Russia’s instability is good for oil and gas

July 14 – Russia has once again sunk into global consciousness, and Texas energy experts say a mercenary group leader’s challenge to President Vladimir Putin is good news for U.S. oil and gas producers. gas.

Odessa oilman Kirk Edwards, Waco economist Ray Perryman and Permian Basin International Oil Show 2023 chairman Larry Richards said Putin had found himself on the ropes since Wagner Group leader Yevgeny’s failed march Prigozhin over Moscow.

“For me, the situation in Russia is very intriguing,” Edwards said. “If the war ended today, there would still be major repairs to be made for Ukraine and I think the world would be looking to make Russia and its oil revenues pay somehow. .

“In the short term, it looks like a slow war as the two sides are not escalating and there is not much movement in either direction. Ukraine will continue to grow stronger with the support of the West and it’s very positive for them but not for a quick end to the war.”

Edwards said Russia’s domestic politics had suddenly become the great unknown.

“The wild card ahead is the political situation inside Russia itself with Putin and his former mercenary general-designate Prigozhin and how it all works,” he said. “There is clearly stress inside Russia and however it goes, so does the country.

“In any case, this bodes well for oil prices to stay where they are or rise depending on any damage to Russian infrastructure for the shipment of liquefied natural gas and crude oil ahead.”

Perryman said Russia has become more opaque than ever.

“I try, not always successfully, to stay out of geopolitics and stick to economics, but the overlaps are significant,” he said. “While it’s hard to say given the lack of freedom in media coverage, the political situation in Russia seems increasingly unstable, with relations between Putin and the Wagner Group clearly complex.

“What’s harder to decipher is the mindset of the general population, military personnel, business and community leaders and others in positions of influence. These are those attitudes that will largely determine the ultimate direction and severity of any conflict that may arise, but the economics of the situation will impact attitudes and behaviors.”

Perryman said Russian oil and gas will come to market one way or another in the near term, regardless of how the immediate power struggles and internal conflicts play out.

“The country has been one of the world’s leading exporters of oil and gas and even with the sanctions in place against purchases by many countries, Russia continues to find markets,” he said. “At the same time, the oil and gas industries make up a significant portion of the Russian economy and an even larger portion of the Russian federal budget.

“With economic incentives of this level, it is likely that Russia will continue to produce as much oil and gas as possible, even if it has to sell them at a reduced price due to sanctions. The industry will survive for now, partly because Russia cannot afford to let it languish.”

Perryman said Russia faces the challenges of the European Union imposing an effective price cap of $60 a barrel and some big buyers are managing to push the price even lower, production inefficiencies Russian making it difficult to take advantage of lower prices.

“Going forward, I think many countries will be reluctant to rely on Russian gas even if the situation changes and the Ukrainian situation eases,” he said. “The importance of energy security has been clearly demonstrated during this conflict and I do not see European countries and others deciding quickly to forego investments in LNG to allow regasification even if greater stability returns.

“When the energy security aspect of importing LNG from the United States or other allies is considered with the clean burning characteristics of natural gas compared to fuels such as coal, the incentives to allow use of LNG are enhanced. As a result, I believe we will continue to see the development of the LNG industry and a gradual decoupling of Russian dependence.”

In the longer term, Perryman said, necessity will require a Russian government that can better integrate with the international community in a way that allows oil and gas production to occur in an orderly manner conducive to market participation. international.

“It’s hard to see the area being sustainable indefinitely under the current constraints,” he said.

Richards said history suggests that the Russian people and their government’s oil market “could experience very significant disruption” over the next five to 10 years.

Quoting American philosopher Ralph Waldo Emerson (1803-1882), Richards said, “When you strike a king, you must kill him.

“It seems that a plot between Prigozhin and two top Russian generals came to light weeks before he was set to be executed and their short-lived mutiny left the country’s president not just in power but looking for retaliation,” he said. “Leadership changes in Russia have historically included significant bloodshed and many analysts believe that powerful oligarchs and other sharks in Russia are smelling blood in the water and quietly surrounding a leader who seems more vulnerable than most. thought so.

“Only time will tell the impact of this uncertainty on global oil and gas markets, but be prepared for a bumpy ride.”

Richards said he was happy that European markets that relied so heavily on Russian natural gas a decade ago have managed to convert to US LNG and other sources.

“As an example, Germany completed a massive floating LNG regasification terminal last year in a record 10 months,” he said. “The U.S. market has invested billions in gas pipelines and LNG infrastructure over the past decade, from new LNG plants along the Gulf Coast to deepening the channel at Corpus Christi to accommodate the massive supertankers of Hull LNG.

“By supercooling natural gas into LNG, you reduce its volume by 600 times, allowing it to be transported by ship, rail or truck. Import terminals like the new one in Germany are designed to regasify LNG in gaseous form so that it can be fed into existing pipeline infrastructure for distribution.

“The greatest impact of the decline in exports and use of Russian natural gas can be seen in the production of synthetic fertilizers made from the ammonia and urea extracted from natural gas, which now feed nearly 50% of the world’s population. These fertilizers are especially crucial in drought-prone areas across Africa and the Middle East where disruptions could cause more instability.”

Richards said Russia’s main economic driver has always been its crude oil sales and if there is a power struggle, the top players will fight for control.

“Even with the sanctioned discount on Russian oil, the sums are huge and many production fields are very remote,” he said. “We could see the Russian government directly take control of these companies to deal with this threat or see the oligarchs play a real power game. Either scenario could mean more uncertainty for global oil prices. oil.”

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