Monday, October 21, 2019

How Russia is Changing the World's Oil Markets

With U.S. sanctions against Russia now well into their fifth year as shown here:





...Russia has learned that it must work around the United States dollar-denominated global economic dominance.  Recent developments by Rosneft, the "...leader of the Russian oil sector and the largest global public oil and gas corporation..." show clearly that the global oil market is on the cusp of a very significant change.

Let's put things into perspective.  Rosneft is a major, world-class hydrocarbon producer with oil production hitting 4.7 million BOPD in 2018 and gas production of 1.12 million BOEPD.  Revenues in 2018 were up 31.4 percent to $133.7 billion putting it in eighth place globally when measured by revenues as follows:

1.) Sinopec (China Petroleum and Chemical Corporation)

2.) Royal Dutch Shell

3.) China National Petroleum Corporation

4.) BP Plc

5.) ExxonMobil

6.) Total

7.) Chevron

8.) Rosneft

9.) Lukoil

10.) Phillips 66

According to its website, Rosneft is included among Russia's strategic companies.  Its major shareholder is ROSNEFTGAZ JSC, a 100 percent state-owned company, which holds 50.0000001 percent of outstanding shares.  BP Plc owns 19.75 percent of outstanding shares, QH Oil Investments LLC owns 18.93 percent of outstanding shares, the Russian Federation through the Federal Agency for State Property Management owns one share and the remaining shares are in free float.

Here are the key operating metrics for Rosneft showing us that it is not an insignificant player in the global oil market:


Rosneft is active in Belarus, Ukraine, Kazakhstan, Turkmenistan, China, Vietnam, Mongolia, Germany, Italy, Norway, Algeria, Brazil, Canada, Venezuela, UAE and Armenia.  Rosneft plans to become the worlds largest operator of offshore hydrocarbon field development with prospective resources of 45.9 billion tonnes of oil equivalent (336.447 billion barrels equivalent).  By way of comparison, Saudi Arabia has 297.7 billion barrels of proved crude and natural gas liquids.  Here is a map (in Russian) showing Rosneft's offshore areas of activity:


Now, let's look at how a recent move by Rosneft could lead to very significant changes in the global oil market.  Back in September, Washington's Special Representative for Venezuela, Elliot Abrams, made the following comments about the relationship between Rosneft and Venezuela:

"We have seen, in the course of all this year, a greater and greater reliance by PDVSA and by the regime on the Russians, both the Russian Government and also on Rosneft, the Russian oil company.   More and more of the PDVSA oil is being given and sold to Rosneft.  Rosneft is transporting it.  Rosneft is merchandising it, if you will, laundering it and selling it to other destinations.  Rosneft is arranging financing.  So Rosneft and Moscow have become even more important to the survival of the regime.  And I think the move of the headquarters is a nice symbol of that." (my bold)

According to Reuters, Mr. Abrams recently stated that the Trump Administration is "...taking a closer look at ways in which Russia is sustaining the regime (in Venezuela)..." which could well result in the imposition of sanctions against Rosneft since they are seen to be aiding the Maduro government.
  
Here is an article about Rosneft from Russia Business Today dated October 5, 2019:


In order to work around potential sanctions against its operations by Washington, Rosneft is now tendering its export contracts in euros as shown here:



In fact, in perusing through all of these invitations to tender for oil exports:


...I could not find any that were denominated in U.S. dollars.

This move by Rosneft will prove to be a major game changer for the world's oil markets.  With Washington using economic sanctions to bully other nations who stand in its way of global dominance, foreign oil companies will increasingly switch away from the U.S. dollar as their preferred trading currency as a means of protecting themselves against any future punishment for actions that do not receive Washington's blessing.  It is only a matter of time before the euro or a currency other than the U.S. dollar become the preferred currency for trading, yet another unanticipated consequence of poorly thought out foreign policies.

2 comments:

  1. It is only a matter of time before the euro or a currency other than the U.S. dollar become the preferred currency for trading

    I have not been keep track but a number of countries incuding Russia, China, India and Iran have been working hard to reduce their dependency on the US dollar and on SWIFT.

    I would interpret Rosneft's move as a vote of confidence in their progress.

    As the Trump sanctions became more capricious it was obvious to anyone outside Washington that as a matter of self-defence the US dollar could not remain as the reserve currency.

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  2. Invariably, whichever new currency will replace the US dollar, it will make use of color-differentiated banknotes, like with banknotes for the euro, Canadian and Australian dollars, ruble, pound sterling, yuan and yen. Some go as far as to have them vary by size as well.

    One thing I never understood is why all the denominations for the US dollar bills have to all be in the same color. If anything, it makes it harder for sight-impaired users to differentiate each denomination one by one.

    Some denizens of the internet rationalize this by saying it creates a notion of stability and seriousness. This is rather suspect considering the euro, British pound, Swiss franc and Kuwaiti dinar are much more valuable than the US dollar, and they have been printing banknotes in color for years. The Swiss franc was even one of the last (Western) currencies to abandon its link with gold in 2000 - 29 years after the US did the same.

    This is one way the US dollar is a broken currency both at home and abroad. Here are other things I've noticed:
    * 1- and 2-euro coins last longer than 1- and 2-dollar bills. We USians have yet to see the 1-dollar bill be replaced with a coin. With inflation having reduced the purchasing power of the dollar, who wants to pay vending machines with stacks of quarters? Also, who wants to use banknotes with the Eye of Horus staring at you in the face?
    * Instead of quarters, there's a 20-cent piece that doesn't rely on a 5-cent to exist. Without nickels, it is impossible to make change from a quarter with only dimes. Thomas Jefferson even had the idea for a 20-cent piece from the get-go.
    * The euro 1- and 2-cent pieces are copper-plated steel. US 1-cent pieces, nicknamed "pennies" for some odd reason, are minted in copper-plated zinc, as has been the case since 1982. There have been stories of careless children and pets swallowing the coins and suffering from stomach lining damage (or, in the case of pets, dying outright) due to the zinc content. What were they thinking?
    * The 5-cent piece may be larger than the 10-cent, but at least it's not the same color or material (copper-plated steel vs 'Nordic gold'), so there's less confusion.
    * The 50-cent piece is smaller than the US half-dollar, in wide circulation, and therefore usable on vending machines.
    * Euro coins' values are minted in Arabic numerals, so you don't have to learn English just to read the values spelled out on dollar coins, let alone know what a 'dime' is. Apparently the dollar's status as a reserve currency did not behoove the US Mint to start denominating values in numerals so they could be read by those who don't speak English.
    * The euro sign is shaped like an E, which is much more straightforward than the dollar sign (neither 'dollar' nor 'peso' begin with an S, and its origins are murky). Same could be said for the pound (L for libra), yuan, yen, and ruble, but I digress.

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