson former chief executive at ExxonMobil, as the Secretary of State, that clues started to emerge as to why Russia is so keen to forge friendly relations with US.

Going back to March 2014 when Russia annexed Crimea, President Barack Obama imposed very restrictive sanctions on Russia, and three years on these are still in force.

Specifically in respect of the Russia oil sector, the US sanctions suspended financing and provision of technology for development projects in support of oil and gas exploration and production for deepwater, Arctic offshore, or shale projects that have the potential to produce oil in Russia.

The Russian economy is essentially based on oil and gas commodities with these hydrocarbons accounting for about 70 per cent of its export revenues and providing as much as 40-50 per cent of the country’s budgetary support.

In 2016, the country produced about 10.3 million barrels oil per day making it about equal to Saudi Arabia’s production.

To boost its oil and gas turnover, Russia planned to venture into the Russian Arctic offshore regions which are thought to hold one of the largest yet to be tapped oil reserves in the world.

In 2011, the Russian state oil giant Rosneft signed a multibillion dollar deal with ExxonMobil chief executive Rex Tillerson to provide technology and capital to exploit the Arctic oil reserves.

The Russians had previously severed their upstream business deals with Shell, the Anglo Dutch oil multinational.

The multinational was additionally to provide technology for developing shale reserves in Russia using the successful US fracking technology.

The multifaceted deal also included access by ExxonMobil to oil reserves in the Black Sea. There were also provisions for reciprocal shareholding by Russians in ExxonMobil interests in the US.

From the wording of the Obama sanctions it appears that the sanctions were specifically tailored to stop the Russian-ExxonMobil deal, and any future deal by an American corporation.

The European Union had their own set of sanctions against Russia on the same subject of Crimea.

I will not in any way attempt to draw any conclusions, but one can clearly see why President Vladimir Putin was so keen to have a government in Washington that would be ready to discuss lifting of the Crimean sanctions.

It was Trump and not Hillary Clinton that would be best placed to enter into negotiations to reverse the sanctions.

On the face of it, having Tillerson as the Secretary of State looks like a ready-made solution for lifting of sanctions and for the US Big Oil to re-enter the Russian oil and gas sector. It fits well in serving mutual Russian and US business interests.

However, since the sanctions were imposed in March 2014 , the oil market has shifted significantly and a number of project justifications that were signed-off by ExxonMobil may have melted away.

From mid 2014 oil prices plummeted from above $100 per barrel and are currently settling at around $55. Unit costs for developing Russian Arctic deepwater production may not break-even at this price.

Further, the oil market has since become over-produced with little room left in the market to push additional production from Russia.

In fact, Russia is already participating in a voluntary oil production cut wit the Organisation of the Petroleum Exporting Countries.

And the US oil companies are already pulling back from overseas reserves with high production costs.

Further, since 2014, US is gradually moving towards oil and gas self-sufficiency after the shale miracle and will soon be competing in exports.

The climate change agreement signed in 2015 has also brought debate about how much oil (high carbon) should be left below the ground.

Political arguments to remove sanctions to allow a return of US oil companies to the Russian oilfields are weaker today than they were in 2014 when the sanctions were implemented.

Again, the Trump policies for more local investments will be used against attempts by the oil companies to invest in Russia when investment opportunities exist in US territories.

In 2014, the European Union did implement their version of sanctions against Russia. Further, to reduce energy supply risks, Europeans have also made efforts to diversify their natural gas supply reliance away from Russia.

The new natural gas discoveries in the eastern Mediterranean will aptly become an effective alternative source for the European Union. Liquefied natural gas imports into the European Union have also been intensified.

Being a country over-dependent on the volatile oil and gas commodity markets, Russia will most likely remain a lesser global economic power with reduced capacity to influence global trade.

The economic partnership that the Russians have been hoping to form with the US would probably have provided them with a much needed political and economic cushion.

Until the true story comes out, debate and intrigues on the subject of US-Russia relationships will probably continue playing prime-time. And the Big Oil will probably be closely watching by the sidelines.