Streetwise Professor

June 16, 2020

Igor Sechin Is An Idiot. But You Knew That.

Filed under: Commodities,CoronaCrisis,Economics,Energy,Russia — cpirrong @ 1:06 pm

The very informative RBN Energy blog notes “Look What You Made Me Do – Permian Crude Producers Waste No Time In Ramping Up Production“:

Crude oil supply news comes in from all angles these days, bombarding the market daily with fresh information on producers’ efforts to ramp their volumes back up now that the global economic recovery is cautiously under way. Crude demand is rising, storage hasn’t burst at the seams yet, and prices have come a long, long way in just a few weeks. Permian exploration and production companies, having avoided a fleeting, longshot chance that the state of Texas might regulate West Texas oil production, are responding to higher crude oil prices as free-market participants should. The taps are quickly being turned back on, unleashing pent-up crude and associated gas volumes that, you could say, were under a sort of quarantine of their own for a while. Today, we provide an update on the status of curtailments in the Permian Basin.

The story mentions “the taps.” US shale regions, Permian in particular, are as close to something that can be turned on and off like a tap as anything in the history of the oil business.

You will recall that Igor Sechin’s brain flash in responding to the Covid-caused demand crash was to spurn Saudi importuning to extend output cuts, which spurred the steamed Saudis to increase output, thereby turning a hard fall in prices into a bona fide crash. A crash that hurt Russian producers generally, and Rosneft specifically, extremely hard.

The reasoning for Sechin’s strategy was that US shale producers had been the main beneficiary of previous output cuts, and he wanted to drive them out of business. Predatory pricing, in other words.

But as the RBN post indicates, this strategy, like most predatory pricing strategies, doesn’t work if the target can rope-a-dope and recover when you attempt to raise prices. That’s exactly what’s happening.

Yes, some companies have gone bankrupt–but bankruptcy is different than destruction. (Igor might not know this. Seriously.) And yes, the industry is facing more stringent financing conditions–but if prices rise these will ease too, and drilling activity will resume.

In other words, Sechin failed to realize that not only is predatory pricing almost always a futile strategy, it is particularly futile when unconventional US oil production is concerned. The Saudis found this out in 2014-2015, but Igor either wasn’t paying attention, or didn’t learn the lesson.

Predation doesn’t pay. This is hardly a new insight, or one not demonstrated by repeated experiences–including experience involving Igor’s intended prey.

Sechin’s predatory endeavors work when they involve exploiting the Russian legal system. In the marketplace, not so much. But we all knew that Igor is basically a thug, and not all that bright.

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  1. @SWP re:>>Igor might not know this. Seriously.<< You could add 'naturally'.
    We are repeatedly told that we don't understand [some other country or culture]
    They don't understand us, either. Igor doesn't appreciate that the taps can be turned back on again on an uptick in price, and he certainly doesn't understand bankruptcy protection.
    Of course, a lot of people here don't understand, either!

    Comment by Richard Whitney — June 16, 2020 @ 3:32 pm

  2. The other thing that happens, bankruptcy protection notwithstanding, is that the assets fall into the strong (or at least, stronger) hands. Pressure like this tends to consolidate – so Igor & friends will be facing better financed players next time ’round – perhaps because some of the 2019 lenders took a haircut, and sold their converted equity to one of the survivors. As they say, be careful what you wish for, because you just might get it.

    Comment by dcardno — June 16, 2020 @ 10:09 pm

  3. Agree on Sechin beeing an Idiot, but whether US shale is turned on again depends not only on the price for oil, but on the continuing availability of easy money and low risk aversion (hunt for yield) of Investors.

    The reason?
    The last time I checked, none of the shale producers were free cash flow positive over an extended period of time, i.e. they require continous injection of capital to stay afloat.

    This argument has been made by David Einhorn and Jim Chanos over the years in presentations to anybody who would listen, but the market has ignored it until the price crashed (like it has ignored the fundamental value of Tesla, or Hertz..)

    I wonder what your position on the non-existing FCF of US shale is, or am I overlooking something?

    Comment by viennacapitalist — June 17, 2020 @ 12:44 am

  4. Hi Professor

    With apologies for going off-thread, there is something I have been racking my brains to remember, and I figure you would know. Or if not you then your commentariat.

    There is a statistical technique that determines which values in a trend are the most significant in establishing that trend. For example, in an analysis of the falling price of retail gasoline, it might find that the price reductions applied by ExxonMobil were the main factor.

    I think this is called principal component analysis but it may also be Granger causality.

    If I wanted to analyse whose prices and price-change times caused a decline in the retail gasoline price which of those would I use?

    Comment by Green as Grass — June 17, 2020 @ 5:51 am

  5. Quite the contrary: prices should not be managed and demand should be met by the most efficient producers. If this was a normal industry frackers would have been wiped out a long time ago. Doesn’t CPirrong understand microeconomics?

    Comment by AL NAIMI — July 22, 2020 @ 6:03 am

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