Watching Government: Russia: On the ropes?

Dec. 15, 2014
Russia's Dec. 1 cancellation of its South Stream natural gas pipeline was not surprising. European nations have signaled for years that they intend to diversify their supply sources and rely less heavily on Russian gas giant Gazprom.

Russia's Dec. 1 cancellation of its South Stream natural gas pipeline was not surprising. European nations have signaled for years that they intend to diversify their supply sources and rely less heavily on Russian gas giant Gazprom. Several have built terminals and regasification plants for LNG imports.

Europe obviously grew annoyed with Russia's periodically shutting off supplies to some countries for apparently political reasons. Its support for building a long-distance transmission pipeline from Azerbaijan to eventually reach southern and eastern European markets was only the initial push back.

But Russia also was not oblivious to what was happening. With the government's support, its oil and gas industry is pivoting to Asian markets.

"Russia is in the midst of a hurricane," said Andrew Weiss, vice-president for studies at the Carnegie Endowment for International Peace, during a Dec. 2 China Oil Forum there.

"From all the contacts I have had with officials there, it's clear China is the flavor-of-the-month," Weiss said. "Whether players beyond Gazprom and Rosneft are comfortable with it is uncertain. Many worry they'll be eaten alive during the move toward Asia."

Weiss said Russia's embrace of the Chinese market has been a strategic plus for Rosneft because stakes in strategic resources can be offered to Chinese investors.

"Russia's greatest gas advantage may be its geographic proximity to Chinese and Asian markets," he observed. "Aggressive pipeline transmission pricing could drive out some competition from LNG."

Sanctions have impact

Its oil prospects are cloudier. Targeted US sanctions in response to Russia's involvement in a continuingly unsettled Ukraine are affecting the capacity to attract outside investment for developing new domestic resources. Several Western partners are holding on to the extent they're able, but potential new ones may possibly be apprehensive about uncertain tax regimes and contract integrity.

Plunging crude prices also have aggravated the country's economic situation since oil exports provide about half of its total revenue. Sales outside the country climbed year-to-year in 2013 to 7.2 million b/d, according to the US Energy Information Administration. Russia's estimated proved reserves were unchanged from 2012's 80 billion bbl, EIA added.

Russian companies aren't waiting for prices to improve to make changes. Rosneft's board of directors adopted strategic goals through 2030 on Dec. 9 which include more efficient assets management; four different production development initiatives; expanded contract gas production; and development of a more powerful domestic oil field services industry.

Setting goals is one step. Reaching them is something else entirely. Russia's oil and gas situation may be so unsettled that it's on the ropes. It's too early to say it's down for the count.