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Tim Daiss

Tim Daiss

I'm an oil markets analyst, journalist and author that has been working out of the Asia-Pacific region for 12 years. I’ve covered oil, energy markets…

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$5 Billion Saudi LNG Investment Plays Into Russia’s Hands

Depending on who you ask, energy markets would likely be better off without more Saudi-Russia oil and gas cooperation, which will amount to greater clout in the Middle East as U.S. influence in the region wanes. After all, it’s been a cleverly orchestrated cohesive Saudi-Russian agreement, albeit the fledgling but increasingly powerful OPEC+ cartel, that reigned in an historic oil market overhang over the last two years, put a floor under global oil prices and returned OECD to five-year levels.

This well-timed oil production agreement saw prices rise from a dismal dip below $30 per barrel in January 2016 to breaching $85 per barrel earlier this month. Though some of those gains have been pared the last few weeks, Brent oil is still hovering in the mid-$70s level, allowing oil producers and oil companies to recoup years of profit losses.

This same oil production group, which could be formalized soon, is ushering in a new era of Saudi-Russian oil market domination, perhaps in ways even stronger than what OPEC did for decades as it largely dictated global oil supply and corresponding prices. Saudi-Russian oil production cooperation has removed or at least vied with U.S. shale oil production momentum as the top energy market story of the decade.

Now, that cooperation will extend to liquefied natural gas (LNG) markets. Saudi Energy Minister Khalid al-Falih told Ekhbariya TV on Thursday that Saudi Arabia wants to invest as much as 30 percent in Russia’s pivotal and capex intensive Arctic LNG project. He called it a “very ambitious project,” and the biggest example of cooperation between the Saudi private sector and Russian companies. The disclosure comes just two few days after the head of Russian Direct Investment Fund (RDIF), Kirill Dmitriev, said at the controversial Saudi Arabian investment forum that Riyadh is ready to invest $5 billion in LNG project in the Russian Arctic.

Pivotal LNG project

Arctic LNG 2 will be a massive project on the Gydan Peninsula in Northern Siberia with a production capacity of approximately 19.8 million tons per annum (mtpa), placing it as one of the larger LNG projects on a global scale. It is set to unlock over seven billion barrels of oil equivalent (boe) of hydrocarbon resources in Russia’s onshore Utrenneye gas and condensate field. A fleet of ice-class LNG carriers, which will be able to use Russia’s Northern Sea Route, will deliver LNG cargoes destined for Asian markets, which makes up more than 70 percent of global LNG demand with that amount to increase going forward amid insatiable Chinese gas demand. Related: Is The Oil Supply Glut Set To Return?

The project, along with Russia’s Yamal LNG project that came on-stream a few months ago and the Sakhalin project which became operational in 2009, will help Russian President Vladimir Putin’s goal of the country becoming a major LNG player. There are several other large Russian LNG project proposals pending. However, with Qatar projected to have an annual liquefaction capacity of 110 mtpa within five or six years, it’s unlikely that Russian will be vying for the top LNG exporter spot any time soon.

Geopolitical consequences

Saudi-Russian gas cooperation is also a brilliant move for Riyadh on numerous fronts. First, it strengthens ongoing bilateral ties between Riyadh and Russia, while also helping the kingdom diversify its international investments. It will also help it move away from oil export revenue reliance.

If the Saudis intend to also sign long term off-take agreements with Arctic LNG, it will help the kingdom’s energy planners use gas to replace oil in its electric power generation sector. The de facto OPEC leader burns an average of 700,000 bpd of oil for electricity to keep the population cool in the hottest summer months from May to August, official figures showed. As more oil used for power generation is displaced with gas, it becomes available for export, albeit without the kingdom having to increase production or in times of a market crisis tapping into its questionable spare production capacity.

The move for Russia is also just as beneficial as Moscow seeks ways to offset restrictive U.S. sanctions on its energy sector. Also, stronger bilateral ties between Riyadh and Moscow could create a wedge between the U.S. and Saudi Arabia, particularly in times of crisis between the two sides, including the current roil over the killing of prominent Saudi journalist and U.S. resident Jamal Khashoggi in Turkey at the beginning of the month.

The danger for Washington is manifold. If the U.S., particularly a growing and assertive anti-Saudi sentiment in both the Senate and House, force President Trump’s hand over harsher rhetoric and possibly economic sanctions against the Saudis, this will give Moscow considerable leverage. Though Trump has insisted that he wants to safeguard billions of dollars of arms sales to Saudi Arabia, if indeed those arms sales were halted, Russian could easily fill the void with its own military hardware sales.

By Tim Daiss for Oilprice.com

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  • Mamdouh G Salameh on October 29 2018 said:
    The Saudis have a long memory. They will never forgive President Trump for insulting King Salman publicly by telling his supporters that he said to the king in a telephone conversation that he will not last for twelve hour without American support. Contrast this with the military and political support which President Putin has extended to his ally Syria without once saying a bad word at least publicly against the Syrian President Bashar al-Assad.

    Putin is expanding his energy cooperation with Saudi Arabia on a huge scale hoping to widen the growing rift between the Saudis and the United States and also to gain more geopolitical advantages in the Middle East.

    Saudi Arabia’s intention to invest $5 bn for a 30% stake in the Russian Arctic LNG 2 project on the Gydan Peninsula in Northern Siberia with a production capacity of approximately 19.8 million tons per annum (mtpa) follows in the footsteps of the OPEC/non-OPEC production cut agreement which both Saudi Arabia and Russia engineered and which has successfully pushed oil prices up from $40 a barrel to $80 recently. It also follows in the footsteps of the growing cooperation between Saudi Arabia and Russia to consolidate long term cooperation between OPEC and Russia thus creating a very powerful Organization OPEC+ which will dominate the global oil market.

    In contrast to this growing cooperation between Saudi Arabia and Russia, the United States roils its ally Saudi Arabia by public insults against its king and by claims that the United States protects the oil-producing countries of the Arab Gulf in a brazen and crude attempt of blackmailing these countries and getting US hand on their money. And as if this is not enough, the US raises also the threat of antitrust lawsuits against OPEC for alleged manipulation of the global oil market for its benefit when it is the United States which has been for years manipulating the global oil market and oil prices for its own benefit.

    Saudi Arabia may be starting to realize that the United States is not part of the solution to its problems but in fact part of its problems. Moreover, Saudi Arabia might also be starting to consider establishing some sort of a political alliance with the Russian-Chinese strategic partnership as a counterbalance to the United States at a time of rising tension with the United States.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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