Streetwise Professor

October 23, 2008

The $64 Question

Filed under: Economics,Energy,Politics,Russia — The Professor @ 7:56 pm

Actually, the $63.90 question–that’s today’s price (per the WSJ) of Urals Med–is: how much stress will this lower oil price put on the Russian government? Flagship firms are feeling the bite in a major, major way. Gazprom, down 6.36 percent on the day, 48 percent on the month, and 63.8 percent on the year. Rosneft down 5.71 percent on the day, 49.8 percent on the month, and 61.3 percent on the year. Gazprom credit protection costs up 145 bp (about 13 percent) in a single day. (Couldn’t find similar figures on Rosneft.) Tatneft was down 40 percent.

These are the firms that are supposed to be the cash cows that fund all the goodies for the big shots and the country at large–and they are turning to the government in search of cash themselves. That situation is not sustainable, and will exacerbate the factional frictions–seething just below the surface even in high times–within the Russian ruling elite.

Moreover, high energy prices had masked the inefficiencies at these firms. It is easy to look smart when the price of your product is sky high. The real challenge of management is dealing with hard times. There is room for serious doubt as to whether the chekist cadres that run these companies are up to the task of navigating through such turbulent waters. They weren’t promoted for their management acumen, or their knowledge of the oil and gas business. Their skills are not the skills that are needed in current circumstances. High prices covered a multitude of sins, and those sins are about to be revealed in a big way. Which will only contribute to the backbiting and infighting.

And we needn’t revisit the implications for the Russian budget, and the political ramifications of that.

Regardez la deluge.

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  1. And GAZPROM’s costs can only soar in the future. According to the article “Gazprom’s expansion hopes in doubt” in the Financial Times:

    The company also faces a massive demand for investment at a time when costs across the industry have been soaring.

    Developing the Shtokman gas field off the north coast of Russia, a technically challenging project, has been estimated at $15bn-$20bn, but will be “much more expensive than people might think,” according to Christophe de Margerie, the chief executive of Total, one of Gazprom’s likely partners in the development.

    Fields and pipelines in Russia’s far east for supplying China and Korea could cost about $100bn, Gazprom has suggested, while opening up the deserted Yamal peninsula in the north of Russia, the location of vast gas reserves, could cost $200bn, according to an estimate from Shell.

    Falling steel prices will help curb those costs, but the demand for capital spending is still huge.

    Chris Weafer of Uralsib, a Russian bank, estimates that Gazprom could have to raise about $20bn over the two years to cover the excess of its investment programme over its available cashflow.

    Valery Nesterov, energy analyst at Troika Dialog in Moscow, warns: “If the crisis continues and oil prices fall, there will be questions over whether Shtokman and Yamal will be delayed.”

    However, Mr Weafer argues that Gazprom will not be able to delay those big projects.

    “The gas is already committed to export customers, or is needed to replace declining fields for the domestic market,” he said.

    Gazprom executives are clear that their priority is developing those Russian fields and pipelines, making it increasingly likely that costly international projects will have to be set aside for the foreseeable future.

    Mr Weafer said: “Gazprom is not going to get involved in anything overseas that costs a lot of money. There may be joint studies, technical work, co-operation agreements and so on, but no big capital spending projects, because Gazprom won’t have the money. There will be a lot of noise, but not a lot of real activity.”


    Comment by Michel — October 23, 2008 @ 9:04 pm

  2. You will need yet again a new title. According to Vedemosti, the Urals Blend for oil is now selling below $60 a barrel. By early afternoon on Friday, Moscow Standard Time, it had fallen as low as $58.35.

    Российская Urals опустилась ниже очередной психологически важной планки в $60 за баррель. С 13:12 МСК она торгуется ниже этого уровня (на 13:20 МСК — около $58,35).


    Comment by Michel — October 24, 2008 @ 12:23 pm

  3. Noted–It’s just damned hard to keep up. Should look into putting an oil price ticker on the site;-)

    The ProfessorComment by The Professor — October 24, 2008 @ 2:56 pm

  4. Don’t forget about Boris Nemtsov’s brilliant take on the Gazprom issues:—-Gazprom

    He’s the only one actually trying to educate the people of his country as to how their future is being stolen by the KGB thugs they have “elected.”

    Comment by La Russophobe — October 24, 2008 @ 4:34 pm

  5. […] Moscow Housing, Boy, I’m Glad He Cleared That Up!, Better and Better, Information Management – Flirting with Catastrophe, The $64 Question. […]

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