Ruminations on Russia

Sitting in a cafe in London between meetings consuming coffee and an overly detailed read of the FT. Today's version seems to be full of energy related pieces, which by there very nature include Russia. The key piece of rubbish is entitled Politics and Easy Profits Signal Global Oil Crunch (no link love as I am writing this on my handheld.)

 

The piece is, in effect, the executive summary of a study by PFC Energy, an energy consultancy that has not done a good job of diversifying its client base from the majors. The sub-title of the study should probably be "nasty countries like Russia and Venezuela won't let us make a profit out of their oil." The essence is that increasing control of national resources by national companies (NOC) means that the world will be short of produced oil because they don't have your best interest at heart whereas BP, Shell and Exxon are your best friend. For evidence of big oil as your best friend please refer to Exxon Valdez, Prudhoe Bay and Texas refinery. The solution to this problem is to liberalize national resources, as Kazakhstan has done, and allow the majors replace their depleting reserves.

 

The concept of produced oil, as opposed to reserves, allows the oil industry to avoid peak oil discussions by putting the blame on not-our-friend governments and the NOC's. Peak oil reserves versus plateau production is a semantic game which seeks to get to the source reason for plateauing production levels. All you and I need to know is that the finding and production cost of every new barrel of oil is much greater than the last one.

 

Whilst I have a certain sympathy with PFC's view that the NOC's are enjoying the good times and not investing for the future the basic criticism of Russia is fairly hard to square with Q107 oil production up 6% versus 1Q06. On the gas front this is the argument I deploy when discussing the surplus of demand over supply for domestic gas and GAZP. However, as I will increasingly argue gas and oil are different sides of the same energy coin.

 

One of the other pieces of fiction peddled by PFC , inter alia, is that only the majors can manage the technical complexity of big complex projects. For further evidence see Sakhalin II and Shell and doubling of the cost base. This confuses technical complexity which is increasingly managed by service companies and project management. I will not deny that the NOC's will steal more (note the comparitor) but it does not make them worse.

 

There are other benefits to opening up your natural resources to the majors - no one mentions Giffen, bribery and Mobil. Nor for that matter the disappearance of the owner of the 10th largest bank in Kazakhstan (google gorst kazakhstan banks) though I am sure that Registan has it covered.