Russia's Descent Into Reality - Energy Sector Facing Huge Debts, High Costs, Low Prices

[hatrack]

EDIT

Now that Russia's foreign-run developments were back under government control or suitably compliant, the government ensured that all future developments would remain similarly tied to the Kremlin with limited foreign influence. In April 2008, the Russian parliament approved a new law which effectively handed monopoly rights for all future developments of the Russian continental shelf to just two companies: Gazprom and state-owned Rosneft. By now, the bulk of Russia's enormous hydrocarbon wealth both present and future was firmly in government hands, a situation which was looked on with gleeful satisfaction by Russians and allowed them to wield considerable influence beyond their borders. Soon followed grand plans for Gazprom to build a pipeline across the Sahara desert, buy all of Libya's gas, and build LNG plants in Nigeria. Energy nationalism at home and the loudly announced forays abroad as personified by Vladimir Putin helped ensure the Russian population returned approval ratings of over 80% for their then president, now prime minister. Russia had picked itself up off its knees, Russia was strong once more, Russia could once again command respect from others. Russia was back.

But anyone who was looking closely could see that beyond the grand announcements emanating weekly from the Kremlin, Russia's oil and gas development strategy was thin on substance and looking more than a little unrealistic. The first warning came in April 2008 when Rosneft's chief executive stated that Russia would need $2.6 trillion to develop just its offshore oil and gas reserves between then and 2050, which equated to a yearly expenditure of $62bn. To put this in perspective, the Sakhalin II project - one of the biggest and most complicated oil and gas projects every attempted and by far the largest in Russia - came in around $22bn and during the peak of construction was costing about $4bn per year. This means that the Russian oil and gas development plans would see the equivalent of about 15 Sakhalin II sized megaprojects running in parallel across Russia for 40 years, executed and managed by just two companies - Gazprom and Rosneft - neither of whom have ever executed a project of such magnitude and complexity before. Even a casual observer would think the numbers to be slightly overambitious, and overly reliant on the performance of two companies with an untested track record of project delivery.

Consider the news which appeared in the oil and gas press in June 2008 that Gazprom had stumbled at the first hurdle along its path to becoming the pioneer of Russian oil and gas development: a relatively simple topside refurbishment of a second-hand platform, part of the first stage of Gazprom's much publicised flagship Shtokman project, was overdue with the budget blown due to the contractor not having enough skilled workers to complete the assignment.

Those with an interest in such matters may also have taken note of the enormous debts that the Kremlin's favoured sons had accumulated. By March 2008, Gazprom had accumulated $41.7bn in debt mostly due to acquisitions, and it is estimated that its current debt stands at about $50bn. Rosneft was not in much better shape having amassed debts of $23.8bn, also largely on acquisitions not least of which was the remains of bankrupt oil form Yuzkos, flogged off the year before in a murky auction. Concerns about Gazprom and Rosneft debts were dismissed by those who would point to the oil price which at the time sat above $140 per barrel generating massive revenues for the two companies, and the fabled wealth of the Russian government in terms of their foreign reserves and the oil stabilisation fund. However, such responses could not hide the fact that both companies were heavily dependent on the western financial institutions to whom they owed the debt, and would rely on these same institutions to provide the funding for future developments. It was also becoming more and more difficult to ignore the increased risk premium being attached to loans extended to Russian companies as a result of the government's contempt for contract law and the unpredictability such behaviour brings.

Unfortunately for the Russians, by the end of 2008 their lofty position was soon beginning to look less secure than it had been six months previously, and by 2009 it was clear that their position was looking precarious. With the global financial crisis setting in, demand for oil and gas collapsed sending the crude price tumbling by over 70% and taking the Russian energy giants' revenues with it. And the western financial institutions upon which they depended for debt refinancing and financing their lofty development plans were facing either complete ruin or a desperate struggle to survive. The two companies upon which all the Kremlin's hopes and dreams depended found themselves with diminished revenues and unserviceable debt going cap in hand to Moscow for a bailout.

EDIT

http://www.samizdata.net/blog/archives/2009/02/russias_descent.html

[Captain Hilts]

1. Putin was blessed by a good run of high energ prices. That's come to an end. nt

[seasat]

2. They've shifted their foriegn policy rhetoric this week.

Putin was able to bully people around when they were full of oil revenues. Now he suddenly realizes that he needs cooperation with other countries. Hopefully, this will weaken his and the the wealthy oligarchs control of Russia giving the people more freedom.