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Readers of Dr. Kent Moors' intelligence briefings over at Energy Capital Research Group – an energy data analytics and price forecasting firm co-founded and chaired by Kent – recently saw his piece on how the incoming administrations pick for secretary of state could shake global oil markets.
To get these briefings as soon as Kent releases them, click here. But the implications here are so huge that Kent had to share them with all of you. Here he is…
Assuming he is confirmed as U.S. Secretary of State, Rex Tillerson will almost immediately begin a process of rolling back sanctions against Russia. And the megalith he runs has been active behind the scenes in making this happen.
Tillerson is still technically CEO of international energy major ExxonMobil Corp. until the Senate confirms his cabinet appointment. There is bipartisan senatorial opposition to that appointment brewing, and the Russia card is already one of the main reasons why.
The political maelstrom surrounding President-elect Donald Trump's refusal to hold Moscow culpable in the election/political party hacking scandal is about to engulf the Tillerson appointment. That confirmation process is about to act like the proverbial "other shoe" falling.
Several years ago, ExxonMobil and Russian state oil major Rosneft signed a joint development agreement. That accord put Exxon on the northern Russian continental shelf and in Black Sea development. But what it gave to Rosneft was far more important. In addition to needed access to Exxon's expertise and deep pockets, it provided the Kremlin with something much more important – high-end technology for heavy oil recovery.
The accord provided that the two companies would combine work at projects both inside and outside Russia. The strategic pairing provides Rosneft with access as a minority partner to Exxon projects in North America and elsewhere. Every one of the more than two dozen Exxon projects earmarked by the Russian major are heavy oil. Additionally, Exxon agreed to move into heavy oil projects in Western Siberia, the single most important domestic target for Russian energy officials.
By the time U.S. and European sanctions hit over Moscow moving into Ukraine, Exxon had committed more than $1 billion to fields inside Russia. The ultimate company exposure could easily move north of $3 billion.
Tundra + Steam = Oil Slushie
Money is one thing, yet from the Russian perspective, access to technology is something else entirely.
There is considerable heavy oil available in Russia, both in new operating areas, such as the continental shelf, and Eastern Siberia. But the Western Siberian target is currently center stage. It is here that the Kremlin's need is both crucial and immediate.
For the past two years, I have been writing about the major declines in production from mature Western Siberian fields. These have been the mainstay of Russian production now for decades. But they are becoming exhausted.
My analysis about a year ago concluded that, at present extraction rates, the decline in extractable Western Siberian reserves could be approaching 8.5% annually by 2020. Over the past two months however, sources at Minenergo (the Russian Energy Ministry) have acknowledged that the decline could be much greater. Some estimates now put it at over 12% per annum at the largest (and oldest) fields as early as 2018.
Additionally, during the most recent global combat over market share (largely versus the Saudis in competition over oil sales to Asia), Russian production rose to over 11 million barrels a day. Contacts at both Minenergo and at Russian majors Rosneft and Surgutneftegaz admit an increasing amount of that excess production was at an actual loss.
Short term, Minenergo could massage the books. Yet over any more extended period, the drain on exhausted primary (West Siberia) production fields is not cost effective. It has been further damaging geological reservoirs and lifting volume at wellhead expenses above what the crude can command on the international market (where Russian Urals Export Blend continues to trade at significant discount to Brent).
This is a very dangerous situation for a nation whose central budget and domestic financial balances remain dependent upon crude oil revenue.
This is where Exxon and its technical know-how comes in.
Russia possesses significant heavy oil reserves located in strata below those comprising what are still the primary production horizons. However, the usual methods for extracting such oil – steam-assisted gravity drainage (SAGD) and similar techniques – are unsuccessful, as they merely collapse the surrounding tundra and prevent any extraction.
Exxon has introduced alternative approaches that may well show promise in allowing Rosneft and other Russian state companies to tap. This is now a major need of the Russian state budget.
The Siberian Candidate
Unfortunately, the introduction of Western sanctions has delayed much of the Exxon move into Russia. That has put billions of Exxon investment dollars at jeopardy. But even more so, it is intensifying a fiscal crisis in Russia itself by undercutting the country's principal source of foreign exchange.
And that has set the stage for a concerted Exxon move against the sanctions from Washington. At issue was a legislative move to transform Obama administration sanctions against Russian incursions into Ukraine into a five-year statutory mandate. That would have made it far more difficult for Trump to overturn what is a presidential sanction against Russian actions once the presidential-elect actually assumes office.
The U.S. Senate ultimately recessed without passing the legislation. That was a major victory for Moscow and for Exxon as well. It sets the stage for a Trump reversal of sanctions and a renewal of Exxon projects in Russia.
But to accomplish this, Exxon used all of its own impressive lobbying professionals, combined with at least three other K Street lobbying agencies it retained for the effort. This sets the stage for a Trump move on the sanctions and a much closer relationship between Exxon and Rosneft.
Exxon lobbying remains among the most effective inside the Beltway. It employs professionals who are very careful in how they operate, can influence both sides of the aisle, and adopt strategies that are well thought out and achievable.
Take the company's approach to climate change. Exxon has walked a tightrope that, at least so far, has allowed it to acknowledge climate change (a major distinction from Trump who does not) while not holding itself responsible for the negative effects.
Nonetheless, the very success of its lobbying campaign against the sanctions-to-law move may have also cost Tillerson the job. Republicans have a one-vote majority on the Senate Committee on Foreign Relations, the body that will hold his confirmation hearings. Two of those Republican senators (Rubio and Paul) are not pleased with the Exxon CEO's coziness to Putin. Even if Tillerson does get out of the committee, at least two more GOP members (McCain and Graham) may well vote against the nominee.
Either way, it appears Exxon has what it wants – and so does the Kremlin. Even if Tillerson does withdraw his name from consideration or is not confirmed, a Trump move to scrap the sanctions is all that is needed.
Given the political firestorm intensifying over Russian hacking and Trump's business connections with Moscow, the sanctions may be the easy part.
To get Energy Capital Research Group's weekly research and analysis, click here.
The post "How Trump's Exxon Pick Is Changing Global Oil Markets" appeared first on Oil & Energy Investor by Dr. Kent Moors.
About the Author
Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.