Oil and Gas in the Capitals

	Vol. 232 No. 1
JACQUES SAPIR, CONTRIBUTING EDITOR, FSU

Russia, BP, the Gulf of Mexico oil spill and state capitalism

There is at least one actor in the oil and gas business with reason to be happy after the disaster in the Gulf of Mexico: Russia. BP’s need to find fresh money to cover its liabilities from the Macondo well blowout and oil spill has forced the company to engage in some large-scale asset stripping, although not at the astronomical levels some analysts predicted over the summer.

The Oct. 15 visit of Venezuela’s President Hugo Chavez to Moscow ended with the cession by Venezuelan state firm PDVSA of its share in the Ruhr Oel—its 50/50 joint venture with BP—to the benefit of Russia’s state-owned Rosneft. BP green-lighted the transaction and then also agreed to sell its shares to Rosneft. Soon afterward, BP CEO Bob Dudley agreed to sell his company’s fields in Venezuela and Vietnam. It is highly probable that the beneficiary of this last transaction will be OAO Zarubezhneft. Rumors of another possible cession, this time concerning Algerian oil and gas fields, were quickly confirmed.

Russian companies have been major beneficiaries of BP’s fire sale. The various actors in this set-piece drama have represented different facets of the Russian hydrocarbon industry, both state-owned and private, as well as various economic and political interests.

So far, the public-sector firms have gotten the most value from these deals. Rosneft is increasing its international clout and could potentially become an alter ego to Lukoil. The small Zarubezhneft will likely increase its influence, particularly in Asia, if it does gain BP’s Vietnam assets. This will greatly raise Zarubezhneft’s stature within the Russian hydrocarbon industry. Even Gazprom, the notorious gas giant, is making new inroads through the deal concerning Venezuela, which could imply not only the mother company but also its oil-producing subsidiary Gazprom-Neft.

Another interesting aspect of this activity is the close collusion between the state and private actors. The memorandum of understanding signed between BP and the financial group Renova-Access concerning some Algerian gas (Amenas and Bourarhet) and oil fields is just one part of a larger drama in which the old feud between shareholders of TNK-BP and Russian shareholders is being settled in the Russians’ favor.

Also intriguing is the increasingly political nature of these transactions. PDVSA’s agreement to sell its share in Ruhr Oel to Rosneft came in return for a series of deals between the Venezuelan and Russian governments, including military contracts (for 35 T-90 main battle tanks, SAM missiles and an ammunition factory), the development of Venezuela’s car-making industry (this deal involving both Russia’s AvtoVaz and France’s Renault SA), building of an oil terminal by Novoship and the development of local power generation by RAO-UES. There is no doubt that such crisscrossed deals are highly favored by the Russian government, as they greatly increase its political leverage. The same can be said of the deal to come with Algeria (a country President Dmitry Medvedev visited this past fall) and even of the deal concerning BP assets in Vietnam.

However, this large new round of external acquisitions raises the issue of how much money Russian companies actually have and how much they will spend, by comparison, on internal investments.

The 2030 Russian energy strategy published a year ago made clear that the country’s hydrocarbon industry requires huge investments in exploration, production and transport: $565–$590 billion for the gas sector and $609–$625 billion for oil. If oil prices remain in the $85–$90/bbl range, Russian companies will have no trouble simultaneously funding internal investments and external acquisitions. However, with long-term factors including the development of alternative sources of energy, new production technologies and energy efficiency measures in Europe and Asia-Pacific markets, there are no long-term certainties that such a price level can be maintained. In the short-term, other factors playing an ever-larger role are financialization of oil and gas markets and the development of spot markets.

In this light, all these acquisitions begin to look like big gambles. Certainly, the Russian government and private actors are expecting a fast exit from the current economic crisis, favoring oil prices around $90–$95/bbl. But the bank and liquidity crisis is still haunting the industry and pushing Russian enterprises (and banks) not to increase their exposure to non-resident loans (see table).

TABLE 1.  Russian debt to non-residents, $ billions

In such an unstable situation, it is highly improbable that private actors would have taken such a large amount of long-term risk. What we are seeing in Russia is an ever-tightening web of relations between the state and companies that are ostensibly private but depend largely on the state for the validity of their market gambles. Is this not what is meant by the term “state capitalism”?

The political side of these various deals has attracted much attention. But the real point to focus on is Russia’s return to state capitalism, a system that actually predates the Bolshevik revolution, and allows companies to fearlessly gamble for high stakes in an uncertain world. This leverage will give Russia more than its share of competitive edge.   WO