The last barrel

Recent events suggest that an old-style Cold War is slowly returning, as regards Russia vs. the U.S. And if this is true, there may be repercussions for upstream oil and gas.

Over the last six months, various incidents point toward deterioration in Russia’s relationship with the U.S. and its allies. Simultaneously, one can see a continuing consolidation of Russia’s oil and gas industry, with a growing level of control returning to the central government, under President Vladimir Putin, as described by our FSU contributor, Dr. Jacques Sapir, in his column on page 23 of this issue of World Oil. The two situations are interwoven, as only the Kremlin can do it.

First, as regards Russian-U.S. relations, consider these incidents in recent months:

• Feb. 7—Two Russian SU-27 fighter jets invade Japan’s airspace near two disputed islands, and the Japanese island of Hokkaido.
• Feb. 12—Two Russian TU-95 “Bear” bombers circle the U.S. territory of Guam, hours before President Obama’s State of the Union address.
• May 7—U.S. Secretary of State John Kerry endures a chilly reception while visiting in Moscow with Putin and Foreign Minister Sergey Lavrov.
• June 11—Two Russian military aircraft cross into Finland’s airspace, forcing the Finnish Air Force to dispatch fighter jets to intercept them.
• June 17—Obama has a tense, chilly bi-lateral meeting with Putin during the G8 summit in Northern Ireland.
• July 15—Two Russian TU-95 “Bear” bombers fly practice missions near the Korean Peninsula and Japan’s Hokkaido Island. Three Japanese fighters intercept the bombers.
• July 19—Obama is considering whether to cancel a fall summit scheduled with Putin in Moscow, partially because Russia harbors American intelligence fugitive Edward Snowden, who was recently granted temporary asylum and has left the airport.
• July 24—Snowden’s lawyer tells journalists that the fugitive will remain in Russia long-term until his temporary asylum request is made permanent.

For the U.S. administration, that is a depressing list. The February, June and July military incidents look like something right out of the Cold War days of the late 1950s through 1970s. In a fashion that would make late Soviet leader Nikita Khrushchev proud, Putin seems to be figuratively thumbing his nose at Obama.

The May, June and July diplomatic incidents are equally disturbing. Kerry was kept waiting three hours for his visit with Putin. When he finally showed, Putin had plenty that he was upset with the U.S. about—Kerry’s assertion that Russia should quit supporting Syrian dictator Bashir Assad; negative U.S. reaction to a new Russian law banning American adoptions of Russian orphans; and Putin’s contention that the U.S. intervenes in Russian internal affairs by supporting so-called democratic opposition to his regime; among other issues.

A month later, Obama’s June 17 meeting with Putin during the G8 Summit in Northern Ireland proved equally unproductive. Putin insisted on continuing his support for Syria’s Assad, while the Obama administration subsequently committed to sending arms to Syrian rebel forces. In Cold War fashion, Putin and Obama chose opposing sides, and one has to wonder if this pattern will now repeat itself in other parts of the globe. In addition, Obama’s call for the two countries to jointly reduce nuclear weapons stockpiles, which was meant to be an olive branch to the Russians, was interpreted by the Kremlin as a U.S. move to undermine Russia’s nuclear deterrent capability.

We are seeing real consequences stemming from the two presidents’ radically different styles. Obama is a professorial dreamer, while Putin is a ruthless pragmatist. While Obama peddles utopian dreams of boundless green energy, Putin pursues a calculated strategy of oil and gas development. As Dr. Sapir describes in his column, it is no accident that Putin has put Igor Sechin in control of Rosneft, and, by default, in charge of all Russian oil and gas policy. Sechin, like Putin, is a ruthless pragmatist, referred to by Russian citizens as “Darth Vader.” As Dr. Sapir points out, we have already seen how Sechin is beginning to marginalize Gazprom, so what will become of Lukoil and Surgutneftegas? Will Putin and Sechin restore complete governmental control over all Russian oil and gas assets?

In addition, as the U.S., thanks to shale development, ramps up its own oil production and becomes more self-sufficient, imports from abroad are being displaced, and a global oil glut could form eventually, lowering prices substantially. Given that close to 80% of Russia’s hard currency earnings still come from oil and gas, Putin and Sechin will not tolerate a low-price environment. Nor, will they tolerate extensive diversification of Western European gas supplies, away from Russian sources. Accordingly, some analysts speculate that the Russians have worked behind the scenes to stir up environmental activists and encourage protests against hydraulic fracturing.

We are just beginning to see events unfold in Russia—they warrant further, close attention in the coming months.

A note of thanks. Before we close out and go on to the September issue, I want to express my sincere thanks and appreciation to our colleagues in the various U.S. state agencies regulating oil and gas, as well as the folks at the federal agency, BSEE. Without the able assistance and data provided by these dedicated professionals, it would be nearly impossible to assemble the mid-year forecast update contained in this issue of World Oil, as well as its cousin, the beginning-of-year forecast in our February issues. These folks are doing their jobs well, despite frequent shortages of personnel and resources.