Authored by Viktor Katuna via OilPrice.com, When the inaugural Russia-Africa summit was held in October 2019, most industry observers believed that the majority of projects under discussion would not get past the FID stage – in no small part because of their varied economic prospects. As well as wheat exports, nuclear technologies, conventional weaponry and ore mining, oil loomed large on the agenda. With the OPEC+ agreement entering its third consecutive year and oil prices stabilizing around per barrel, Russian oil firms have enough cash to invest but face an uncertain future with domestic projects as no one really wants to see their own project ending up in the category of “spare production capacity”. International sanctions and the ramifications they entail have compelled
Tyler Durden considers the following as important:
This could be interesting, too:
David Stockman writes The Mother-Of-All-Puts
Mark Hendrickson writes Giving Thanks to Society’s Economic Benefactors
Frank Shostak writes Why the IMF Is Wrong about Liquidity Traps
When the inaugural Russia-Africa summit was held in October 2019, most industry observers believed that the majority of projects under discussion would not get past the FID stage – in no small part because of their varied economic prospects. As well as wheat exports, nuclear technologies, conventional weaponry and ore mining, oil loomed large on the agenda. With the OPEC+ agreement entering its third consecutive year and oil prices stabilizing around $60 per barrel, Russian oil firms have enough cash to invest but face an uncertain future with domestic projects as no one really wants to see their own project ending up in the category of “spare production capacity”.
International sanctions and the ramifications they entail have compelled Russia to look beyond their usual investment regions – with little to no investments in Europe since 2014. Gazprom is now an unwelcome investor in Europe and even the privately-owned LUKOIL has mulled divesting its downstream assets and has reduced its retail presence in Europe. Investing in the United States or Canada is completely out of question for reasons predominantly political, whilst Middle Eastern NOCs have grown to become competitors, themselves looking for opportunities to diversify their portfolio. Due to all of the above factors, Africa has emerged somewhat naturally as a suitable region for Russian investment.
The Russian Energy Ministry has repeatedly declined to link Russia’s newly-found interest in Africa and the OPEC+ curtailments, saying that greenfield projects usually require 5-7 years before commissioning and thus the time gap between today’s issues and future production is too wide to impact any forecasts. Yet no one really knows when exactly the OPEC+ cuts would come to a stop – it might be this year or it might be any year in the upcoming decade. Oil companies need to prepare for the future and cannot just act upon the (usually quite sudden) decision to ramp up production to normal levels. With much of the US majors now focused on domestic shale and deepwater developments, Russia sees a new role for itself in Western Africa.
The Democratic Republic of the Congo has emerged as one of the key areas for Russian investments in Africa. The DRC wouldn’t be the first African nation to see Russian investments per se – the Russian NOC Rosneft already bought stakes in gas-producing projects in Egypt (Zohr) and Mozambique, whilst LUKOIL has had a tumultuous history in Ghana. The DRC, however, may be the first country where Russian companies take on complex commitments, including infrastructure-related solutions. Oddly enough, these will not be headlined by an oil & gas company but by VEB, the state development corporation – in the upcoming months VEB and the Congolese oil company SNPC are supposed to finalize the deal on construction of an oil products pipeline.
This 2.1mtpa capacity pipeline will connect the Congolese port of Pointe Noire to the Maloukou Terminal next to Kinshasa – providing for the supply of both gasoline and diesel, as well as aviation kerosene. Reportedly the leading Russian steel pipe manufacturer TMK will clinch the contract on the Congolese product pipeline in the upcoming weeks, however it still remains to be seen which oil company would take the job. The fact that it is the state’s development corporation taking the role of interfacing between the Congolese NOC and Russian firms implies that it need not be majors who get involved – the case of Syria demonstrates that tasks of such difficulty might be allotted to new companies (though staffed with experienced oilmen) which avail themselves of government support.
The pipeline deal comes just several months after Russia’s leading private oil firm LUKOIL entered Congo’s offshore by buying 25 percent in the Marine XII license block. Marine XII, operated by ENI, comprises five discovered fields with a total reserve base of 1.3 BBbls which should reach a production plateau of 100kbpd, essentially tripling from the current output level of some 30kbpd. The $770 million investment on Marine XII will supplement LUKOIL’s earlier involvement in offshore Ghana, where it aims to start development drilling on the ultra-deepwater Pecan field (reserves estimated at 0.34 Bbbls, exploration well drilled to a depth of 4880 meters) which lies in the Deepwater Tano Cape Three Points block. In addition to the above, LUKOIL and Russia’s state-owned geological exploration company Rosgeologia have signed separate agreements with Equatorial Guinea on future exploration activities in the country.
With most of Nigeria seemingly booked by international majors who have opted to move into Western Africa much earlier, Russia seems to be seeking a place of its own in the southern part of the Gulf of Guinea. The pipeline deal with the Democratic Republic of Congo enhances its market presence in both Congos as it will be used to feed both Kinshasa and Brazzaville. Potential upstream activities in Cameroon might also come into the picture – LUKOIL took a 37.5 percent stake in the offshore Etinde field in 2014 – if the Russian firm decides to kickstart its drilling program in the region. Add to this the prospect of Russian appraisal/drilling success in Equatorial Guinea and you get a fairly dense web of coverage in West Africa.
So why are Russian firms doing this?
Firstly, because they have internal goals to attain which, given the zero tolerance for any substantial market liberalization, will be quite difficult to reach if they are to focus solely on projects at home. Rosneft is an illustrative case in this context – as Gazprom has maintained its monopoly on pipeline exports, Rosneft has essentially failed to achieve its aim of producing 100 BCm per year of gas by 2020. However, with a couple of Zohr-like investments it can recover whatever has been potentially lost domestically in ventures abroad.
Second, OPEC+ is putting pressure on companies not to lose out when all the others are seeking new opportunities – focusing solely on Russia would be a remarkably short-sighted strategy.