Oil Prices Changing The Face Of Global Geopolitics

Posted: Monday, February 2, 2015 2:00 pm

In a documentary that aired recently on the Canadian Broadcasting Corporation’s popular The Fifth Estate program, an allegory of Vladimir Putin was presented. The wily Russian president was described growing up in a shabby St. Petersburg apartment, where he would often corner rats.

Now, punished by low oil prices and Western sanctions against Russian incursions in Ukraine/ Crimea, Putin is himself the cornered rat. Many wonder, and fear, what he will do if conditions in Russia become increasingly desperate.

In the last six months oil prices have plunged over 50 percent and the Russian economy is hurting. The country now faces slowing economic growth, a depressed ruble, and runaway inflation estimated to be up to 150 percent on basic foodstuffs.

The Kremlin is counting on austerity cuts to help balance its budget, which has revenues coming in at $45 billion lower than earlier projections. The exception, significantly, is defense. With the military exempted from the austerity plan, it begs the question of whether Putin will “play the nationalist card,” such as he did in Crimea, in an effort to strengthen greater Russia during a period of economic weakness.

Georgia On His Mind

We are already seeing this to be the case. As Oilprice.com reported last week, Putin is set to absorb South Ossetia – Georgia’s breakaway republic that declared itself independent in 1990. Under an agreement “intended to legalize South Ossetia’s integration with Russia,” Russia would invest 2.8 million rubles (US$50 million) to “fund the socio-economic development of South Ossetia,” according to Agenda.GE, a Tbilisi-based news site.

The situation is analogous to Crimea because, like Crimea, South Ossetia contains a significant Russian-speaking population with ties to the Motherland.

If Putin succeeds in annexing the tiny province, it will be a real poke in the eye to the United States, which provoked Russia in the early 1990s by promoting construction of a pipeline between the former Soviet republics of Azerbaijan and Georgia. The BTC pipeline moves oil from Baku in Azerbaijan to Tbilisi in Georgia and then onward to Ceyhan on Turkey’s Mediterranean coast.

BTC started operating in 2006. Then, two years later, Putin built his own pipeline to cut out Georgia. The South Ossetia pipeline run by Gazprom stretches 75 kilometers from South Ossetia to Russia.

The current move on South Ossetia is a way for Russia to assert its energy independence in the face of Western sanctions and low oil prices.

It comes as Russia announced plans to divert all of its natural gas crossing Ukraine to a route via Turkey. As Bloomberg reported last week, Gazprom will send 63 billion cubic meters through a proposed link under the Black Sea to Turkey – after the earlier South Stream pipeline, a $45-billion project that would have crossed Bulgaria, was scrapped by Russia amid opposition from the European Union. By sending the gas to Turkey and on to Europe via Greece, Gazprom is in effect sending Europe an ultimatum: build pipelines to European markets, or we will sell the gas to other customers.

According to one observer, the proposed land grab in South Ossetia combined with the snub to Europe by shifting its gas to Turkey and bypassing Ukraine, is a classic Putin power play:

“Russia is preparing to absorb a province of neighboring Georgia, and delivering an ultimatum to Europe that it could lose much of the Russian gas on which it relies,” Steve LeVine writes in Quartz. “Putin has argued that the west is simply intent on ousting him and weakening Russia… Faced with these perceived attempts to undercut him and his country, Putin suggests that he has no choice but to pull around the wagons and stick it out. This could go on a long time.”

Iran: Falling Oil Prices Spur Peace Dividend

Some have speculated that the oil price crash was orchestrated by the Saudis, possibly in collusion with the United States and other Gulf states, to punish Iran, its main political and religious rival in the Middle East.

Whether or not that is true, there is no denying the effects of a low oil price on Iran’s economy. “Iran is already missing tens of billions of dollars in oil revenue due to Western sanctions and years of economic mismanagement under former President Mahmoud Ahmadinejad,” Bloomberg reported on Jan. 7. Like Russia, Iran is looking at spending cuts in next year’s budget, which is based on an overly-optimistic $72 a barrel crude oil price.

However, unlike Russia, which is “circling the wagons” and pulling further away from the West currently, the oil price drop could actually lead to more of a détente between Iran and Western countries. In a speech on Jan. 4, President Hassan Rouhani said Iran’s economy “cannot develop in isolation from the rest of the world,” while at the same time, Iran’s foreign minister was negotiating a nuclear deal that could see the lifting of UN sanctions, the Washington Post observed.

Then there is the cooperation between the West and Iran over the terrorist group ISIS. The National Post’s J.L. Granatsein wrote in a column on Tuesday that Iran has deployed substantial numbers of its Revolutionary Guard elite Al Qods brigade into Iraq and Syria to fight ISIS, along with Western allies including the US, Britain, France and Canada. This is despite Iran’s support for Hezbollah in Lebanon and Syria’s president Assad.

“Politics makes strange bedfellows indeed, but not much can be stranger than this. Led by the Americans, hitherto the Great Satan to the Iranian leaders, the ties between the West and Iran are becoming tighter, each side reacting to the horrors of Islamist fundamentalism throughout the region,” Granatsein writes. “The Iranians have been hurt by sanctions, and they are being wracked even more by the falling price of oil. Easing curbs on trade and Iranian banks may mitigate the effects of the oil price collapse.”

Venezuela Bracing For The Worst

The other major loser in the oil price collapse, Venezuela, may not see such a positive outcome. Wracked by decades of economic mismanagement by Hugo Chávez, the South American oil producer was already struggling to pay its debts when new president Nicolás Maduro came to power.

Now, with inflation running at 60 percent and lines forming outside state grocery stores for food and other basic supplies, Maduro faces the specter of serious social unrest if conditions do not improve. The country has some of the world’s cheapest gasoline prices, but Maduro has refused to end fuel subsidies, fearing, no doubt, a repeat of widespread riots in 1989 that left hundreds dead after gasoline prices were allowed to rise.

Venezuela is even more dependent than Russia on the price of oil, earning some 96 percent of its foreign currency from oil sales, putting Maduro in the untenable position of either borrowing more, despite crushing debts, or slashing spending:

“With only $20 billion left in its reserves, and $50 billion in debt to China alone, Venezuela appears headed toward a choice between abandoning its oil giveaways and defaulting on its debts, or starving its own population to the point of revolt,” according to the Washington Post.

Source: http://oilprice.com/Energy/Energy-General/Crushing-The-U.S.-Energy-Export-Dream.html

Weekly Oil Report: Primary Petroleum Drilling 2nd Well

Compiled by Darryl L. Flowers
Publisher, Fairfield Sun Times

Primary Petroleum's "Spring Hill" Well
DRILL BABY, DRILL - Primary Petroleum has moved their rig to a new location near Bynum on their “Spring Hill” site. Sun Times photo by Darryl L. Flowers

It’s been a busy week in the oil patch!  Primary Petroleum has wrapped up the first phase  at their “Rockport” well.   The rig has been moved just a little closer to Bynum and is now punching the ground at their Spring Hill well site.
In other state activity, Primary has added another approval to their list of wells they plan to drill, with the approval of the Dupuyer Ridge 16-35-28-8 well in Pondera County.  And Primary got approval for two more Teton County wells:  The Ralston Gap 4-2-25-6 and the Ralston Gap 4-13-25-6.
In Roosevelt County Windy Butte Reclamation Facility, LLC won approval for their SWD 101 well, while in Sheridan County Evolution Oil Group, LLC got the OK for their Bolster Archer 1 well.
Horizontal wells were greenlighted in Glacier County with the approval of the Tribal Love Rock 3607-18-16H well.  In Richland County Continental Resources Inc. was approved for their Rena 1-11H well, and in Roosevelt County Oasis Petroleum North America LLC was approved to drill their Krogedal Federal 2958 11-27H well.
There was one re-issue location this week in Fallon County, for the Continental Resources Inc. Waterhole Creek 14-10SH well.  There were three re-issues in Richland County,  two for Enerplus Resources USA Corporation for the Leghorn-Gityup 33-15-HID3 and the Stockade-Calesto 33-3-HSU wells.  XTO Energy was given a re-issue permit for the Harold 34X-12 well.
Three wells were completed in Glacier County, all belonging to Rosetta Resources Operation LP: The Gage 3606-19-01; the Turvey 3406-07-14; and the Simonson 3608-34-01.  In Richland County XTO Energy completed their Sherlock 13X-24 well, and it’s apparently a gusher, with initial production of 1,144 BOPD and 783,000 cubic feet of gas along with 1,403 barrels of water per day.  All the completions are in the Bakken formation.
Permits expired for 2 wells in Hill County, both belonging to Devon Energy:  The Olson DIR 22-1A and the State 36-14 wells.  Devon also abandoned four wells in Hill County:  the Mara 20-16, the Hillbrant 34-10, the Neuwirth 18-7 and the Brown 25-4
In Teton County Startech Energy Corp. was approved to abandon two wells in Blackleaf Canyon, the Blackleaf 1-5 and the Blackleaf 1-19.
Big Sky in the Big Sky
In Glacier County, Big Sky Petroleum Corporation has updated the status of their Bakken Project. Big Sky, along with its partners, FX Energy and American Eagle Energy, have completed drilling and casing a horizontal sidetrack from the group’s previously drilled vertical test, of well 14-29, in Toole County, Montana. Good oil and gas shows were noted throughout the drilling of the horizontal section. The approximate 4,100 feet lateral section targeted the Bakken Formation and was cased with a 4.0” liner equipped with 26 stimulation sleeves. A multi-stage fracture stimulation is currently slated for December.
The group has also completed the drilling of the vertical section of the Big Sky Operating 15-13 in Toole County. The 15-13 was cored and logged in three prospective sections of the Bakken Source System with noted visual oil shows in all three sections. The 15-13 has been cased awaiting further drilling and completion operations that will be conducted based on evaluation results and would likely include targeting the most prospective of the multiple pay zones with a horizontal sidetrack in 2012.
Big Sky is working with its partners to determine the next drilling location to advance the Bakken project in the Southwest Cut Bank Sand Unit. The SWCBSU 81-3 in Glacier County was a vertical deepening of an existing well designed to cost effectively evaluate the various prospective zones within the Bakken Source System. The SWCBSU 81-3 strat test well confirmed the presence of oil in the target zones following a small stimulation of multiple zones in the well. Further drilling plans currently being evaluated will likely include a vertical pilot well with a horizontal lateral in the vicinity of the 81-3 and targeting one of the multiple oil-bearing zones in early 2012.
Milton Cox, the Company’s Chief Executive Officer commented, “Big Sky’s management and technical team are greatly encouraged by the results we have seen. Confirming oil in the Cut Bank field area on the west flank of the Kevin Dome, documenting strong oil shows in the horizontal leg of the 14-29 and the very promising results from the 15-13 wells located on the central portion of the dome further confirms the potential of the Bakken/Three Forks on Big Sky’s leasehold. We look forward to significantly advancing the project evaluation on both our Dome and Basin acreage adjacent to the Newfield and Rosetta indicated discoveries. We remain on target to position Big Sky as a major participant in this exciting and rapidly evolving play.”
Newspapers and Oil
It’s not often you get to mention newspapers and the oil industry in the same story nowadays, since the media can’t seem to bash the energy industry enough.
But at least one oil man has been involved in newspapers for a while: Philip Anschutz.  Mr. Anschutz and his Clarity Media out of Denver were the owners of the San Francisco Examiner.  Last week the Examiner sold.  No word yet on the details, but Mr. Anschutz also owns Anschutz Energy, which is doing quite a bit of drilling in Montana’s Glacier County.
Speaking of newspaper transactions, Warren Buffet last week bough his hometown newspaper, The Omaha Wold Herald for $150 million.
$7.2 Billion Deal
When it comes to oil/gas industry transactions, there was a whopper of one last week.  Samson Investment Company of Tulsa, which owns interests in 10,000 wells (it operates 4,000 wells in the US) sold to a group made up of KKR, Natural Gas Partners, Crestview Partners, and Itochu Corporation for $7.2 billion.  Samson is active in the Bakken and Powder River plays in our region.  KKR came to fame a few decades ago when they bought out R.J. Reynolds Tobacco Company in Winston-Salem, NC.  At the time it was the largest purchase ever.  KKR is also known as Kohlberg, Kravis and Roberts & Co. The purchase does not include Samson’s offshore interests.
The company will retain its headquarters location in Tulsa.  Henry Kravis of KKR is a Tulsa native.
The acquisition of Austin, TX based Brigham Exploration by Norwegian oil giant Statoil was completed on December 1.  The deal was valued at $4.4 billion.  Brigham is active in the Bakken, and according to production figures, the company lives up to its motto “No Oil Left Behind.”  Statoil has been making a lot of moves in the U.S., recently spending $1.3 billion to buy acreage in the Eagle Ford shale formation of Texas.  Other foreign energy companies looking to invest in the US are France’s Total Oil, China’s CNOC and Austrailia’s BHP Billiton.  According to the Houston Chronicle, these groups are paying “huge sums to enter US shale rock formations, such as the Bakken.”
Invest in Russia?
As oil and gas development in the US increasingly faces opposition from the media, the government and environmentalists, some investors are starting to look at the former Soviet Union where the industry seems to be more welcome.
According to PennEnergy, Reuters is reporting investors are raising funds for acquisition opportunities in Russia in the coming months, with one private equity player reportedly eyeing $1 billion to spend on the industry next year.
Investors are reportedly seeing opportunity in Russia, where promising significant internal rates of return are more possible than in other markets. The movement by private equity players may be spawned from recent movement from LUKOIL and Gazprom to reinvest large amounts back into the country.