With the production of ‘conventional oil’ having reached a plateau and fossil fuels in general under attack for their impact on the climate and the environment, the global oil industry is undergoing an unprecedented upheaval. Oil being the very lifeblood of all industrial societies, the geopolitical and economic consequences of these changes are already being felt.
The Russia-China energy marriage and the multipolar world
Trade between Russia and China in the first quarter of the year grew 3.6 percent on the year, to $14.2 billion. A senior CNPC official has confirmed that the company is interested in buying a stake in Russia’s biggest oil company, Rosneft. Gazprom Neft, another energy giant, has been selling its crude to China in exchange for yuan rather than dollars since last year.
These are all instances of a strategy pursued by Moscow and Beijing that has been gathering pace since oil prices collapsed and the West hit Russia with a series of economic sanctions for its military involvement in Ukraine.
China has clearly demonstrated its ambition to expand its international influence by transforming its economic model into one that is less reliant on heavy industrial production and turning its currency into a rival for the greenback. The yuan is already in the currency basket of the IMF, the Special Drawing Right, and international trade in yuan is growing fast.
Russia, on the other hand, needs cash to prop up its sluggish economy that is still over-reliant on oil, and it doesn’t mind getting yuan instead of dollars. Diversifying the economy is difficult and will take time, so the Kremlin is looking to do the most it can with what it has, and what it has is an abundance of oil and gas (metals and minerals, too—but that’s another story). Supporting China in its quest for more international weight seems to be another thing that Moscow doesn’t mind.
So, China is the most natural market for Russia’s oil and gas, and if this means letting the Chinese in by selling them a stake in Rosneft, the Kremlin appears willing to take that once unthinkable step.
On the other hand, the perceived sanctity of state control of Russia’s oil and gas sector is not as complete as one might believe. After all, none other than BP holds 19.75 percent in Rosneft, a stake almost equal to the one that is now being put up for sale.
Rosneft is working on becoming a truly global company. However, low oil prices are taking their toll and Rosneft needs cash. A stake sale would help, along with its long-term crude oil supply contract with CNPC, which closed in 2013.
CNPC, for its part, is suffering the fallout of the oil price rout as well, plus some problems unique to China. The company cannot downsize because jobs will be lost, so instead of investing into loss-making E&P activities, it can shore up its finances by becoming a shareholder in the Russian company, which, it’s worth noting, is still profitable despite challenges.
Russia and China have similar political priorities, which basically boil down to a greater international influence that would support economic sustainability.
It’s no coincidence that China introduced last month its new, gold-backed yuan. It’s no coincidence that both China and Russia have been buying gold—a lot of it.
The CNPC-Rosneft deal is a milestone along the road to what some analysts see as a new world order. The U.S. dollar is still firmly in control of its top status, but struggling under the weight of a $19-trillion national debt, that may not last forever.
U.S. oil industry bankruptcy wave nears size of telecom bust
The rout in crude prices is snowballing into one of the biggest avalanches in the history of corporate America, with 59 oil and gas companies now bankrupt after this week’s filings for creditor protection by Midstates Petroleum and Ultra Petroleum. The number of U.S. energy bankruptcies is closing in on the staggering 68 filings seen during the depths of the telecom bust of 2002 and 2003, according to Reuters data, the law firm Haynes & Boone and bankruptcydata.com. Charles Gibbs, a restructuring partner at Akin Gump in Texas, said the U.S. oil industry is not even halfway through its wave of bankruptcies. “I think we’ll see more filings in the second quarter than in the first quarter,” he said. Fifteen oil and gas companies filed for bankruptcy in the first quarter. (Also read: De-Dollarization Accelerates As Russia Nears Launch Of Ruble-Priced Oil Trading Platform)
50,000 Laid Off In Saudi Arabia As Oil Crisis Bites Deeper
Irina Slav, Oil Price.com
Saudi construction giant Binladin group has laid off tens of thousands of workers, leading to rare protests, as workers torch seven buses demanding compensation as low oil prices begin to bite in earnest. The numbers of layoffs range from 50,000 to 77,000, many of who say they were not paid for several months. Binladin group, which last year had all of its contracts frozen after a crane fell over the Grand Mosque in Mecca, killing 107, denied that it owed its workers any compensation. The company said the layoffs were a “routine” adjustment to a slowdown in construction activity in the country.
Influential Saudi Oil Minister Dismissed
Charles Kennedy, OilPrice.com
A Saudi government overhaul which saw the dismissal of the long-time Saudi oil minister signals quite a lot—from the kingdom’s new economic ‘’vision’’ to the fallout from the global oil price crisis. Ali al-Naimi was replaced after serving as an oil minister for 20 years and earning himself the reputation as the most formidable figure in the industry. He will be replaced by Khaled al-Falih, a former Health minister, who also spent 30 years working for the state-owned Saudi Aramco, largely as chairman of the oil conglomerate. Al-Naimi’s removal comes as Saudi Arabia has embarked upon major economic reforms aimed at curbing the country’s dependence on oil whose lowest prices in a decade has inflicted massive financial losses.
Big Oil Abandons $2.5 Billion in U.S. Arctic Drilling Rights
After plunking down more than $2.5 billion for drilling rights in U.S. Arctic waters, Royal Dutch Shell Plc, ConocoPhillips and other companies have quietly relinquished claims they once hoped would net the next big oil discovery. The pullout comes as crude oil prices have plummeted to less than half their June 2014 levels, forcing oil companies to cut spending. For Shell and ConocoPhillips, the decision to abandon Arctic acreage was formalized just before a May 1 due date to pay the U.S. government millions of dollars in rent to keep holdings in the Chukchi Sea north of Alaska. The U.S. Arctic is estimated to hold 27 billion barrels of oil and 132 trillion cubic feet of natural gas, but energy companies have struggled to tap resources buried below icy waters at the top of the globe. (Also read: World’s Largest Shipping Company Preparing For Another Oil Price Crash)