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Colin Chilcoat

Colin Chilcoat

Colin Chilcoat is a specialist in Eurasian energy affairs and political institutions currently living and writing in the former oil capital of the world. Colin…

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EU Extends Sanctions As Rosneft Waits For A Bailout

EU Extends Sanctions As Rosneft Waits For A Bailout

Peace talks are dead and the body count is rapidly rising in Ukraine. More than 5,000 have perished since the conflict began and September’s ceasefire – for lack of a better word – has eroded. In an emergency meeting on January 29, European Union foreign ministers unanimously agreed to extend sanctions against Russia. The sanctions – set to expire soon – will now be drawn out to September. Still feigning innocence, President Vladimir Putin’s laundry list of problems continues to grow.

EU foreign ministers will meet again February 9 to discuss new additions as well as the tightening of existing economic sanctions. Officials hinted the new measures will make it tougher for Russian companies to refinance themselves and could further affect Russia’s already tanking sovereign bonds. While welcoming the move, the United States will not immediately alter its sanctions regime. State Department spokeswoman Jen Psaki confirmed the government would take some time to “consider others that we could add.” Related: Russian Stimulus Plan ‘Just Talk’

Russia, for its part, is running out of ideas on how to turn its economy around – outside of a complete rebuke of the rebel position of course. Since January 1, the ruble has fallen approximately 15 percent, erasing its December rebound. Consumer prices and inflation are growing at a rate of more than 10 percent per annum and GDP for the first half of 2015 is projected to retract 3.2 percent.

On January 30, Russia’s central bank cut its key rate to 15 percent – this, after last month’s late-night change from 10.5 to 17 percent that angered Russian politicians and bankers alike. The adjustment, the central bank noted, is “aimed at averting the sizable decline in economic activity against the background of negative external factors.”

The central bank’s announcement comes just days after the government published its $35 billion anti-crisis spending plan. The plan targets banks and big companies in addition to social programs. Of note, is the 10 percent cut to planned expenditures in 2015. It is still not clear just which long-term investment projects will meet the axe, but Putin has ordered that defense and social spending carry on unaffected.

For its part, Russian state-owned oil giant Rosneft is still waiting for its handout. The company has asked for more than $18 billion from the state’s National Welfare Fund. In November, Rosneft sought nearly $35 billion – a request that was denied. The most recent call for cash seeks to finance 28 projects, including its strategically important “Star” shipyard located in the Peter the Great Gulf in the Sea of Japan. Related: Russia And China’s Growing Energy Relationship

The project is estimated to cost $1.5 billion, more than 20 percent of which is allocated from the federal budget – future cuts notwithstanding. The shipbuilding complex is not just important to Rosneft, but gas players as well who have been late to adapt to changing transportation trends, i.e. liquefied natural gas (LNG). State-owned Gazprom and independent Novatek have already expressed their need for 29 LNG and 6 oil tankers for the transport of hydrocarbons from Russia’s promising offshore fields.

For the time being, Rosneft has managed to soldier on – the Arktun-Dagi offshore field is now online and on track to produce 100,000 barrels per day of oil – but its finances are in disarray and joint projects have been shelved. The company’s work with ExxonMobil in the Kara Sea will not resume this year as scheduled. The frozen projects and huge debt load have tanked Rosneft’s capitalization on the Moscow Stock Exchange, where Russia’s second largest company Lukoil briefly passed it today. For the sake of comparison, ExxonMobil’s value is approximately five times greater than the two companies combined. It is perhaps too big to fail, but Rosneft could use a helping hand.

By Colin Chilcoat of Oilprice.com 

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