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:
Despite the weakened condition of the domestic producers and Medvedev’s international investment strategy, Deputy Prime Minister Igor Sechin and Chairman of Rosneft boasted last week that Russian firms are well-positioned to develop the country’s vast resource base on their own. He claims “they have sufficient experience and technical capacities,” adding that “the system of production-sharing agreements will not have such importance in the future.” (Over the past decade and a half foreign companies often accessed Russia’s resources by signing production sharing agreements with the Russian government that allowed the firms to recoup all of their investment before they began sharing oil revenue with the government.)
However, Russian subsoil energy agency, Rosendra, reported that 90% of new auctions held during the first quarter of the year failed because of a lack of interest due to limited state and private financing. This lack of domestic activity highlights Russia’s difficulty in exploiting its resources without international assistance.
Russia’s domestic and international ambitions are bound by the lack of funds and a tight global credit market. With commodity prices low, ambitions will need to be scaled back. But as prices rise, so will the country’s ability to follow through.
