Putin Is the New Global Shah of Oil
By Marin Katusa, Casey Research
In the ever-evolving landscape of global oil production, a seismic shift has occurred: Exxon Mobil has been dethroned as the world’s leading oil producer. As of October 25th, a new player has emerged at the top – Rosneft, the state-controlled oil company of Russia, effectively under the leadership of Vladimir Putin.
Rosneft’s recent move to acquire TNK-BP, an oil giant co-owned by British-based BP and a consortium of Russian billionaires known as AAR, signifies a monumental change. TNK-BP, which produced an impressive 1.74 million barrels of oil equivalent per day in 2010, processed nearly half of that through its refineries.
Once the acquisition is finalized, Rosneft will command over 4 million barrels of oil production daily, positioning it as a formidable competitor against Exxon. But it’s Putin who stands at the helm of Rosneft, using this lever of power to exert Russia’s influence on the global stage.
Despite being a financial success story, TNK-BP has been marred by internal conflicts among its partners, culminating in a series of high-profile disputes. The writing has been on the wall since last year, when one of the AAR tycoons stepped down as CEO and indicated it was time to part ways with BP. Speculation around potential buyers for this lucrative venture has now been confirmed.
The acquisition will happen in two parts: first, Rosneft will purchase BP’s 50% stake for a combination of cash and stock worth $27 billion, granting BP a 19.75% ownership in Rosneft. In the second phase, AAR will receive $28 billion in cash for its remaining share, a deal that remains pending but increasingly likely.
However, the AAR billionaires are in a hurry to sell, keen to avoid becoming pawns in a partnership with a dominant Rosneft. After all, Rosneft’s ascendancy has often come at the expense of other oligarchs, and history has shown that Putin is willing to eliminate competition when necessary.
Should these deals go through, Rosneft’s daily production could soar to 4.5 million barrels, placing it on par with Exxon in the global oil race. The overall deal, valued at around $56 billion, eclipses the worth of names like Nike and Kraft. If completed, this would mark the largest transaction in the oil sector since Exxon merged with Mobil in 1999.
These figures warrant serious reflection. The amount Russia is investing to secure its domestic oil production has the unmistakable scent of nationalization. And with Putin, arguably the most resource-driven leader today, orchestrating this play, it seems Russia is undergoing a “Saudi Aramco-ing” of its oil industry.
This consolidation of power under Putin is likely to push oil prices upward and could catalyze a robust energy bull market.
What’s In It For BP
BP’s historical presence in Russia has been lucrative, but the company is weary of the internal strife of TNK-BP. Despite this, BP recognizes the importance of maintaining a foothold in Russia, particularly for tapping into its extensive northern oil and gas reserves.
The cash and stock deal will provide BP a substantial share in Rosneft, ensuring that the company can benefit from Russia’s vast untapped oil resources. This arrangement will also likely secure BP a position on Rosneft’s board, facilitating direct engagement with Rosneft’s CEO, Igor Sechin, who plays a critical role in shaping Russian energy policy.
Moreover, a stake in Rosneft allows BP to strengthen ties with a Kremlin that has grown more powerful in the oil sector compared to the 1990s, highlighting the necessity of having insider connections in Russia to avoid sudden business setbacks.
Putin’s Plan Is Working
Rosneft’s rapid growth over the last decade isn’t coincidental; it’s a direct outcome of Putin’s strategy to reassert state ownership over much of Russia’s oil resources. A notable moment occurred in 2003 when Putin imposed a staggering $27 billion tax liability on Yukos Oil, leading to its bankruptcy and subsequent transfer of its assets to Rosneft, catapulting Rosneft from producing 400,000 barrels to 1.7 million barrels per day.
This event represented a clear act of nationalization. Yukos’ founder, Mikhail Khodorkovsky, was imprisoned for fraud, and Rosneft transformed into the nation’s oil behemoth almost overnight.
Through this decisive maneuver, Putin created a national oil giant designed to enhance Russia’s influence on the world stage, particularly by controlling energy needs in other countries. The forthcoming TNK-BP acquisition is merely the next phase in this agenda, positioning Rosneft to oversee nearly half of Russia’s total oil production.
Only Saudi Arabia extracts more oil than Russia, and no nation exports more oil than the latter. By progressively nationalizing its resources, Putin is tightening his grip on Europe’s energy dependencies.
Yet, Putin recognizes that he cannot achieve this alone; Russia lacks sufficient expertise in oil and gas production. History supports this assertion: when Saudi Arabia nationalized its oil industry in 1980, the immediate aftermath saw production plummet by over 60% within just five years. This outcome is one Putin cannot afford, prompting him to encourage BP’s continued presence in Russia.
Rosneft needs BP’s technical expertise to capitalize on unconventional tight oil and shale gas reserves. Moreover, having BP as a significant shareholder enables Putin to maintain the facade that Rosneft is not merely a government extension.
Nonetheless, as Rosneft acquires increasing control over Russia’s oil wealth, Putin’s leverage in international spheres escalates. While Saudi Arabia experienced difficulties in its initial years as an oil powerhouse, it has now cemented its status as a dominant global force, primarily due to its control over oil prices.
Russia has positioned itself as a critical supplier of energy to Europe, having established pipelines that secure its access to significant markets. Additionally, it is seizing control of the uranium sector, owning a substantial share of primary production and dominating 40% of global uranium-enrichment capabilities.
Gazprom, another state-owned enterprise, already has Europe in its grasp, supplying 34% of its gas requirements. Future projects like the South Stream pipeline only promise to enhance this position. Gazprom’s recent bid for a stake in Israel’s Leviathan gas field underscores its ambitions.
With Gazprom controlling gas and Rosneft overseeing oil, Russia’s influence spreads like a red hand across the continent. Should Rosneft complete the acquisition of TNK-BP, it will emerge as a true giant in global oil, elevating Putin’s capacity to dictate terms to dependent nations.
In this scenario, Russia might manipulate supply to drive prices upward, pitting countries against each other and demanding long-term, high-price contracts to ensure stable access.
Envision, for a moment, a scenario where Russia joins OPEC. The cartel could suddenly command over half of global oil production, along with most spare capacity, positioning OPEC to dictate oil prices worldwide.
Understanding the unfolding dynamics is crucial, as the implications extend far beyond immediate financial interests. The trajectory Russia is on suggests a new world order may be at hand—one in which the Kremlin exercises unprecedented influence over global energy resources.
Sincerely,
Marin Katusa
for Economic Prism
[Editor’s Note: Marin Katusa is a prominent investment analyst and senior editor at Casey Energy Opportunities, Casey Energy Confidential, and Casey Energy Report. Transitioning from a successful teaching career, he now focuses on analyzing and investing in junior resource companies. He frequently comments on BNN and actively participates in early-stage investment evaluations through the Vancouver Angel Forum. Marin also manages a portfolio of international real estate projects, leveraging sophisticated analytical methods to assess investment variables.]
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