Login

Log In

Enter your username and password below

Russia Just Crowned the New King of the Global Energy Kingdom

You could practically feel the global energy landscape quake when Rosneft (PINK: RNFTF) announced it would buy out TNK-BP for a whopping $56 billion.

This is the biggest energy deal since Exxon Mobil (NYSE: XOM) formed in 1999. And as you’ll see, it has huge implications for BP (NYSE: BP), which is forfeiting its half of the lucrative joint venture it undertook with AAR back in 2003.

But first, we have to address the much bigger story here…

In short, Russia just fired the latest salvo in the global resource chase.

There’s no question the deal represents a serious power play by Russia, since it’s basically crowning its state-run oil giant the new king of the global energy kingdom.

You see, Russia is the world’s single largest oil producer, but its fields have already peaked, and its reserves are dwindling. That’s unthinkable for a country that stakes its national pride, and a good deal of its foreign policy, on its vast energy reserves.

And for the country’s nationalist president, Vladimir Putin, it’s unacceptable.

To Putin, Russian sovereignty is invariably linked to its resources. And with oil fields decaying and the United States emerging as a major natural gas player, he sees his country’s influence waning.

So he’s taking back control of ALL of its natural resources.  And this deal is certainly a good start. With TNK-BP’s assets added to the mix, Rosneft will be able to raise its output from 2.59 million barrels per day (bpd) to about 4.5 million bpd.

Indeed, the real story here is how global powers are seeking to control natural resources on their own soil.  And in this case, we’re seeing a corrupt oligarchy assert itself by elevating its state-run energy arm at the expense of Western oil majors.

Rosneft has now leapfrogged Exxon to become the largest publicly-traded oil company in the world.

And since Russia has effectively “nationalized” the oil by taking it away from BP and awarding it to the state-run Rosneft, BP’s power in the region has been severely diminished.

Of course, BP hardly had a choice in the matter…

What’s Next for BP?

BP has been harassed by its Russian partners and the Russian government for the past decade. And now it’s finally being pushed out of the country altogether.

That’s bad news. But it could be worse.

No matter what, the company ultimately would have had to cede control of the project to Russia. At least this way it gets what amounts to a lucrative bribe to leave the country.

BP will receive a boatload of cash – $17.1 billion dollars to be exact. And we all know BP needs to raise cash because of the massive Macondo oil spill in the Gulf of Mexico, which depleted the company’s reserves.

The cash from this deal will bolster its balance sheet, giving the company a greater opportunity to invest more in exploration. It’ll also see its stake in Rosneft increase to 20%.

But that’s nothing compared to all the company is losing. TNK-BP accounts for 40% of BP’s global oil output and 27% of its total oil and gas production. And more importantly, it’s paid BP $19 billion in dividends since 2003.

To top it off, that 20% stake in Rosneft is hardly guaranteed.

Basically, BP will own 20% of a company that’s controlled by the Russian government, in a country that’s a pseudo-dictatorship with little rule of law. There’s absolutely nothing to prevent a total takeover of BP’s stake in the future if Russia decides to do so.

So BP might get access to the Arctic, but it loses control of any decision making.

As a result, this will certainly dissuade other foreign oil majors from investing in Russia and its decaying infrastructure. But that’s clearly a price Russia is willing to pay. This sends a clear message to other foreign oil companies that Russia’s energy resources are her own.

Make no mistake, this is just the one of many mega-deals we’ll see as a result of the global resource chase. And if you own some of the companies involved along the way, it could drastically reshape your portfolio.

So stay tuned in the coming weeks and months as we further explore these trends and point out the best ways for you to profit.

And “the chase” continues,

Karim Rahemtulla