Sechin and China
By staff commentator Yulia Latynina, Novaya gazeta, April 3, 2020, p. 4. Complete text:
There is one country that benefited immensely when Rosneft CEO Igor Sechin decided to walk away from talks with OPEC. Cheap oil is a godsend for China as it recovers from the coronavirus epidemic and tries to jump-start its economy. For all the other countries, the decision was a disaster. Oil crashed, bringing the ruble down as well. Russia’s Urals crude blend is trading $4 to $5 below Brent. (In better times, the price differential was only $2.) Yet Urals is not selling well even at such athat discount, because Saudi Arabia is aggressively squeezing Russia out of European markets, offering its crude at fire-sale prices. Nigeria, too, has now jumped into the game. Its oil is even better quality than Saudi Arabia’s in the spring and summer months.
Storage capacity is exhausted. In the US, the Mercuria Energy trading house bids a negative price on crude, effectively asking oil producers to pay it to take away their output. Saudi Arabia reportedly has asked the UAE to help it uncover secret [illicit bank] accounts of Putin’s friends in Dubai for the purpose of reporting them to the US. The Kremlin is bombarding the White House with phone calls, cajoling and begging Trump to talk some sense into the Saudi crown prince. But the prince refuses to play ball and rejects any idea of having a “meeting of experts,” let alone high-level talks.
There are no oil storage facilities left – especially in Russia, because, unlike Western countries, Russia does not have a large network of big storage tanks. In the West, the situation is not much better because oil terminals are at capacity. Sometimes, companies use oil tankers as floating storage, but freight rates for tankers have more than doubled recently. Back when oil prices were high, freight expenses were only a small fraction of the price, but now that, after oil has crashed and tanker rates have soared, keeping your crude in a tanker is a costly option.
This whole situation is terrible for Russia, bad for Saudi Arabia, and not great for the US, either. At first, Trump hailed low prices (cheap gas is great news for drivers at the pump), but eventually he got so nervous he called [Saudi Crown Prince] Mohammed bin Salman at 5 a.m. Washington time.
There is only one country that has benefited greatly from Igor Sechin’s inexplicable decision: China. Taking advantage of rock- bottom prices and a collapse in demand in Europe, China bought a record 1.5 million [metric] tons of Russian oil dirt cheap.
That is exactly what China needs right now. Having declared victory over the coronavirus, China is reopening its economy, and cheap oil is very handy. China is stocking up on crude. Analysts from Wood Mackenzie estimate that China’s petroleum reserves could reach 1.15 billion barrels this year, equivalent to 83 days of oil demand, up from 900 million barrels in 2019 and just 200 million in 2014.
Sechin’s decision sent oil prices tumbling right when China needed to recover from the epidemic. It gave China’s economy a major boost at the expense of 140 million Russians, whose income dropped by a 5% in US dollars as a result. For debt-laden Rosneft, it is nice to have a friend in China who owes you one.
In fact, Rosneft itself did not lose that much in the debacle. On the contrary, the company got a chance to get rid itself of toxic investment projects, swapping them for valuable assets (which, by the way, it may offer to China later on).
I am referring to the surreal Venezuela deal, of course.
Rosneft had invested about $9 billion in Venezuela, according to Reuters. An investigation by Reuters reporters, based on Rosneft’s internal memos, reveals that this money had largely vanished by 2015. Russian money sank into Venezuelan quicksand. Oil output turned out to be far lower than projected. Our Venezuelan partners struggled to procure even basic drilling equipment, yet wasted millions of dollars on “social projects” in a remote area inhabited by only a few hundred people.
Things haven’t gotten much better since 2015. As we all know, instead of paying his petroleum engineers, President Maduro chose to put his military in charge of the oil industry. As a result, crude production plummeted again, because – surprise, surprise – Venezuelan soldiers are not petroleum engineers.
Any private company would be in big trouble after making a $9 billion investment like that. Not Rosneft. Last week, it dumped its Venezuelan assets onto the Russian state under the pretext of seeking protection from US sanctions. The thing is, when oil exports didn’t quite work out, Maduro switched to cocaine, which got him in trouble with US law enforcement. Yet Rosneft did not just write off its assets in Venezuela. Instead return, Rosneft got a 9.6% stake from the government for one of its subsidiaries.
The very idea of this deal is mind- boggling. Usually, people pay to have their garbage picked up; nobody gets paid by their waste collection company. Can you imagine a situation where you pump 20 barrels of shit from your septic tank and dump it in your boss’s driveway, and then your boss comes to you in the morning and pays you for such a nice surprise?
What’s even more remarkable is that the state has lost its controlling interest in Rosneft as a result of this deal, and now Rosneft can easily sell these shares to some opaque investors – just as it sold 19.5% of its stock to Glencore and Qatar’s sovereign wealth fund a few years back [see Vol. 68, No. 50, pp. 13 14].
Currently (as of March 27), this 9.6% stake in Rosneft has lost much of its value and is only worth 306 billion rubles – again, because of Sechin’s decision-making. So now would be a good time to sell it off to some good old friend, citing the company’s weak cash position. Come to think of it, getting those shares from the state may have been the real purpose of this whole deal, while getting rid of Venezuelan assets was merely a nice bonus.
Venezuela is not Rosneft’s only disastrous project. The company wasted another $3 billion to $4 billion on Iraqi Kurdistan. But hey, the founder of Kurdistan’s ruling clan, Mustafa Barzani, spent 12 years in Joseph Stalin’s USSR and posed for photos in a Red Army uniform. As Bloomberg found out recently, Rosneft forked out $250 million to a mystery consultant for this deal.
So, let’s recap. The decision to walk away from talks with OPEC sent oil and the ruble plummeting right as the coronavirus was wreaking havoc in Russia and around the world. Russian people lost a quarter of their income in dollars, and the Kremlin was left without the cash cow it usually relies on for helping people – right when people desperately needed this help.
Putin was hoping for a triumphant victory over the US and Saudi Arabia, but instead he is now going to Trump for help and bringing him Maduro’s head on a platter – and Saudi Arabia is still refusing to talk! China is the only winner here – along with Rosneft, which in this difficult moment got rid of dead weight and even freed itself from state control.
This business model seems to be working nicely: The more problems a state company faces, the easier it is to get rid of state control. Now, what do we call the people who do such things? Right, we call them patriots who stand up for their country. I mean, you wouldn’t call them businesspeople, would you?
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