The Rebirth of MINNEFTEPROM (Ministry of Oil Industry - Министерство нефтяной промышленности СССР)
Rumors of a Russian Mega Oil Producer | Finances | Perceived Challenges
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“Barbershop Whispers….Russia (BWR)” begins with “My Takeaways” on the main topic, followed by a discussion on the main topic. The last two BWR sections are “Follow-ups” on previous publications and “Quick Bites” on emerging events.
In last week’s BWR, I discussed discuss the Bank of International Settlements (BIS) exit from the Central Bank Digital Currency project mBridge. The West needs to step up with game.
In this week’s BWR, I discuss the potential merger of Rosneft, Lukoil, and Gazprom Neft. Allegedly, discussions have been going on for several months, but what are the drivers and challenges to creating this mega oil producer?
Takeaways
STRATEGIC INDUSTRIES—The Kremlin consolidates more control over industries it considers critical to national security.
The Rebirth of MINNEFTEPROM (Ministry of Oil Industry - Министерство нефтяной промышленности СССР)
Rumors of a Russian Mega Oil Producer | Finances | Perceived Challenges
State Control of Energy Assets
According to the Wall Street Journal (WSJ), merger discussions between Russia’s three biggest energy producers have been ongoing for several months. Rosneft, Lukoil, and Gazprom have discussed consolidating their respective oil production, trading, and sales operations into one entity. This entity would then become the second-biggest crude oil producer in the world, second only to Saudi Arabia’s Aramco. The merged operations would also produce three times as much crude oil as Exxon Mobil, the biggest American crude oil producer.
The WSJ describes a scenario in which Rosneft would absorb Gazprom Neft, a subsidiary of quasi-state-owned Gazprom, and privately held Lukoil.
Finances
Since Gazprom’s voluntary withdrawal from the European market and subsequent pivot to Asia following Putin’s second invasion of Ukraine in 2022, it has struggled financially. Gazprom posted a 2023 loss of ($6.8B), the first loss since 1999. For nearly two decades and as recently as 2022, Gazprom was one of the largest contributors to the Russian Federal budget. In 2022, excluding dividends, it contributed $40B to the Federal budget and the National Wealth Fund (NWF) combined. Given its current financial position, the Kremlin, Gazprom’s majority shareholder, has ordered Gazprom not to pay 2023 dividends.
Gazprom’s financial position is not improving and continues to record massive losses. Net losses from January to June 2024 almost doubled year to year, reporting losses of 481B ($5.5B) compared to 255B ($2.95B) in 2023, according to Gazprom financial statements. It should be noted that Gazprom Neft represented 42% of Gazprom’s total 2023 revenues of 8.5T ($8.6B). Since 2022, Gazprom Neft has become an increasingly important revenue generator for Gazprom Group.
It should also be noted that Gazprom has some $70B in international debt, of which some 20% will come due in the next two years and must be refinanced. Given that Gazprom has been shut out of the international markets, in which markets and currencies will Gazprom be able to refinance its international debt, and how will the absence of Gazprom Neft impact the pricing of that debt? Refinancing in the Russian and Chinese markets would be expensive and will test the liquid capacity of those markets as it is now.
Hydrocarbon export revenues remain the Kremlin’s cash cow, representing almost a third of federal revenue and influencing the Kremlin in the OPEC+ arena. Despite Western sanctions, in particular the oil price cap sanction, the Kremlin continues to have enough cash to fund the war.
Perceived Challenges
According to the WSJ report, opposition from some Rosneft and Lukoil executives and amassing the funds needed to buy out Lukoil shareholders “may be” a challenge. However, for the past two decades, Putin has managed to persuade private sector Masters of the Universe to take a more sympathetic view of the Kremlin’s position on all matters, including the distribution of assets. A case in point is the questionable forced bankruptcy of Yukos in 2004, which resulted in most of the Yukos assets being acquired by Rosneft while Yukos founder and CEO Mikhail Khodorkovsky was convicted and sent to prison for alleged Yukos tax fraud activity.
These subtle acts of persuasion continue to be applied today. For example, a week after the Ukraine invasion in 2022, Lukoil’s board called for an end to the fighting in an open letter to shareholders, customers, and employees, a rare public display of opposition by any Russian company. Ravil Maganov, then chairman, died six months later when he fell from a hospital window in Moscow.
Consolidating Lukoil into a mega oil producer would continue the asset redistribution process accelerated by Putin’s second invasion of Ukraine. If a merger occurs, Putin’s long-time loyalist Sechin would likely be the primary beneficiary.
Under Sechin, Rosneft expanded globally, partnering with Exxon Mobil, BP, and Venezuela’s PDVSA. It also has strategic relationships with many foreign governments.
Conclusion
Rumors of mergers and takeovers have multiplied since Putin’s second invasion of Ukraine. As the war economy overheats, Putin continues to place a new generation of loyalists in positions of power, consolidating assets and redistributing them to those he believes he can trust.
If a mega oil producer is created, it will come at the expense of Gazprom and Lukoil. Rosneft will increase its asset size and influence with the Kremlin. Sechin is likely to be the beneficiary and director of the merged mega-producer. However, it is still unclear if this will happen, and if it does, what will be the structure.
Not covered in this piece, but a future BWR topic, is the status of Western seized Russian subsidiaries Rosneft Deutschland GmbH and Gazprom Germania GmbH, as well as the disabled non-performing Nord Stream AG.
Watch this mega producer and EU energy space.
Additional Reading(s)
Gazprom Flare Out (Barbershop Whispers…Russia, 16 Jun 2024)
Gazprom reports 9-month loss of $3.2 billion (Reuters, 29 Oct 2024)
Russia Struggles with the Changing Gas Market (Barbershop Whispers…Russia, 10 March 2024)
Russia Struggles with the Changing Gas Market (Barbershop Whispers…Russia, 10 Mar 2024)
Russian LNG - China and Asia Market? (Barbershop Whispers…Russia, 17 Mar 2024)
Russian Oil Price Cap & New Ecosystem (Barbershop Whispers…Russia, 22 Oct 2023)
Follow-ups & Quick Bites
Follow-ups
Oracle Receives US Treasury (OFAC) Approval to Settle Russian Subsidiary Debt
The American technology company Oracle has received an OFAC license to buy back its debt from Russian creditors.
Oracle sent letters to Russian creditors, informing them of its intent to buy debt claims against its Russian subsidiary, which declared bankruptcy in Russia, for up to 60% of the debt’s nominal value. Oracle’s creditors in Russia included Sberbank, Alfa-Bank, MegaFon, and others. According to various reports, the company’s total debt exceeded ₽1.4B ($14.3M). A condition of Oracle’s debt repurchase offer is that creditors must forgo any new claims against the company.
Western exits from Russia have become fewer due to the increasingly complicated and costly process the Kremlin has imposed on Western exits since Putin’s second invasion of Ukraine in February 2022.
Additional Reading(s)
Oracle Russia (TAdvisor, 8 Nov 2024)
Oracle Suspends Operations in Russia, SAP Pauses Sales (Reuters, 2 Mar 2024)
"Should I Stay or Should I Go" - Western Companies Reconsider Russian Market Exit (Barbershop Whispers…Russia, 09 Jun 2024)
Russia Signs Security and Energy Agreements with Venezuela
Last week, during Russian Deputy Prime Minister Dmitry Chernyshenko's visit, Russia and Venezuela signed seventeen intelligence and energy cooperation agreements.
In a ceremony at the Miraflores Palace, President Nicolás Maduro said the 17 agreements would "seal and strengthen the path of union and cooperation" between Venezuela and Russia "from now until 2030 and beyond."
Russia is one of the few countries to recognize Maduro's questionable and opposition-disputed presidential election victory earlier this year.
Based on detailed election results published by the opposition, the United States and several Latin American countries have backed opposition candidate Edmundo Gonzalez Urrutia as the rightful winner.
Brasilian President Luiz Inácio Lula da Silva blocked Venezuela’s invitation to become a BRICS Partner Country because of Maduro’s oppressive tactics on his political opponents and the disputed election.
Venezuela has the world's largest proven oil reserves and once produced more than three million barrels daily. Oil has long been its only notable foreign currency earner.
Additional Reading(s)
Venezuelan President Counts on Longstanding Relationship with Russia (TASS, 07 Nov 2024)
Russia’s Deputy Prime Minister Meets President Maduro in Caracas, 17 Agreements Signed (Orinoco Tribune, 8 Nov 2024)
Alliance of the Aggrieved – Russia and Venezuela (Barbershop Whispers…Russia, 20 Oct 2024)
Quick Bites
Russia Launches New Nuclear-Powered Icebreaker
Putin presided by video link over the launch of Russia’s newest nuclear-powered icebreaker. Putin said,
“Strengthening the nation’s icebreaker fleet is crucial to our plans for Arctic development and boosting cargo traffic on the Northern Sea Route,”
The Northern Sea Route, which stretches some 5,000 km from the Barents Sea to the Chuckchi Sea, is an alternative shipping lane developed by Russia primarily for LNG shipments to Asia. Compared to traditional routes, it can shorten transit times by up to 15 days.
Chukotka, the new icebreaker, joins Russia’s fleet of nuclear-powered icebreakers capable of plowing through 2.8 meters of ice. Vessels in this series are around 173 M long, have a displacement of 33,500 MT, and an expected service life of 40 years.
Putin further stated,
“The creation of these powerful, modern vessels is yet another demonstration of Russia’s industrial, scientific, human, and technological potential […] This is exactly how our entire national economy should develop — on the foundation of our technologies and groundbreaking scientific solutions.”
Additional Reading(s):
Putin Takes Part in Ceremony Launch of New Nuclear Icebreaker (Pravda.ru, 7 Nov 2024)
Russian Yard Launches Future Nuclear Icebreaker (Barid Marine6 Nov 2024)
Putin Congratulates a “Courageous” President-elect Trump
Russian President Putin publicly congratulated Donald Trump on his presidential election victory and described him as “manly and courageous.”
Trump has said he will end Putin’s war on Ukraine in 24 hours and has consistently characterized US support for Ukraine in its war for survival as a drain on US resources.
Kremlin spokesman Dimitri Peskov has said Putin is ready to discuss Ukraine with Donald Trump, but that does not mean he is willing to alter Moscow's demands. Peskov made the remarks during his daily news briefing, saying,
"The president has never said that the goals of the special military operation are changing. On the contrary, he has repeatedly said that they remain the same,"
Trump has not articulated how he will end Putin’s war on Ukraine in 24 hours. However, Bryan Lanza, who worked on Trump's 2024 presidential campaign, told the BBC the incoming administration would ask Ukrainian President Volodymyr Zelensky for his version of a "realistic vision for peace."
Forcing Ukraine into a ceasefire agreement in exchange for territory now would deliver victory to Putin, given the fragile state of the overheated Russian economy and the weakening state of Russia’s aging armed forces – aging in terms of troops and equipment.
The takeaway here is platitudes to the fawning US President-elect will get Putin everything, including a ceasefire in Ukraine and time to rebuild his war machine for another day.
However, Putin and Zelensky should be reminded as any negotiations begin, Trump negotiates only for Trump, not for Russia, Ukraine, or the US—only for Trump.
Additional Reading(s)
Putin is Ready to Talk to Trump (Reuters, 8 Nov 2024)
Trump the Oligarch in Context—Eurasian Impact (Barbershop Whispers, 28 Aug 2024)
Putin Congratulates Trump (NPR, 7 Nov 2024)
Vol 2, No 53 - BWR 10.11.2024
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