‘Yukos Affair’ and its shadow over Putin’s Russia

President Vladimir Putin and what colours his vision of modern Russia are under the spotlight like never before. As Ukraine burns and western sanctions hit the Kremlin, Russia’s president remains defiant spewing yet stronger nationalistic rhetoric with a coterie of supporters in tow. Many would find internal politics in Putin’s Russia to be fascinating and repugnant in equal measure.

Yet, in order to understand the present, a past occurrence – the downfall of Yukos and its former chief Mikhail Khodorkovsky – would be a good starting point. In his latest work published by I.B. Tauris, academic Richard Sakwa not only describes the episode in some detail but also contextualises power struggles and insecurities that shaped one of the most controversial episodes in contemporary Russia.

This book isn’t merely Khodorkovsky's story from an unceremonious arrest in 2003 to a surprising release in December 2013. Rather, the author has taken that backdrop to give the readers an insight into the beginning and subsequent evolution of ‘Putinism’ as we know it. 

In just under 300 pages split by 12 chapters, Sakwa, an expert on Russian affairs with half a dozen works under his belt, has portrayed the event as an extraordinary confrontation between the two great forces of modernity – the state and the market – with Putin and Khodorkovsky as antagonists. 

“It was about their associated conceptions of freedom and at the same time – a struggle for Russia,” he writes. Putin’s determination to clip Khodorkovsky’s petrodollar powered wings marked a turning point. The oligarch’s controversial trial(s) attracted widespread international condemnation and ended in one of the world's richest and most powerful men becoming the state's prisoner. 

Far-reaching political and economic consequences in its wake left an indelible black mark about the quality of freedom in Putin's Russia. It also laid bare the complex connection between the Kremlin and big business during Russia's troubling transformation from a planned economy during the Soviet era to capitalism.

Being an outsider, it is easy to feel sympathetic towards Khodorkovsky and castigate the Russian way. However, by not overtly romanticising Khodorkovsky's resistance to Putin’s view of modern Russia, Sakwa paints a convincing picture of how the oligarch turned prisoner himself was no stranger to the contradictory essence of the country's democratic evolution.

As the author notes, Khodorkovsky was not only Putin’s antagonist, but also at the same time a protagonist of the contradictions that the president's regime reflected. Ultimately, it all leads on to how subversion of law and constitutionality has become commonplace in today’s Russia.

While the said subversion started taking hold in post-Soviet Russia, and Khodorkovsky most certainly used it to his advantage when it suited him; it was the oligarch’s ultimate downfall that made the state of affairs manifestly obvious beyond the country’s borders. It resonates today with Putin’s modus operandi as entrenched as ever. 

Through his brilliant, balanced description of a key episode in Russia’s rise towards becoming an oil and gas powerhouse, Sakwa has charted a warning from history on what to expect and where it might lead. The Oilholic would be happy to recommend Putin and the Oligarch to energy analysts, those interested in geopolitics, Russia, Yukos Affair or the oil world at large.

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© Gaurav Sharma 2014. Photo: Front Cover – Putin and the Oligarch: The Khodorkovsky-Yukos Affair © I.B. Tauris, February 2014.

BP’s sale, South Africa’s move & the North Sea

BP continues to catch the Oilholic’s eye via its ongoing strategic asset sale programme aimed at mitigating the financial fallout from the 2010 Gulf of Mexico spill. Not only that, a continual push to get rid of refining and marketing (R&M) assets should also be seen as positive for its share price.

 

This afternoon, the oil giant inked a deal to sell five of its oil & gas fields in the Gulf of Mexico for US$5.6 billion to Plains Exploration and Production; an American independent firm. However, BP Group Chief Executive Bob Dudley reiterated that the oil giant remains committed to the region.

 

"While these assets no longer fit our business strategy, the Gulf of Mexico remains a key part of BP's global exploration and production portfolio and we intend to continue investing at least US$4 billion there annually over the next decade," he said in statement following the announcement.

 

Last month BP agreed to sell the Carson oil refinery in California to Tesoro for US$2.5 billion. As a footnote, the agreement holds the potential to make Tesoro the largest refiner on the West Coast and a substantial coastal R&M player alongside the oil majors. While regulatory scrutiny is expected, anecdotal evidence from California suggests the deal is likely to be approved. Back in June, BP announced its intention to sell its stake in TNK-BP, the company's lucrative but acrimony fraught Russian venture.

 

One can draw a straight logic behind the asset sales which BP would not contest. A recent civil case filed by the US Department of Justice against BP does not mince its words accusing the oil giant of “gross negligence” over the Gulf of Mexico spill which followed an explosion that led to the death of 11 workers. Around 4.9 million barrels of oil spewed into the Gulf according to some estimates.

 

The charges, if upheld by the court, could see BP fined by as much as US$21 billion. The trial starts in January and BP, which denies the claim, says it would provide evidence contesting the charges. The company aims to raise US$38 billion via asset sales by Q4 2012. However, the Oilholic is not alone is his belief that the sale programme, while triggered by the spill of 2010, has a much wider objective of portfolio trimming and a pretext to get rid of burdensome R&M assets.

 

Meanwhile in Russia, the Kremlin is rather miffed about the European Commission’s anti-trust probe into Gazprom. According to the country’s media, the Russian government said the probe “was being driven by political factors.” Separately, Gazprom confirmed it would no longer be developing the Shtokman Arctic gas field citing escalating costs. Since, US was the target export market for the gas extracted, Gazprom has probably concluded that shale exploration stateside has all but ended hopes making the project profitable.

 

Sticking with Shale, reports over the weekend suggest that South Africa has ended its moratorium on shale gas extraction. A series of public consultations and environmental studies which could last for up to two years are presently underway. It follows a similar decision in the UK back in April.

 

Sticking with the UK, the country’s Office for National Statistics (ONS) says output of domestic mining & quarrying industries fell 2.4% in July 2012 on an annualised basis; the 22nd consecutive monthly fall. More worryingly, the biggest contributor to the decrease came from oil & gas extraction which fell 4.3% in year over year terms.

 

The UK Chancellor of the Exchequer George Osborne has reacted to declining output. After addressing taxation of new UKCS prospection earlier this year, Osborne switched tack to brownfield sites right after the ONS released the latest production data last week.

 

Announcing new measures, the UK Treasury said an allowance for "brownfield" exploration will now shield portions of income from the supplementary charge on their profits. It added that the allowance would give companies the incentive to "get the most out of" older fields. Speaking on BBC News 24, Osborne added that the long-term tax revenues generated by the change would significantly outweigh the initial cost of the allowance.

 

According to the small print, income of up to £250 million in qualifying brownfield projects, or £500 million for projects paying Petroleum Revenue Tax (PRT), would be protected from a 32% supplementary charge rate applied by the UK Treasury to such sites.

 

Roman Webber, tax partner at Deloitte, believes the allowance should stimulate investment in older fields in the North Sea where it was previously deemed uneconomical. Such investment is vital in preserving and extending the life of existing North Sea infrastructure, holding off decommissioning and maximising the recovery of the UK’s oil & gas resources.

 

“Enabling legislation for the introduction of this allowance was already included in the UK Finance Act 2012, announced earlier this year. The allowance will work by reducing the profits subject to the 32% Supplementary Charge. The level of the allowances available will depend on the expected project costs and incremental reserves, but will be worth up to a maximum of £160 million net for projects subject to PRT and £80 million for those that are not subject to the tax,” Webber notes.

 

Finally on the crude pricing front, Brent's doing US$114-plus when last checked. It has largely been a slow start to oil futures trading week either side of the pond as traders reflect on what came out of Europe last week and is likely to come out of the US this week. Jack Pollard of Sucden Financial adds that Chinese data for August showed a deteriorating fundamental backdrop for crude with net imports at 18.2 million metric tonnes; a 13% fall on an annualised basis.

 

Broadly speaking, the Oilholic sees a consensus in the City that Brent’s trading range of US$90 to US$115 per barrel will continue well into 2013. However for the remaining futures contracts of the year, a range of US$100 to US$106 is more realistic as macroeconomics and geopolitical risks seesaw around with a relatively stronger US dollar providing the backdrop. It is prudent to point out that going short on the current contract is based Iran not flaring up. It hasn't so far, but is factored in to the current contract's price. That’s all for the moment folks! Keep reading, keep it ‘crude’!

 

© Gaurav Sharma 2012. Photo: Oil Rig © Cairn Energy

Scrutinising UK’s latest North Sea tax break

The British government announced fresh tax relief measures last week aimed at boosting output in the North Sea. The Oilholic’s first thought, after having scrutinised the small print, is that it’s a positive signal of intent from UK chancellor George Osborne following on from his 2012 union budget. In all fairness he is also looking to put the taxation measures of 2011 budget, which irked the industry, behind him.

From July 25th, new UKCS gas fields with 10-20 billion cubic metres (bcm) in reserves located at depths of less than 30 metres will be exempted from a 32% tax levy on the first £500 million (or US$776 million) of income. Shallow water offshore projects will still pay the 30% Ring Fence Corporation Tax on all income from the field.

UK Treasury figures suggest the measure is expected to cost £20 million per annum in reduced tax receipts, but the government reckons it would generate additional jobs and crucially bolster energy security.

Chancellor Osborne said, "Gas is the single biggest source of energy in the UK. Today the government is signalling its long-term commitment to the role it can play in delivering a stable, secure and lower-carbon energy mix."

A new UK gas strategy is expected this autumn and all indications are that the British will acknowledge the critical role of the gas market in meeting emissions targets alongside a mix of subsidy supported renewable projects. Another passive acknowledgement then that gas, not renewable energy platforms, would be the immediate beneficiary of a post-Fukushima turn-off?

In fact the Oilholic and quite a few others are convinced that gas-fired plants would play a more than complementary role in a future British energy mix. The latest tax relief, aimed at shallow water gas prospection is proof of this.

Derek Henderson, senior partner in the Aberdeen office of Deloitte, also believes the move builds on UK March’s Budget when a number of other reliefs were announced. “This announcement should further support investment, unlock potential gas reserves and increase long term production leading to additional employment and an increase in overall tax revenue,” he said.

“This encouraging action by the Chancellor also provides more evidence of the constructive dialogue that is taking place between industry and the Government. The politicians are demonstrating their commitment to gas, it is now up to the industry to respond with increased activity levels,” Henderson concludes.

Centrica pledged to invest £1.4 billion towards developing its Cygnus gas field with partner GDF Suez barely hours after the announcement of the tax relief. Six days later Prime Minister David Cameron came ‘up North’ to pledge his support to the sector.

“If everything goes well in the oil sector and the renewables sector, is really important, high-quality manufacturing. I think that's something to celebrate and something to stand up for," he said speaking at Burntisland Fabrications in Fife.

The company has just won a contract from Premier Oil to create structures for their platform destined for the Solan oilfield development, west of Shetland. Burntisland Fabrications said the contract will create an additional 350 jobs.

UK’s Department of Energy and Climate Change (DECC) greenlighted Premier Oil’s plans for the Solan oilfield in April. The field could produce up to 40 million barrels of oil, with a projected production commencement rate of 24,000 barrels per day from Q4 2014. Given the amount of activity in the area, looks like a lot work might be coming from developments west of Shetland and it’s great to see the Prime Minister flag it up.

Meanwhile oil giant BP posted a sharp fall in Q2 2012 profits after it had to cut the value of a number of its key assets. The company made a replacement cost profit, outstripping the effect of crude oil price fluctuation, of US$238 million over Q2; versus a profit of US$5.4 billion in the corresponding quarter last year. The cut in valuation was in a number of its refineries and shale play assets.

With the TNK-BP saga continuing, BP’s underlying replacement cost profit for Q2 2012, leaving out asset value reductions, dipped to US$3.7 billion versus US$5.7 billion noted in Q2 2011.

On the crude pricing data front, both benchmarks have not moved much week on week and price sentiment is still bearish ahead of FOMC and ECB meetings. Given that on the macroeconomic front, the global indicators are fairly mixed, Sucden Financial Research analyst Myrto Sokou believes crude oil prices will continue to consolidate within the recent range.

“We saw this today; trading volume remains fairly low as investors would like to remain cautious ahead of the ECB and Fed decisions,” she concluded.

Andrey Dirgin, Head of Research at Forex Club said, “On Tuesday’s trading session, September’s energy futures performed indifferently. Oil contracts didn’t manage to fix on their levels and moved slightly down. The nearest Brent Crude futures contract fell 0.21% to US$104.7.”

Away from pricing and on a closing note, the Oilholic notes another move in the African crude rush. This one’s in Sierra Leone. A fortnight ago, the Sierra Leone government provisionally awarded two offshore exploration blocks – SL 8A-10 and SL 8B-10 – to Barbados registered ODYE Ltd.

The said exploration blocks SL 8A-10 and SL 8B-10 contain 2584 sq.km and 3020 sq.km of prospection area respectively. According to the Petroleum Directorate of Sierra Leone, the exploration blocks consist of early to late Cretaceous oil prone marine source rocks, primarily shale, sand and shale basin floor fans, channelised sand sequences and potentially high porosity sands.

ODYE says it is looking forward to “working with the other participants in these provisionally awarded blocks, Chevron Sahara and Noble Energy” to develop the assets. So the West African gold rush continues. That’s all for the moment folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: Andrew Rig, North Sea © BP Plc.