Exxon Mobil is no longer the world's number-one oil producer. As of yesterday, that title belongs to Putin Oil Corp - oh, whoops. I mean the title belongs to Rosneft, Russia's state-controlled oil company.
Rosneft is buying TNK-BP, which is a vertically integrated oil company co-owned by British oil firm BP and a group of Russian billionaires known as AAR. One of the top-ten privately owned oil producers in the world, in 2010 TNK-BP churned out 1.74 million barrels of oil equivalent per day from its assets in Russia and Ukraine and processed almost half that amount through its refineries.
With TNK-BP in its hands, Rosneft will be in charge of more than 4 million barrels of oil production a day. And who is in charge of Rosneft? None other than Vladimir Putin, Russia's resource-full president.
TNK-BP has been an economic dream, producing many billions in dividend payments for its owners - but it has been a relations nightmare. The partners have fought repeatedly. In 2008 Russian authorities arrested two British TNK-BP managers amid a dispute over strategy that forced then-CEO Bob Dudley (who now heads BP) to flee Russia - and that is just one of many partnership scandals.
The writing has been on the wall for TNK-BP since this time last year, when one of the AAR billionaires quit his role as CEO of the venture and declared that the relationship with BP had run its course. Since then speculation has raged over who might buy into the highly profitable venture.
Now we know: Rosneft is buying the whole thing, in a two-part deal. In the first part, Rosneft is acquiring BP's 50% stake of the joint venture in exchange for cash and Rosneft stock worth $27 billion. The deal will give BP a 19.75% stake in Rosneft. In stage two, AAR would get $28 billion in cash for its half, though this deal is not yet finalized.
Finalized it will be, however, because the billionaires of AAR are now eager to sell, rather than remain in a joint venture with the powerful Russian oil company. Rosneft gained much of its current heft at the expense of another Russian oligarch whom Putin threw under the bus, and the billionaires of AAR know they could easily meet the same fate if they try to partner with Rosneft as equals.
If it all comes to pass, Rosneft's daily production will jump to some 4.5 million barrels per day - enough to put the Russian firm neck and neck with Exxon in the race to be the world's top oil producer. And the deal that seals it will be worth something like $56 billion - for comparison, Nike is worth $34 billion and Kraft only $27 billion. If the TNK-BP deal goes through, it will be the largest in the industry since Exxon bought Mobil in 1999. See What's In It for BP.
Numbers like that deserve a little contemplation. Russia is spending a heck of a lot to buy its own oil production - smells like nationalization to me. And with Vlad Putin - the most resource-driven leader in the world today - behind the controls, I dare say we're witnessing the "Saudi Aramco-ing" of Russian oil.
Putting Putin in a position of even greater resource power can only lead one place: to high oil prices and a new Cold War in energy.
Putin's Plan Is Working
Rosneft has grown dramatically in the last ten years - not by chance, but because Rosneft is Vladimir Putin's vehicle to reassert state ownership over a fair chunk of Russia's oil fields. The most famous example happened in 2003, when Putin charged privately held producer Yukos Oil with a $27-billion tax bill that bankrupted the company. The Russian president then handed Yukos' oil fields over to Rosneft, immediately boosting Rosneft's daily production from 400,000 barrels to 1.7 million barrels.
It was blatant nationalization. Yukos' chairman and founder, Russian billionaire Mikhail Khodorkovsky, was convicted of fraud and sent to prison. Overnight, Rosneft ballooned from a small producer to Russia's biggest oil company.
With a snap of his fingers, Putin had created a national oil giant, a vehicle through which he could pursue his plan to reassert Russian influence in the world by controlling other countries' energy needs. The pending TNK-BP deal is simply the next step in this plan. If Rosneft does buy TNK-BP, the state oil giant will pump almost half of the barrels of oil produced in Russia.
That is a massive amount of oil. Remember, only Saudi Arabia produces more oil than Russia; and no country in the world exports more oil than Russia. The country is an energy superpower - and by gradually nationalizing Russia's energy resources, Putin is tightening his grip on Europe's energy needs.
However, Putin knows he can't quite do it alone - his country doesn't have enough oil and gas expertise. Without the right expertise, production will tank, and Putin's whole plan will be derailed.
History proves that point. When Saudi Arabia nationalized its oil industry in 1980, the country was producing more than 10 million barrels of oil per day. Within five years, production had fallen by more than 60%.
For Putin, that's not an option. That's why he is encouraging BP to stick around - Rosneft needs BP's technical expertise in order to tap into Russia's huge reserves of unconventional tight oil and shale gas. Having BP as a significant shareholder also lets Putin continue the pretense that Rosneft is not simply an arm of the government.
But an arm of Putin's government it is, and as Rosneft gradually takes control of more and more of Russia's oil wealth, Putin's leverage on the international stage will increase. Saudi Arabia may have struggled in its early years as an oil-producing giant, but today the country hosts incredible clout on the world stage because of its ability to open or close oil spigots and thereby influence global oil prices.
Europe is reliant on Russia for oil and gas. To be in control of other nations' necessary energy resources is to be in a very powerful position - one that Putin has been working toward for more than a decade.
He has built pipelines that bypass troublesome countries and feed into needy markets. He is cornering the uranium market by owning a large amount of primary production and controlling 40% of global uranium-enrichment capacity, while leaving the United States in need of a new nuclear-fuel supplier. He has increased Russia's oil and gas production and encouraged unconventional exploration.
Gazprom, the Russian state gas company, already has Europe wrapped around its little finger. Russia supplies 34% of Europe's gas needs, and when the under-construction South Stream pipeline starts operating, that percentage will increase. As if those developments weren't enough, yesterday Gazprom offered the highest bid to obtain a stake in the massive Leviathan gas field off Israel's coast.
Gazprom in control of Europe's gas, Rosneft in control of its oil. A red hand stretching out from Russia to strangle the supremacy of the West and pave the way for a new world order- one with Russia at the helm.
It is not as far-fetched as it might seem - or as you might want it to be. If Rosneft does buy both halves of TNK-BP, it will become a true goliath within the global oil sector. All the little Davids who rely on its oil will be at Putin's mercy. Same goes for Gazprom as a Goliath in the continent's gas scene.
In this scenario, Russia could choke off supply to raise prices. Putin could play oil- and gas-needy nations off one another, forcing European nations to commit to long-term, high-priced contracts if they want secure supplies.
Or imagine this: Russia could join OPEC. Suddenly the oil cartel would control more than half of global oil production and most of its spare capacity. With that kind of clout, the nations of OPEC could essentially name their price for oil - and the rest of the world would simply have to pay.
Additional Links and Reads
Rosneft to Replace Gazprom as Energy Driver on TNK Deal (Bloomberg)
Rosneft's deal to buy TNK-BP will accelerate the company's eclipse of Gazprom as the dominant force in Russia's energy industry. Over the past decade Russian President Vladimir Putin used Gazprom, the world's biggest natural gas producer, to assert Russia's power. Today, the lead role in Russia's energy machine is shifting to Rosneft.
Investors, Analysts Weigh Fallout from Canada's Rejection of Petronas-Progress Deal (Platts)
Late on Friday night the Canadian government issued its decision on the proposed takeover of Canadian natural gas firm Progress by Malaysian energy giant Petronas: the government said no. Investors and analysts were left scratching their heads - the deal seemed to fit the government's requirement of being in Canada's net interest. But with CNOOC's proposed deal to buy Nexen also awaiting government approval, all the prime minister's office would say is that its new framework clarifying the Investment Canada Act is pending. For now, that just means that no one is really sure whether Canada is open for business.
Obama Faces Tough Call on Iran Oil Sanctions (Reuters)
Mere weeks after the election, President Obama will be faced with a pivotal decision regarding the US's sanctions against Iranian oil: whether China, India, South Korea, and other nations have done enough to wean themselves from Iranian oil. The decision requires a careful balance between the need to stay tough on Iran and the worry that too much pressure will punish the world with high oil prices.
US Natural-Gas Boom Claims First Nuclear Plant (Reuters)
Dominion Resources is shutting its Kewaunee nuclear plant in Wisconsin next year. It's the first US nuclear plant to fall victim to growing competition from natural gas, but it likely won't be the last. After claiming hundreds of coal-fired plants, the surge in US shale-gas output is now starting to grind down the nuclear industry, and smaller, older plants like Kewaunee are the first to feel the pressure.
Source: Casey's Daily Dispatch
