Yukos: The Secret Buyer
Russia's government pulled off a moderately slick trick by selling Yukos's major production unit to a shell company, a mysterious organization that no one had ever heard of. Indeed, the move has the smell of being a new twist to the old style maneuvers by the KGB. But the maneuver fooled no one, and did nothing to change the fact that the Russian government has now taken over that country's oil industry, and that International companies, as well as major global investors are about to make what could be a historic exit, with potentially major repercussions, to themselves, and to the Russian energy industry.
Yet, even as the average consumer only cares about how much he has to pay for a gallon of gas, or how much it costs to heat her home, the events in Moscow, over this past weekend, are certain to color the oil markets for the next several decades.
In reports culled from multiple sources, here is how the auction went, as we have been able to reconstruct. Representatives of Gazprom, another unidentified bidder, and Balkanfinansgroup gathered in a room with representatives of the Russian government. Reporters were allowed into the same building, but watched the auction on closed circuit television. The auction began. Balkanfinansgroup made a bid. A Gazprom representative left the room to "make a phone call." Balkanfinansgroup raised the bid. In 10 minutes, before the Gazprom representative returned, the auction was declared over, and Yukos was eventually a dead entity.
According to Bloomberg: "Russia's Property Fund agreed to sell the main oil unit of OAO Yukos Oil Co. to OOO Baikalfinansgroup for $9.34 billion, a group with unidentified backers and registered in the western Russian city of Tver. " The Russian government might have thought that some of the international pressure was gong to be taken off, as "the oil unit of OAO Gazprom, the state-run natural gas company and expected winner, never bid at the auction in Moscow – after appearing and registering. Vladimir Zlentsov, a spokesman for the Property Fund, which held the auction, said he doesn't know who the backer of Baikalfinans is."
Opinions were uniform about the deal being a front for Gazprom, although no direct evidence was available. One analyst told Bloomberg: [``The best guess is that Baikalfinans is a front for either Surgut, Gazprom or both acting together. Nobody else would have that level of cash. This signals the end of Yukos as an independent company. It can't possibly survive with the level of cash flows from its remaining business. The remaining assets will probably be sold or confiscated.'' ]
The New York Times noted: "The winner of the Russian oil industry's crown jewel was not just an unknown but also a complete surprise, since Gazprom, the country's natural gas monopoly, had appeared to have positioned itself to take over Yukos, formerly the country's No. 1 private oil producer. The mystery surrounding the winner - a company called Baikal Finans Group and registered in Tver, a regional town near Moscow - immediately raised suspicions in the minds of industry analysts that the winning bidder was acting on behalf of Gazprom, or even the state itself. The auction was reminiscent of the controversial, insider-led privatization deals conducted in the early 1990's - with murky financing, questionable bidding and unknown shell companies representing powerful financial groups and emerging as the winner of lucrative assets. "
AP reported the peculiarity of the auction: "Next to nothing is known about the buyer, which only registered its interest on Friday. Analysts have speculated that it is essentially another Gazprom-controlled vehicle, albeit one which relies on alternative sources of financing." And even more strange was the fact that "Gazpromneft didn't place a single bid during the auction. Baikal Finance Group opened the bidding at the starting price of 246.75 billion rubles, and then proceeded to increase its own bid without a counterbid from its opponent." Perhaps, the most interesting of all reports is this: "Baikal Finance Group only applied to take part in the auction after the Houston bankruptcy court issued an injunction restraining Gazprom and the western banks who were preparing to finance its bid from participating in the auction."
The New York Times reported: "(It is) possible that another cash-rich Russian oil company, like Surgutneftegaz, was the real bidder behind the unknown winner, but that it was more likely that the winning bid was actually some sort of mechanism to give Gazprom time to raise funds after the ruling in Houston (over the wekkend, which froze bank assets available to Gazprom) spooked its lenders. Deutsche Bank and its banking syndicate withdrew from financing Gazprom's bid following the Houston ruling."
Perceptions Of Government Fraud
International oil companies are having second thoughts about investing in Russia, suddenly. According to the Dallas Morning News: "Lee Raymond, chairman of Irving-based Exxon Mobil Corp., said this month that he's having second thoughts about investing in Russia. Mr. Putin once said Exxon Mobil was discussing the purchase of a significant share of Yukos." In fact, the News, went as far as reporting: "The Russian government warned off non-Russian companies that expressed an interest in bidding."
The whole affair has been shrouded in a mantle of cloak and dagger maneuverings, summarized succinctly by the New York Times: "Since it began in the summer of 2003, the Russian prosecutorial assault on Yukos and its founder has been complex and opaque, has set foreign investors on edge and raised questions about the fragility of rule of law and property rights here. And the final blow to Yukos - which had already sought bankruptcy protection, in Houston last week - hewed to that pattern.: After winning the auction, noted the Times: "Officials from Baikal Finans Group, the company that won oilfields producing as much oil as Indonesia, did not even appear afterward - leaving the circumstances and motives of their bid a mystery."
The Real Fight
Aside from the nearly certain gamesmanship involved in the Yukos auction, there is a much more subtle game afoot here. Readers of this space are familiar with the struggle inside the Kremlin being between two major groups, the siloviki, or the old guard, and the St. Petersburg clan, of which President Putin is the leader. Putin has been pressured, in the view of some, to have turned back to old style Russian maneuvering, by the siloviki, who in the view of some, Putin is using as an excuse to return more control of private enterprise to the government.
The real question is this: Is Putin going along with the siloviki because he wants to, or because he has to? And from a global market and geopolitical standpoint, does it really matter?
Our opinion is that it doesn't really matter, and that Russia is either on the brink of making one move too many on the wrong side of the ledger, endangering its potential for what it truly wants, entry into the World Trade Organization, and a seat at the big table as an equal player to the U.S., or has just made visual contact with the proverbial pot of gold at the end of the rainbow.
One thing is certain. The Yukos saga may have ended. But a new saga has started, as Russia is now within sites of becoming the world's major oil and natural gas supplier. It is a position of pure unadulterated power. And this new power is in shaky hands, the hands of ruthless bureaucrats, who have been biding their time, with one goal in mind, the return of Russia to the upper echelons of world power, financial and military.
Stratfor.com noted: "Russia's siloviki, the leaders of the country's security and military apparatus, who share power with the more reform-minded St. Petersburg clan led by President Vladimir Putin," although seeming to be disorganized, and stunned by the events in Ukraine, which many think were orchestrated by them, may have stumbled into a bit of good fortune of late as "important economic changes afoot in Russia already seem to be giving the siloviki an organizing principle that they have been lacking."
Stratfor's line of thinking is logical: "With the loss of Ukraine, Russia has reached an historical geopolitical low from which it will be difficult to recover. Domestically, however, the siloviki can take note of some significant successes with respect to the destruction of Yukos, and with a string of acquisitions by natural gas giant Gazprom that they have pushed for that are beginning to snowball."
In other words, despite what the rest of the world may think, Gazprom, by default has the world's largest natural gas reserves under its hold, and has now, presumably, bought a significant chunk of oil, making it a major global player in energy, the size of Exxon Mobil or another major, at least based on reserves, and potential ability to do business.
Stratfor predicts: "With Gazprom now Kremlin-owned, future acquisitions will likely see the oil pipelines of state-owned Transneft, a billion-dollar state pipeline enterprise, merged with Gazprom. This will give the company control of Russia's oil exports, the second-largest in the world after Saudi Arabia. Along the way, Gazprom will also likely swallow up more of Russia's private oil firms, adding to the reserves of Rosneft and Yuganskneftegaz."
In fact, Stratfor goes as far as to say that the siloviki may have lucked into a golden opportunity, despite their clumsy approach. It is entirely possible that all of this "will be completed in a matter of months, and with the state firmly in control of Russia's oil and gas revenues and the billions in hard currency that they bring in, the siloviki will quickly realize that the gargantuan company that Russia has built would be the perfect vehicle for projecting Russian influence abroad, and they will push Putin to use it. Gazprom will come to represent economically something that Russia now lacks militarily -- the capacity to project influence beyond Russian borders."
Much of the groundwork for this has already begun, as Russian President Putin has recently traveled to India, and Brazil this year, with the intention of indeed projecting Russian economic influence abroad. Indeed, following Stratfor's analysis one step further: "As global energy demand continues its rapid growth, more countries will come to depend on Russia for the energy supplies for economic growth. This will be Russia's opportunity to wield renewed global influence, and the siloviki will realize this if they have not already. The creation of Gazprom Inc., begun as a siloviki-driven effort to create new foundations of power for the Russian state at home, will likely become the principal tool for the recalibration of their tactical approach to the world."
Stratfor, expects the creation of "oil and/or gas pipelines radiating from Russia's continental shelf to China, Japan and Europe, with major investments likely elsewhere, in South Asia and South America," to start developing as Gazprom consolidates its power. "As this occurs, Gazprom will use its newfound cash flows and existing pipelines to fully consolidate its control over Central Asian natural gas resources, which it will continue to import on the cheap and re-export at global prices."
Now it gets interesting. Stratfor expects that the Russian government will allow foreign investors to own just enough shares of Gazprom to keep them quiet and supportive, as it becomes the leading oil and natural gas supplier to the world.
And, then, the coup de gras: "Once Gazprom is in control of both oil and gas supplies and the means to deliver them and has stable revenue streams, Russian negotiation tactics with many countries will begin to change. The next time there is a crisis in the Caucasus and Europe begins to complain about Moscow's influence, Gazprom will begin to wonder publicly whether or not it is time to raise gas prices. After all, unlike oil, natural gas is not a fungible commodity. It necessitates a multi-billion dollar in-place transport network -- like the one linking Russian natural gas fields to European consumers -- to work. Likewise, if Japan says that it intends to support U.N. resolutions put forth by the United States that Russia opposes, Gazprom will begin to wonder publicly whether or not China might be a more stable market for its resources the next time long-term contracts are up for grabs. It might not even wait that long."
Conclusion: The Emergence Of Gazpronism
Russia is in the middle to late stages of becoming OPEC's replacement as the world's number one oil supplier. If not in reserves, most certainly in influence, as it has a nuclear arsenal, and at least a limited capacity to deliver some kind of military action to its neighbors, despite the failures that it has displayed in recent contests.
The United States, Japan, China, and Europe, have not openly figured this out yet. But, it is certain, that somebody somewhere has connected the dots in a similar fashion to Stratfor's analysis, or will do so once they read it, or similar accounts.
As Gazprom emerges as the new big player in town, there will be repercussions, as Russia's actions will give rise to a new phrase becoming part of daily business vernacular, "the oil card," the very heavy oil card that will be pulled out, shaken about, and used to attempt to crush those who oppose Russia's views of how the world ought to be.
No one is going to take this lying down. They simply can't.
The U.S. is the lone Super Power, for now. China sees itself as a major player. Europe is desperately trying to remain relevant. Japan is beginning to re-arm. India is an emerging force. Iran is on the verge of being nuclear. The Middle East is in turmoil. OPEC is on the ropes. And Latin America and Africa, will eventually figure out that they are once again being left behind.
Thus the world will have a new dilemma. Some will have to choose between the perceived threat of "unilateralism" from the U.S., versus what promises to be the other major alternative "Gazpromism" from Russia. Others, especially the big players will have to figure out how to neutralize, or even defeat this new threat.
And that is where any forecasts go straight out the door, and things get truly and potentially volatile, as well as dangerous.
Oil Markets : $48...The New Resistance
Cold weather and tight enough supplies should keep crude futures above $40 for the next few weeks.
The important question is whether the market can take prices back to $50.
The charts say $48 should be a difficult resistance level. But, weather markets are unpredictable. And with a Christmas blizzard headed for the Northeast U.S., anything is possible.
The Philadelphia Oil Service Index (OSX) closed above 120, and above the 20 and 50 day moving averages. Volatility will likely increase here in the next few days. For more details on trading the energy sector visit our energy timing page, featuring our highly effective OIH timing model and our Top Ten Energy Stock List.
The Amex Oil Index (XOI) closed above the 686-720, pivot band, and above the 50 day moving average, suggesting that prices are getting ready to attempt a move up. For immediate analysis, including stock picks, and the latest in technical analysis of the entire energy complex, our subscriber section has a full complement of recommendations in oil service and the rest of the energy complex.
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