Scraping the Barrel… 10 August 2012

As today’s barrel scrapings reveal: Russia’s oil industry evolves (but no, Putin is not loosening his iron-fisted grip) and big, sagging economies look set to push down on oil prices. Read below for more…

Russia’s energy industry is at a crossroads. With output from onshore fields declining, it must now undertake the expensive and challenging development of offshore fields, many of them in the unforgiving Arctic north – a task ranking up there, in difficulty, with space exploration, according to someone quoted in the Financial Times who evidently has done both. Russia’s industry is dominated by seven major players who individually lack the expertise to unlock resources from ever harder to reach offshore depths. For this, they will need the help of foreign partners – which has never been President Vladimir Putin’s favorite thing to admit. Putin knows energy is at the heart of Moscow’s geopolitical bargaining power, and would rather un-freeze Lenin’s corpse than relinquish energy from state control.

So he would never allow foreign majors to merge with or buy into Russia’s producers with major stakes. What is more likely, according to the FT, is that foreign companies will come in through minority stakes, or asset and share swaps, with state-controlled players. That’s great for the foreign majors, who drool at the prospect of Arctic oil – but less so for Russia, where state control has in the past led to greater inefficiency, corruption and political horse-trading trumping good business – an unhappy marriage that looks likely to continue.

In the oil price world, the roller coaster continues. After momentarily rising back above $109 earlier this week, industry observers see sagging demand and overproduction leading to prices dropping below triple digits in the next several months, to possibly as low as $83 per barrel by years’s end, according to the Centre for Global Energy Studies. The cause is pretty basic, really. In the main consuming regions of the world, demand is low: Europe is dragging its feet with the debt crisis that has loped into its third year, Americans still can’t find jobs (over 8% unemployment) and China is lethargic after six quarters of economic deceleration.

Meanwhile, some major producers are finally revving up: South Sudan looks poised to resume oil flow after progressing in peace talks with Sudan, and Yemen resumed flow from its main pipeline in mid-July – which, combined, will add 500,000 barrels per day to a glut already fed by an over-producing OPEC. Without the capacity to use its imported crude, China is adding to its stockpile in a strategic oil reserve. Bloomberg speculates that nations are stockpiling oil at the fastest rate in 14 years – without explaining exactly how this conclusion was reached, I must note – but the reigning philosophy in the global oil market seems to be: If you can’t use it, don’t let anybody else use it, either.

To check out previous news roundups, see the Scraping the Barrel series.

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