RUSSIAN
ENERGY SUPERMODELS
by Jim Willie CB
December 28,
2006
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Jim Willie CB is the editor of the “HAT TRICK LETTER” For specific detailed analysis of the Gold, USDollar, Treasury bonds, and inter-market dynamics with the US Economy and Fed monetary policy, see instructions for subscription to my newsletter research reports, which include stock recommendations positioned to rise in the commodity bull market.
RUSSIA COURTS, THEN TORTURES EUROPE Let’s be plain. The Russian energy conglomerate is an extension of the Russian Govt, controlled by President Putin, and dominated by Gazprom. In the US realm, Exxon Mobil might be the biggest and richest energy giant, but it is a bloated obese frumpy stodgy stalwart by comparison to Gazprom. XOM is more interested in stock options, retirement golden grants, and investment cutbacks than true discovery and powerful growth. The Vice President of Russia is Dmitri Medvedev, who happens also to be the Chairman of Gazprom. In the United States, we fake it, with VP Cheney pretending to have no allegiance or formal connections to Halliburton. Charitable donations cloud his direct personal gains in the form of HAL stock options. To say HAL has marginally benefited from the current USGovt administration is like saying Costa Rica has decent looking countryside, coasts, and ladies (no, they are each breathtakingly beautiful). In Russia, the Gazprom and Medvedev tie is boldly stated and used to great advantage like a weapon and a calling card. This is a juggernaut to be reckoned with, to be respected, to be dealt with, and not to be betrayed or trifled with. Permit me to go out on a limb, and forecast that the next Russian President will be Medvedev, with probability of at least 98%. Any new political opponents might find themselves in court over income tax violations, criminal fraud, or sedition, perhaps simply blocked from ballot position during the national vote. There is precedent for such blockage.
At times the Russian story reads like a bully who attempts to reform, but simply cannot bear to let go of old habits. Moscow once more used their incredibly advantageous position against England last spring and summer, with a successful gambit to acquire British gas supplier Centrica. One might say that Putin used leverage to cut off parts of Europe, and prevailed. Moscow also recently snubbed US customers, by playing Germany and Western Europe against the United States, diverting natgas supply to Europe in order clearly to curry favor. The pattern continues into the present. Putin sometimes openly states his plan to build an energy supplier monopoly in order to rebuild a decimated Russian nation. It is their great advantage. In November a real brawl in Europe over a revised Permanent Cooperation Agreement took place. Europe depends upon Russia for 44% of its natural gas imports and 30% of its oil imports. Conversely, Russia sells 60% of its exported gas to the European Union. Eastern nations felt fresh wounds from the harsh tactics employed by Putin during mid-winter, centered on Ukraine. Eastern Europeans want more shared control of the network of pipelines, which Moscow guards closely and is not willing to share. Some European nations are working with Norway so as to skirt the Moscow influence, something which does not go unnoticed. Beware of the Russian Bear betrayed, since it will deliver a swipe with sharp claws. On the other hand, Germany and the Netherlands are forging direct partnership agreements, much to the displeasure of the USGovt current regime. WashingtonDC finds itself helpless to stop the fabric to be woven. Poland feels sidestepped and shunned by the new planned immense German pipeline. Poland has by far the worst relations with Russia, and to this day suffers from a farm product embargo imposed by Putin. Other nations surely observe the impact of angering Putin, and thus watch their step. Germany has pledged gas supply to Poland, if Russia were to cut them off in retaliation. France and Germany are reluctant to invite Georgia into NATO, for fear of angering Russia, which has threatened to double the gas price it charges Georgia, which in turn seeks to increase gas supply from Turkey and Azerbaijan. What a mess! Bulgaria has cut a deal with Russia, whereby they pay a discounted price for Russian gas, in exchange for Russia to use Bulgarian pipelines to ship gas to Greece, Turkey, and Macedonia. France is the most self-reliant among EU nations, due to its heavy nuclear power usage. And Americans denigrate the French? They seem genius by comparison to the knucklehead policy in the United States, marching headlong from crisis into crisis as a result of embraced adopted dependence from enemy camps, as well as collusive attempts to further non-petroleum solutions. RUSSIAN ENERGY CONSOLIDATION A consolidation process is underway to fortify Russian Energy Inc, a veritable powerhouse. Rosneft plans to invest $20 billion over next five years, so as to increase oil production from 1.8 million barrels per day to 2.0 mbd in three years. The end result is to be two thirds of Rosneft output exported to the EU, with expansion conducted in Siberia and Sakhali. The financial outlays are to come from Russian sources. Rosneft has also signed a cooperative agreement with Gazprom, with the collusion understood to effectively shut their foreign rivals. Together with Gazprom, the team duo will submit joint bids on a 50-50 basis. Rosneft will sell Gazprom some ot its extensive Siberian supply. Gazprom and Lukoil have themselves signed a similar deal earlier in November, whereby a joint venture will be formed to acquire property in Russia and abroad. Outsider rivals can only watch and burn in envy. They must be content to enjoy a minority slice, suffer forced sellouts, and be willing victims of contract and legal treachery. The latest full scale battle in this Eurasian theater involves Gazprom, which has taken control of the $20B Sakhali project from Royal Dutch Shell. Details are being worked out in a complicated contract, again forced by the Russian Govt and its lackey courts. But it looks as though Gazprom finally will confiscate an liquefied natural gas (LNG) facility. The vehicle was trusty bully tactics which enabled them to purchase Shell’s stake in the Sakhalin-2 massive project for $7.45 billion as compensation. My guess is that is a low figure, not to be challenged. Diversification has been a crucial objective of Gazprom in recent years. Shell will cede 30% in the project, and apparently not even be granted some leeway on the trumped up environmental fines. Such fines are a kick in the backside by Putin on the deal, doled out to his Western partners on their way out the conference room door. Two Japanese minority partners will cede 10% stakes as well. Thus Gazprom’s control. Putin demands for Russian companies to be made majority partners on any project on its soil, no exceptions. Elena Herold of PFC Energy Group summed it up. “Gazprom wanted to be in LNG for a long time to diversify their markets. They had this political power, so they used it… In fact, there is always a line to team up with Gazprom and Rosneft. Where else are they going to go? There are other countries that are full of oil but they all have surprises and obstacles and challenges… Clearly, part of Mr Putin’s strategy is to enhance state control over energy resources so that Russia can dispose of it in a way that it sees fit and use it as a source of influence in the world. Russia had an imperial status before when it was put on a par with the United States. It lost that glory and now it is bringing it back through energy, where it can dictate conditions and be arrogant.” That covers it. By using strong arm tactics, Russia renders itself less efficient from a capital formation standpoint. THE GLOBAL ENERGY BULL IS INTACT The global 2006 oil demand is forecast to rise by 1.1%, and to rise by 1.7% in 2007. Global natural gas usage rose by 5.7% year over year. The natgas price has come down, aided in large part by a warm weather pattern through most of the United States, portions not whacked by snow like the Rockies region. One should remain aware that a weak USDollar goes hand in hand with a strong energy price complex. So energy prices should be buffeted by the weak USDollar all year long in the new year. It is impossible to conclude with any degree of certainty whether the energy price hurts the USDollar more than the USDollar lifts the energy price. In fact, the buck is fundamentally weak and crippled at the same time USEconomic dependence has grown acute on foreign energy supply, especially from unfriendly nations. The natural depletion problem among producers only exacerbates the underlying oppositional forces. Energy geopolitics is now immersed within religion and racial conflicts to make a witch’s brew.
Confirmation of the continued energy bull comes from the XLE, the largecap S&P Energy stock index. The XLE has set a new high, after an eleven month pause. The chart is beautiful, stronger than the crude oil chart. The breakout is classic according to the textbook, with followup retracement back toward the 58 level from where it broke out. Further confirmation comes from the oil service holders index OIH, which has risen from 136 in mid-November to 151 to mid-December, only to retreat toward its 20-week moving average in support . The OIH has not set new highs, but a firm recovery has been revealed. MIDEAST POWER PLAY LEVERAGE The collective group of European nations wants access to the vast gas fields in Kazakhstan, Turkmenistan, and the Caspian region. Eurasia is embroiled in a war over energy pipelines, a main subplot in the Global Energy War. The inauguration of the BTC oil pipeline in July marked a significant new event in the global energy chessboard, as it connects the Caspian Sea to the Mediterranean Sea via Azerbaijan, Georgia, and Turkey, all firm US allies. It is my contention that most of all conflict between the United States and Iran involves Russia far more than the public is told, far more than the US press & media reveal in controlled fashion. Russia aids Iran in every controversial aspect which the US finds objectionable. The leaders through their mouthpieces do not wish to incite Cold War emotions and attitudes, although that is precisely what the battle for energy supply and supremacy has engendered. Expect Cold War rhetoric to return in due time. It is also my contention that in the private conversations between heads of state, Russia is using Europe in blackmail maneuvers. Any military initiative waged against Iran by US Forces will be met with a reaction by Moscow on the energy front, namely natural gas supply to Eastern Europe and Western Europe. Iran has itself threatened on numerous occasions to halt oil shipments if under attack. Russia will surely follow suit. This is a stalemate, made gripped in locked state by the presence of Russia. Its alliance with Iran and its vast formidable strength as an energy powerhouse enable it to stymie US intentions in the Mideast region, whether of an aggressive or constructive nature. My steady view has been tilted toward the former, not the latter. Notice that the name China has not been mentioned above, by intention. In recent days, the US Embassy has delivered warnings to Beijing on progress toward Iranian energy deals. The $16 billion deal has triggered a USGovt response, according to a standing law against nations engaged in overt terrorism and moving on a path toward nuclear conflagration. One must wonder if their energy projects with Tehran will interfere with sizeable Wall Street stock fees from initial public offerings. This can only get worse! The United States finds itself in a very weak position relative to OPEC, to Russia, to much of Central Asia, to Iran, and to China, even to the northern rim of South America. The “full spectrum dominance” strategy has worked very badly to enhance US national interests. Nowhere is vulnerability more acute than in the energy world. The threat to the USDollar is multi-faceted. Three important sides are the trade and credit imbalances, along with energy dependence, followed by central bank diversification. The energy submissiveness by the United States, vis a vis Russia, is not sufficiently covered in the mainstream or even in major website journals. The associated weakness raises the stakes geopolitically, raises the risks of military aggression, and raises the risks of Russian retaliation, all of which work to damage the USDollar, and to lift gold. ©
2006 Jim Willie, CB
The opinions of FSU contributors do not necessarily reflect those of Financial Sense. |
The
Russian Energy Inc powerhouse is taking shape, and man oh man, it is a
formidable juggernaut capable of disrupting the global balance of power.
Major Western energy giants struggle to keep pace, join forces in
incestuous unconstructive fashion, and have become increasingly “bit
players” in the scheme of things. The Seven Sisters from the US &
Western Europe seem like rented high school prom queens by comparison.
The Russian dames are supermodels on the runway, not much on earning
style points (rude, pushy, intimidating) but incredibly impressive
chassis to behold (nice bodies) !!!
Last
winter Europe was treated to “hard ball” in natural gas price
negotiations which pitted Ukraine against Eastern Europe, with Former
Soviet Republic pricing in the crossfire. Moscow by and large won out
from the power play in the global fishbowl, with a more favorable higher
price paid by Ukraine, with more control over natgas flow through the
vast network of pipelines into Russia from the southern republics. The
Cossacks are back in force!
Jim
Willie CB is a statistical analyst in marketing research and retail
forecasting.