Russian President Dmitry Medvedev attempted to allay global fears that Moscow is trying to amass access to natural resources this week during a trip through Egypt, Nigeria, Namibia and Angola as he signed billion dollar energy deals providing Russia a greater foothold in Africa .

In Angola, Medvedev emphasized that these resource contracts were important to coordinate “action in the context of the world crisis.”

In Nigeria, he boasted to his hosts about the economic benefits of the investment stating “the prospects are very good” that Russian investment within the country could be worth “billions of dollars”

In Namibia, during prepared remarks he stated “we must do everything possible to promote trade and economic ties” between the two countries, while mentioning energy only as one of the fields where Russia would invest. The list also included tourism and agriculture, hardly strategic imperatives.

Despite Medvedev’s touting of cooperation and economic benefits, it’s hard to see Mededev’s actions other than a …..click here to read more

Russian President Dmitry Medvedev is on a 4-nation tour this week through Africa to push his expansive international energy policy. Today, his former company, Russian gas giant Gazprom, signed a $2.5 bln deal with its counterpart in Nigeria to build infrastructure including refineries, pipelines and gas power stations.

The deal gives access to Nigeria’s resources and highlights Russia’s attempt to bolster its international stature by becoming a key global commodity supplier. However, the deals come as many Russian energy firms are saddled with debt; are producing less; and are failing to invest in domestic upstream activities (exploration and production), making it unlikely they can meet more ambitious investment plans without scaling back somewhere.

Gazprom announced today that it may cut its planned investment by 30% as the company expects sales to plummet roughly 40% this year. Deputy CEO Valery Golubec had previously announced cuts of 10% in output this year and the firm also signaled it would delay investment in several large projects including development of the Bovanenkovskoye field. Beyond a reduction in income and output, the company also faces substantial debt obligations of $60 bln with $10 bln due this year.

Gazprom is not the only Russian company facing recent worsening financial conditions:

Lukoil’s profit fell 71% in first quarter of 2009 over the previous year.

Gazprom Neft, Russia’s fifth largest oil producer, announced it would cut capital expenditures 43% after stating that crude oil output would drop over 5% from 2008. Profits also fell 76% in the first quarter of the year.

Rosneft profits similarly dropped by 20% in the first quarter of the year. The firm also has $7 bln in debt due this year and $24 billion in longer-term debt.

Transeft profit fell 33.6% in the first quarter of the year (although recovering some in the second quarter) and has roughly $4 billion in short term debt out of $8 billion outstanding.

Despite the weakened condition …..click here to read more

The European Union plans to announce today that it sees possible disruptions for its gas supplies from Russia via Ukraine, a liklihood we identified earlier this year. What’s worse, Gazprom is now demanding $230 in debt payments from Belarus, another key gas transit route to western Europe.

The payments from Belarus may stem from a political dispute over disagreements including Minsk’s failure to follow Russia’s lead in recognizing the independence of Georgia’s break-way republics and Moscow’s freezing of a $500 million loan for Belarus. However, due to the opacity of the gas trade in eastern Europe, Gazprom’s debt may be legitimate.

The saga of the dispute in eastern Europe is likely to play out in political circles over the summer until the weather gets cold. But for those in Europe looking for a warm apartment in the winter, they should follow Ukraine’s purchases from Russia over the summer. Ukraine’s national gas company, Naftogaz, will unlikely have the cash to pay to fill its storage capacity for the winter heating season. The Ukrainian newspaper Sehodnia reports that the company may not have the funds by as early as July. Unless Ukraine buys its required amount, a new flare-up is in the offing, which portends a few weeks of cold in western Europe.

Today the Senate Energy and Natural Resources Committee voted for an amendment, as part of a comprehensive energy bill, which would give the Secretary of the Interior Department flexibility in suspending mandatory royalty payments to companies for the production of oil and gas. The incentives, originally part of the 2005 Energy Bill, allow oil companies to produce certain amount oil and gas royalty-free from specific offshore areas, including deepwater. They were designed to encourage businesses to invest in expensive technologies to develop areas that might not otherwise be profitable.

The new amendment, which will be voted on as part of a comprehensive energy bill later this year, affords the Secretary discretion in suspending the incentives. Today’s change follows a string of other modifications proposed by both the Hill and the Administration that would increase oil companies’ payments to the government, such as the Administration’s budget plan to reduce tax exemptions.

Proponents of the royalty change believe the incentives cost the government potential foregone revenue. They believe the high price of oil and gas acts as a greater inducement to drill than the royalty-free production allotment. I estimated that the government revenue loss from these mandatory royalty payments to be easily over a billion dollars a year (Note: I used to oversee the budgeting of oil and gas revenue for the federal government.)

Others such as Senator Lisa Murkowski (R-AL), who voted against the provision, believe that the mandatory incentives encourage firms to take greater risks to develop US oil and gas supplies.

Incentives remain a useful tool to encourage risk and investment in marginal producing or new areas, but their value declines as oil prices increase. Recently their use has become more of a political game and lost is the serious analysis to determine when government incentives are necessary. President George W. Bush said in 2005:

I will tell you with $55 oil we don’t need incentives to oil and gas companies to explore. There are plenty of incentives.

The Democratic-led Senate Energy and Natural Resource Committee supported legislation today that would allow for oil and gas exploration off the coast of Florida. In an ironic twist, this includes an area that Republican President George W. Bush took off limits in 2002. Far more Congressional action is needed before the legislation is past, but today’s action is a sign of a changing political landscape.

Seven years ago, at the behest of his brother, Republican Governor of Florida Jed Bush, President George W. Bush spent over $100 million to curtail drilling near Florida’s coast by buying back seven of nine federal leases from oil companies in a resource rich area called Destin Dome. The government secured a ten-year nonproduction agreement from Murphy Oil, which decided not to sell back its two leases in a calculated decision to wait till the government reversed course.

The decision helped bolster the governor’s standing in his state while the Bush Administration heralded the deal – which also included buying back leases near the everglades — on environmental grounds. He said, “Florida is known worldwide for its beautiful coastal waters and the Everglades. Today we are acting to preserve both.” But it was a costly way to prolong the inevitable: more offshore drilling.

Now Byron Dorgan (D-ND) is leading the charge. His amendment is a bit more pragmatic. It is an attempt to get more Republican senators on board with a larger climate bill, by opening up for exploration a proven, hydrocarbon-rich area that could be developed quickly due to its proximity to existing infrastructure. The legislation does not open up all of the water near Florida as it codifies a moratorium elsewhere.

But even those areas may be eventually under threat, …..click here to read more

The consulting and market research company Point Carbon predicts that “Phase 3 of the European Union’s Emissions Trading Scheme [from 2013] (EU ETS) could see the price of an EU Allowance rise from €30/ton in 2013 to €40/t in 2016.” ETS allowances fell to nearly €8/t this year and have recovered slightly since. Firms sold allowances to raise funds as traditional revenue plummeted in the slowing economy. This combined with the abundance of credits put downward pressure on allowance values.

Point Carbon’s prediction gives a baseline to energy firms that tend to make long-term investment decisions. But in practice the report may be of little use. The analysis does not assess market conditions per se, but rather the political climate that governs the ETS. Predicting the political air in, say, France five years from now is highly complex, predicting it in the 27-nation EU, downright impossible. Add to the mix that the government controls the supply of ETS and the market may be far more difficult to forecast than oil where analysts can at least track supply to some degree.

The report does have some merit, however. …..click here to read more

Oil prices rose yesterday as Goldman Sachs stated it expects prices to reach $85 by the end of the year from its current level just below $70. Its analysts believe the recent price increase is the first stage of a longer sustained rally. They are right to see oil price rise over the long-term as demand increases and supply tightens due to limited investment and capacity constraints, however, they seem a bit overly optimistic. Oil executives are less sanguine in the near-term.

“It does kind of feel like the market is getting ahead of itself. The demand has not increased.

Larry Nichols, chief executive of Devon Energy Corp

“It’s more perception than reality… A lot of people think we bottomed out — I tend to think otherwise. So I wouldn’t be surprised to see a pullback in oil prices.”

Steve Farris, CEO of the exploration company Apache Corp

“It’s been our firm’s view that the fundamentals of the market would suggest a lower price — a $40 or $50,” Spears said. “In the range of that. Not $70.”

Richard Spears, vice president of Spears and Associates consulting firm.

Goldman pins the forecast on increasing demand in China, a notoriously difficult market to predict because of a lack of reliable statistics. It is the same reason for the basis for their prediction last year that oil may hit $200. Although predicting this market is difficult, and few with the notable exception of Ed Morse at Lehman Brothers (my old firm) predicted the fall in oil’s price last year, Goldman still seems a bit far out ahead of the pack. When fundamentals don’t support current oil prices, and industry leaders that benefit from high prices are perplexed with the high prices, Goldman’s call is bold.

Oil has finished higher during 16 of the last 20 trading sessions and seven straight as it continues to rise from lows in February. Although it looks set to close lower today as traders cash in on recent gains, the price has increased over 110% over the past four months. But the fundamental drivers over that time have not changed much: demand remains muted and despite a recent fall in US crude oil and gasoline stocks, supply has not dropped substantially to warrant the price change. Simply oil is trading on something other than fundamentals (read: supply and demand).

Oil has risen due to several factors. One, it has jumped with equity markets which have been on a tear lately, surging over 2.5% yesterday as some economic data – including manufacturing reports showing that China and India output has improved – hint that the worse of the economic crisis may be over. Traders believe that greater economic activity should raise demand for oil and therefore its price. Two, oil has also risen as the value of the US dollar continues to fall (As oil is denominated in dollars in the international market, this has kept the oil price constant with other currencies). Three, investors may also be plowing into commodities as they are concerned about potential inflation as governments spend more to stimulate the economy. (Commodities are often a place for refuge to protect against inflation.)

There are two likely short-come outcomes. …..click here to read more