Russia Is Ready For U.S. Sanctions

Sanctions, Oil Deals: The Russian Perspective

Sources:

- High-level figure close to the Russian presidential administration
- Senior official in the Russian Ministry of Finance
- Moscow-based Russian economist
- UK-based geopolitical analyst for Fortune 500 companies
- Oil trader for a major European corporate entity
- Moscow-based investigative journalist
- Moscow-based energy analyst

According to a source close to the Russian Presidential Administration, Russia is pursuing an aggressive response to U.S. sanctions over Crimea, Donbas and the poisoning of the ex-GRU Colonel Sergei Skripal and his daughter in the UK. Moscow is looking to use its dominance within the energy sector to apply pressure on the U.S. oil sector.

Despite the current sanctions, Russia’s economy remains fairly stable. This stability has meant that the threat of tougher sanctions targeting Russia’s sovereign debt with maturity over two weeks and restricting dollar transactions of Russia’s largest banks did not raise significant concerns.

A senior official within the Ministry of Finance noted that “it is no surprise that the U.S. will seek tougher sanctions but we have been implementing an economic strategy that can take the strain”.

Most importantly, in anticipation of tougher sanctions by the U.S., Russia has been looking to the East. Russia’s growing isolation from the West due to the continuous sanctions has intensified its relationship with global players, with financial and political alliances being forged with China, Turkey and several Gulf states.

At the same time, Russia has responded by applying its own pressure on Western oil companies and oil traders by requesting the use of euros instead of dollars for payments and by introducing penalty clauses in the negotiation of its 2019 oil sales contracts in order to protect itself against the sanctions.

Part of the penalty clause incorporates measures if they fail to pay for supplies in the event of new U.S. sanctions being enforced that could disrupt oil sales. Negotiations between the large oil producers in Russia, such as Rosneft and Gazprom Neft, with oil traders, such as Gunvor, Trafigura and Vitol, have intensified in recent weeks.

According to an energy analyst “none of the oil traders and oil companies want to take responsibility for the impact any upcoming U.S. sanctions could have on their trade, so they don’t see why they should be penalized. They consider this a political issue that has nothing to do with their business.”

However, as an energy-focused journalist based in Moscow noted “It is naïve to think that Russia is not going to use its influence in energy policy to counter-measure the impact of further U.S. sanctions. Russia is very much aware that it has the upper hand when it comes to oil; and if U.S. oil companies and traders are not willing to compromise, Russia will be more than happy to turn its back on them and engage fully with Chinese and Gulf companies.”

According to an oil trader for a European corporate entity “it is important to distinguish the position of U.S. oil companies and European ones. Entities like Total and ENI are more interested in successfully concluding their negotiations with Russia because they are aware of their dependency on Russian oil. So they are more likely to take a less aggressive stance than their U.S. counterparts”.

Libya: From Palermo to Paris

As we have noted repeatedly, elections have no chance of taking place in Libya next month, a fact that has now been officially confirmed.

What’s going on right now in Libya is largely a colonial game. Thus we see first one ‘peace’ conference in Paris, followed by one in Palermo, Italy, which ended on Tuesday. The Palermo conference was an attempt by Italy to upstage France as the main power broker in Libya. The Paris summit was about propping up General Haftar. Haftar showed up at the Palermo summit, but made it clear that he wasn’t there officially.

At the Paris summit in May, Libya’s factions agreed to hold elections by 10 December. That’s not going to happen, as made clear at Palermo this week. There is no date on elections, but factions agreed to hold a UN conference on organizing elections in Spring 2019.

And the issue of migrants—however unrelated it may seem—is going to end up being a key to who ends up with control over Libya’s oil wealth (meaning, control over the government).

Italy and France have the same agenda here, but the position of chief power broker is key. France is propping up Haftar in an attempt to make him as legitimate as the failing Government of National Unity (GNA). By supporting Haftar, they are supporting Saudi Arabia and the UAE, as this is not only a colonial power battle—it’s also a battle between Saudi Arabia/UAE and Qatar, plus their allies, with Qatar representing the Muslim Brotherhood in this case. The GNA wasn’t going to recognize Haftar, so France boosted him in Paris.

Europe, in general, is gunning for Libya to create ‘camps’ for migrants. The GNA has refused, which is another reason for France’s support of Haftar. For Italy, the migrant issue is a critical one, so this will play in Haftar’s favor as well.

That Haftar only showed up to the Palermo summit and refused to sit down with world leaders should not be taken as a significant snub. He is prone to theatrics, in general, and this is more of a publicity stunt than anything else.

But Italy’s description of the summit as a success is a wild misrepresentation, even if Rome needs the Palermo summit to trump its precursor in Paris.

In the meantime, oil production remains steady in the status-quo standoff, with the NOC saying that exports of crude, natural gas and condensates rose almost 6 percent in September, compared to August.

Global Oil & Gas Playbook

Crude oil has entered a bear market and this time it happened so fast banks are only just now beginning to revise their price projections downwards. It was just a couple of weeks ago that OPEC oil ministers assured the world there will be enough oil for everyone despite U.S. sanctions against Iran that snapped back on November 5. Now, they are discussing production cuts on growing worries about oversupply.

Two reports that came out this week contributed to the bearish sentiment saw oil prices fall by more than 20% inside a month. One was from the International Energy Agency and the other was from OPEC, and both had little by way of good news for exporters of crude oil, predicting a slowdown in demand growth accompanied by further surging U.S. production that will lead a non-OPEC increase of more than 2 million barrels daily this year and next.

Meanwhile, U.S. inventories are also rising, which is normal for this time of year—especially with higher production—but with the market so jumpy, normal does not mean much to price movers. So, instead of going to $100 a barrel as many analysts expected days before the Iran sanctions came into effect, Brent crude and WTI have both shed a quarter of their value as of mid-October. And this slide will likely continue, despite OPEC’s talk about production cuts, as indications of an oversupply play together with economic growth expectations.

The Saudis are angry, and the general consensus is that Trump tricked them into creating an oversupply situation that would lower energy costs for American consumers.

Deals, Mergers & Acquisitions

- Anadarko has decided to sell $4 billion worth of its midstream assets, which is almost all of them, including pipelines and storage facilities. The buyer is Western Gas Partners, a midstream master limited partnership. The sale is seen to wrap up by the end of March next year. It will involve $2 billion in a cash payment with the rest to be paid in shares of Western Gas Partners.

- Exxon, Chevron, ConocoPhillips, and Shell are among potential suitors for Permian-focused independent Endeavor Energy Resources. Exxon and Chevron have already submitted their bids for the private company, which has the rights to 329,000 net acres in the Permian, and could be worth up to $15 billion. The company’s holdings are a potentially very tasty morsel, with just 2% of the acreage tapped so far.

- Norway’s Equinor has bought a 9.7% interest in a solar power company, Scatec Solar, after earlier buying a 0.3% stake in the firm. The price tag for the bigger stake was $82.55 million and, according to the company it will help it expand its exposure to the fast-growing solar industry as the state oil and gas company continues with its complete makeover that also involved a change of name to distance itself from its main business.

Tenders, Auctions & Contracts

- UAE’s Adnoc has awarded Italy’s Eni a 25% stake in the Ghasha natural gas concession, which spans several offshore fields. The fields contain so-called sour gas that needs more processing than other gas to reduce its sulfur content and make it suitable for consumption. The project is part of Abu Dhabi’s drive to become self-sufficient in gas and will also involve another partner, yet to be picked, with Adnoc retaining 60% and operatorship in the 40-year concession.

- Gazprom Neft is keen on taking part in the next oil and gas licensing round in Abu Dhabi as part of expanding its cooperation with local major Mubadala. Earlier this year, Mubadala’s oil and gas division sealed a deal for the acquisition of 44% in a joint venture operating in Russia, Gazpromneft-Vostok. Now, its partner in the venture is looking to enter production projects in the emirate.

Discovery & Development

- Shell and Anadarko have locked horns in Mozambique over the supply of locally sourced natural gas for Shell’s planned 38,000 bpd gas-to-liquid plant. Anadarko, together with Italy’s Eni, develops a huge discovery off the shore of the African country that contains an estimated 150 trillion cu ft of natural gas. Plans are to liquefy the gas at a two-train LNG facility on the coast and sell it abroad. Anadarko has told Shell it would only be willing to start supplying gas to its fuels plant once the second liquefaction train starts operating at the LNG project, which will only take place in 2031. For Anadarko, it’s a question of the commercial viability for Shell’s project, which it doubts the project has.

- Petrobras has begun production from a second floating production, storage, and offloading unit at the Buzios field, which was discovered eight years ago in the prolific Santos Basin that has attracted the attention of Big Oil with its reserves, especially those in the pre-salt zone. The unit has the capacity to process a maximum of 150,000 barrels of crude daily and compress a maximum of six million cu m of natural gas.

- The UK’s offshore drilling regulator has given the go-ahead to drilling plans at the Wick prospect in the North Sea that could hold as much as 250 million barrels of oil in resources. Drilling is slated to begin next month with an appraisal well to confirm the resource estimate. The Wick prospect is operated by Corallian Energy. The prospect lies close to the biggest onshore gas field in Europe, Wytch Farm.

- Cenovus and Canadian natural Resources are calling for production cuts among Alberta oil producers in an attempt to reverse a steep discount of Canadian crude to WTI that has seen profit margins shrink considerably. The discount itself is a consequence of pipeline bottlenecks that have seen local producers increase the amount of oil they transport to refiners by rail, a costlier alternative to pipelines that has also eaten into bottom lines.