Streetwise Professor

May 27, 2014

Gazprom Down, Rosneft Up: Cutting the Oil Link, Sucking Up to Sechin

Filed under: Energy,Politics,Russia — The Professor @ 4:23 am

The news and commentary pages have been filled for days with big stories claiming that the (alleged) China-Russia gas deal represents a seismic change not just in energy markets, but in international relations.

I remain skeptical because I still remain unconvinced there is a real deal with price and financing terms nailed down. What’s more, some of the more sober commentary casts doubt about how favorable the economics of the deal are for Russia, even if the reported contours of the deal are correct. Gazprom must develop green fields in east Siberia, and build the pipes to China. This will be quite expensive, and the reported pricing terms may border on the break even. This should not be surprising because the Chinese are hard bargainers, and Putin needed a deal more than they. (Probably the biggest beneficiaries will be the tunnelers at Gazprom, and companies to whom money is tunneled, like the pipe making Rotenberg brothers.) ┬áSo I don’t see this deal-if it exists-being the triumph for Russia and Gazprom as the commentariat is trumpeting.

Here is a piece of hard information that is very bad news for Gazprom: Eni has negotiated an end to oil-linked pricing, and the adoption of European hub pricing. This undermines Gazprom’s pricing model, and for this customer alone costs the Russian company about $650 million off the bat. There is a virtuous cycle here that will make the oil-link progressively less defensible. More hub based pricing tends to enhance the liquidity at the hubs, which makes the hub prices more reliable, and thereby reduces the cost of indexing contract prices to hub prices.

On the Rosneft side of the house things are much cheerier. Western company after western company trooped to St. Petersburg to pay court to the sanctioned Igor Sechin. They signed dozens of deals, and ladled on sick making praise for Sechin, Rosneft, and Russia. Bob Dudley from BP was the worst (go figure, given how Sechin has him by the short ones), but he had a lot of competition. Decent people would get a room to engage in such sucking up, but Dudley et al did it in full public view.

BP (and other companies) were obviously undeterred by the US sanctions on Sechin. They said they can deal with Rosneft, and meet with Sechin personally: they just can’t do deals with Sechin personally. Or something. Meaning the sanctions are a joke.

So I would score things Rosneft up, Gazprom down. Would that they were both down, and hard.

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6 Comments »

  1. I own North Atlantic Drilling, even though the stock is way up today on Rosneftnews I am not happy they are getting in bed with Russia.

    Comment by Tom — May 27, 2014 @ 1:02 pm

  2. I own North Atlantic Drilling, even though the stock is way up today on Rosneft news I am not happy they are getting in bed with Russia.

    Comment by Tom — May 27, 2014 @ 1:08 pm

  3. @Tom. As @Tim Newman notes, those who crawl into bed with Russia usually end up regretting it.

    The ProfessorComment by The Professor — May 27, 2014 @ 3:32 pm

  4. On an unrelated note, Proton down, Zenit up.

    Wonder what Obama is going to say to the “lend-lease” request from Ukraine. My guess is, in terms of FDR’s “garden hose” metaphor, it will be “you should negotiate with the fire, and I will threaten it with an unspecified amount of water tomorrow (and here is my Gatorade bottle)”

    Comment by Ivan — May 28, 2014 @ 11:58 am

  5. Also down: a Russian surveillance drone near Donetsk.

    Comment by Ivan — May 28, 2014 @ 2:28 pm

  6. @Ivan. And sadly, a Ukrainian helo is also down, w/14 dead including a general.

    The ProfessorComment by The Professor — May 29, 2014 @ 5:21 am

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