Much Ado About OPEC: Russia Is The True Wildcard, And Just Got Even More Powerful

Tyler Durden's picture

Today the world is transfixed with the dissolution of OPEC courtesy of yet another polarizing response to the most recent set of US MENA policies, with Saudi siding with the US (it has no choice in this: recent violent developments in the MENA region means Saudi Arabia is now even firmer attech to Uncle Sam's armed sleeve), yet the truth is that this is a completely non-event from a pure crude supply/demand perspective. Why? Because the real marginal supplier, in light of OPEC's secular decline in output, has been Russia for a long time. The Globe and Mail's Jeff Rubin explains: "Other than a gratuitous gesture to their concerns, any announced OPEC production increase isn’t going to pump more gasoline into U.S. gas tanks or, for that matter, the tanks of motorists anywhere in the OECD... Khalid al Falih, chief executive officer of state-owned Saudi Aramco, recently warned in April that at the country’s current rate of growth in domestic oil consumption, Saudi Arabia would burn a staggering 8.3 million barrels a day of its own oil by 2028. That is almost its current level of production." In other words, Saudi would promote unilateral actions regardless of the other 6 countries that just isolated the Middle East country, simply to keep its population happy with ever greater bribes, but also due to the expansion of its own economy (as transient as it may be). The real story is here: "Russia, the one country actually capable of producing 10 million barrels a day, isn’t even at the table at the OPEC meeting. And it’s been Russia that has been adding the most to world exports over the better part of the last decade as OPEC exports have faltered." In other words, now that the former cartel is finished, and supply bickering and uncertainty portend extreme crude volatility, Russia's role in the energy output scene, and thus in political in general, is about to become that much more important.

More from The Globe and Mail:

OPEC production remains well below its level prior to the Libyan civil war, and what ever modest increase its kingpin producer, Saudi Arabia, can muster will be more than consumed by that country’s own soaring demand for power from air conditioners in the approaching peak power summer season.

The only thing OECD oil consumers can count on growing in Saudi Arabia and the rest of OPEC is the cartel’s insatiable thirst for its own oil. With the price of gasoline  less than bottled water, Saudi Arabia already burns three million barrels a day with demand claiming a third of its total oil production.

Ridiculously cheap gasoline and even cheaper diesel-fuelled electric power are one of the key tangible benefits the Saudi population, outside, of course the extended royal family, get to benefit from the country’s massive oil wealth. In a period of unprecedented and growing social unrest in the region, those oil subsidies are unlikely to be withdrawn any time soon.

As for why it behooves the US to make a very close friend out of Putin ASAP:

Oil production in Russia, the world’s largest producer, rose to a near post-Soviet high of 10.26 million barrels a day in May. Unlike Saudi Arabia, which has been hard pressed to maintain even a nine million barrel a day production level, Russian production has been north of ten million barrels a day since September 2009.

Prime Minister Vladimir Putin has made it a national priority to maintain Russian oil production at over ten million barrels a day for the next decade. Let’s hope Russian oil giants like OAO Rosneft are up to the task.

And since the global geopolitical-energy axis just got redefined, expect Russian interests in the broader European area to become that much more well bid by the Kremlin, now that it has eliminated Obama's protest.

Slowly, gradually, the transition to the new reserve currency pair, the CNY-RUB, is becoming effectuated and more palpable with every passing day.

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BobPaulson's picture

They're the only ones with excess capacity to trade...for now. They have to balance the need for the trade revenue with the strategic advantage of hoarding.

BobPaulson's picture

For sure (I'm a Albertan who normally works there in heavy oil related research). The production capacity of Canadian tarsands are highly overstated IMO. The reserves are massive and will never run out but it's like ripping up the pavement on the road and turning it into gasoline. EROEI is the bottleneck.

I'm not saying they won't try to maximize this, I'm just saying it aint 10MMB/d.

oddjob's picture

 EROEI is the bottleneck.

Just 'Candu' it.

Flakmeister's picture

Been looked at, fresh water is a serious issue. Also the NG is used to hydrogenate the bitumen....

trav7777's picture

mosely-claven says "ionic liquids" will make this all go away

falak pema's picture

he carry big crystal bowl. He be big sooth sayer crystal ball gazer of noble tribe of chem eng big ben yin yang chin chow. Him hate peak oil and all limit to mother earth. 

Monedas's picture

Do they use some of the refined product to soften up tar sands or do they just steam it out ? Just curious ? Monedas 2011 A wasted mind is a terrible thing ! School vouchers now !

Urban Redneck's picture

 

I hope the fucking pipeline leaks all the way to the Gulf Coast, it would be karmic retribution to the tree-huggers who prevent the construction of new refineries in the US

(like perhaps on the northern border where the oil comes in, which in addition to reducing costs, environmental risks, and providing potential feed stocks for the dying manufacturing industry, it would reduce the strategic risk of petroleum shocks due to the Gulf coast refinery concentration.)

 

Flakmeister's picture

Why don't you investigate the refining capacity (and what type of crude they can handle) instead of number of refiners...

In 1982 (the earliest data provided), the United States operate 301 refineries with a combined capacity of 17.9 million barrels of crude oil each calendar day. In 2010, there were 149 operable U.S. refineries with a combined capacity of 17.6 million barrels per calendar day

 

taken from:

http://www.nacsonline.com/NACS/Resources/campaigns/GasPrices_2011/Documents/StatisticsDefinitions.pdf

Urban Redneck's picture

Because my point was about building a new refinery where it would do the most good. 

Pumping oil from Canada to the Gulf Coast in order to utilize existing refineries makes no rational sense.

Flakmeister's picture

Why? Where would you build a refinery that would make rational sense? The finished product still has to be distributed...Refineries gain (to a point) by scaling in size, also, it is cheaper to upgrade/expand than to go greenfield...

Urban Redneck's picture

Build the thing somewhere between the Dakotas and Detroit, the volume of finished product is less than the volume of raw product, and the distance is substantially less (see the post I just did below).  I don't buy the cheaper cost model when the pipeline alone is $7B and its maximum flow is 700kbpd, with the pipeline, unlike a refinery, you can't scale, you can only build another pipeline if you need more capacity.  Plus, when the next Hurricane Katrina or whatever hits the 700kbpd capacity on the coast, there is a huge cost to bring the refinery back on line, and a an even bigger cost to the American consumer through higher oil prices.  If the crude pipeline leaks, it could be anywhere in the breadbacket of America and the entire pipeline must be taken OFFLINE to fix the situation.  With a refinery on the Canadian border finished product can be shipped by pipeline, rail or barge depending on the location of the refinery.  Rerouting in the event of a pipeline shutdown is a simpler matter and more unlikely to be necessary since the pipeline from the oilfield to the refinery is significantly shorter. 

Flakmeister's picture

Actually the volume of finished product is larger... hence the term "refinery gains"...

Sounds good until you realize that 700 kbpd is an enormous refinery and that building it far from existing industrial infrastructure is not cheap...plus the fact that the existing refining capacity is not being exercised, sounds like a surefire way to loose billions....

 

Urban Redneck's picture

The refinery doesn't need to be far from existing industrial infrastructure and there is lot of industrial infrastructure that is a lot closer than 2700km.  The raw material is basically worthless until it is refined, so if the pipeline goes down for repair  (the chances of which increase with each length and join) or the refinery is shut down due to hurricane season activity then the refinery, pipeline operator & US consumer is SOL.

zuuuueri's picture

You realize that 700kbpd of refinery capacity would cost something in the 20-30 billion range? 7bn for a pipeline to bring the stuff to existing refineries (which have excess capacity anyway) and even several billions on upgrades at existing refineries is a lot cheaper than building a new one.

There is also a huge difference between older refineries that have not had capital improvements  and those with newer better equipment. This is one sector where investment in upgrades and improvements makes a big difference. A lot of refining capacity has been shut down worldwide over the past couple decades because it's simply too inefficient to remain profitable. There are plenty of 30-50 kbpd refineries, even in a city nearby (wherevery one happens to live) which say 20 years ago were operating full tilt, but today would lose money. It's a better investment to put the money into expanding capacity at a facility that's been kept up to date.. and so far, transport costs have not tilted the equation back in favor of more, smaller, facilities.

Also, if there was a real will (and funding) to do it, a pipeline bringing canadian crude to the gulf could be complete and pushing product in 2 years. A major refinery in the hundreds of kpbd is a ten year project _before_ overruns and delays. 

As for 'cant scale', scaling up capacity in a pipeline or a refinery both come down to capital investment. You can't scale up capacity in a refinery without building and installing equipment, infrastructure, etc, either. With a pipeline, you already have the toughest problem - obtaining the right of way - solved, and yes pipelines, like rail lines, are occasionally upgraded. Depending on what goes through them, the schedule for replacement of pipe and equipment along the pipeline can be quite aggressive (corrosion is a major problem with crude, sulfur content and dissolved gases play a big role there.. the canadian syncrude is probably better than a lot of real crude in this respect) and a pipeline operator is more or less always slowly rebuilding his pipeline... kind of like painting a big ship. you dont ever stop and paint it... you just have a couple guys who are always ina continuous process of repainting it.. 

 

Urban Redneck's picture

20-30 billion for 700kbpd in US refining capacity is outrageous - no wonder they call it the RUST BELT.  I could build 4 separate brand new refineries (using US E&D firms and Asia steel) in Africa for less than half that amount. 

I also don't think any 2700km pipeline in the US could be built in 2 years- it will take more than two years just to resolve the litigation (both expropriation and environmental).  At least with a refinery in Duluth the bulk of the much shorter pipeline could be run along the US-Canada border where the State's expropriation case is strengthened by the State's duties for border security.

Overruns and delays are likely in either scenario.

The whole point of building a new refinery would be to eliminate (90%) of the $7B cost of the pipeline, reduce refining concentration risk along the Gulf coast, and limit the environmental risk to a much smaller geographic area.  There is also the more fundamental wisdom of trying to defy the laws of physics- the run from the Canadian border to the Gulf Coast is all downhill, but the distribution of the refined product back across the American continent is basically all uphill from the existing refineries they want to expand (basically at sea level).

   

zuuuueri's picture

even if you could build such refineries in africa for that amount, here you are proposing that texas is too far away from this oil, but africa is not? does not compute.. 

Besides, it would for a lot of reasons be easier to build such a facility in an industrialized place with cheap educated labor and some infrastructure. in africa you'd have to build ports and roads and settle a few civil wars before you could ever build your refinery.. 

The closest thing to what you might be imagining is the jamnagar refinery in india. its humongous, about 600kpbd, it was completed in an amazingly short amount of time (but brought online in stages, so it reached full capacity about 10 years after the plan began) and cost something like 7 billion US. It's only been oeprating anywhere near capacity for a few years, so it is hard to say how many corners were cut or what the ROI will be like in a few years as maintenance costs change, but for now, it is probably the best example of what you are talking about. As a direct contrast, consider the heavy sour refinery that the saudis have been trying to build for years. The project's delivery date has been pushed into the 2020's and the cost is north od 20 billion, all the most expensive western companies building the thing and it just keeps slipping into the future and costing more without every getting anywhere. It is expected to be of comparable mega-capacity to your 700kpbd number, a little higher. That's 2000 miles away from the indian refinery and probably even a lot of the laborers are imported from india ;) 

As for pipeline construction speeds, yes, clearing right of way is the biggest issue. From the engineering perspective, with enough men and machinery (and if you really mean business you hire everyone out there) the nice thing about sucha project s that you can build almost all of it in parallel. A refinery has to be built in the right order, just the way the thing works. If you have twenty teams building a mile of pipeline a week each, yes, in 2 years you have your pipeline finished with time to spare.

 

Urban Redneck's picture

I am not suggesting building in Africa, I'm suggesting Duluth, MN. 

I was suggesting that there is some extremely uncompetitive cost component in the US if 700k costs 20-30B.  The costs for Africa were simply as a comparison, the specific costs for one of our current clients of the port and related basic infrastructure works and the first 100k of capacity comes to roughly USD 2.2B and the projection is about 1B for the second 100k. Settling the civil war is a nice to have, not a core requirement, and has already been priced in.  On the E&D side either you pay for quality work upfront, or you pay even more for financing, unless you have an unsavory relationship with certain politicians or bankers.

I am not familiar with the jamnagar refinery, but the last E&D package for an oil refinery I saw out of India was a feasibility and preliminary design for 150k capacity in SE Asia and I was NOT impressed.  However, one of the guys I sometimes work with offered to have his old firm do a redesign and serve as project manager if the refinery found financing, as far as I know it hasn't yet though.  Perhaps they shouldn't have skimped on the design bill. 

falak pema's picture

Upgrading existing refineries is much cheaper than making new one...I should know I designed them and saw them being built for twenty years! In twenty different countries.

Urban Redneck's picture

"Upgrading existing refineries is much cheaper than making new one" in the funny math world of ceteris paribus economics, but not necessarily here. 

Transporting any material costs money, the further a given amount of material is transported, the greater the cost both in dollars and energy consumed. Given that the target market is the domestic USA, the project moves the raw materials literally all the way from one border to the far border, just so that the value added product can be moved back closer to where it came from, this increases per barrel operating costs over time and will eventually eclipse the $1-2B base footprint cost of a new refinery, especially on a long enough timeline.

The pipeline must be constructed before it is operated, so land the must be acquired and then all the normal project E&D &C must be paid for and done, in the US there is huge litgation risk and delay with that big a land grab. Time is money.

My combined refineries and pipelines are under 20 and none of them were in the first world, but even looking at the cursory information in the article, the upfront numbers don't make sense.  The MAXIMUM flow rate of the pipeline is 700 kbpd.  If you want more flow you need to construct ANOTHER 2700km pipeline.  For less than $7B that the pipeline will cost you can a refinery to process the whole 700kbpd right in cheap ND land or somewhere near wherever the proposed pipeline enters the US, you can add in the 700kbpd Gulf capacity expansion cost as a buffer.   

falak pema's picture

My comments referred to revamping developed economies with existing infrastructure like USA and EU; where refineries are located either at consumer locations or at shipping points where it comes into the continental shelf. Not where nothing exists like in remote China etc. 

Urban Redneck's picture

How about Duluth, MN?  There is waterway access and a little over 200m to the Canadian border- how many kbpd capacity could be built for $7B?  My expience is only in the 100-300kbpd size but in that size in a third world shithole you can generally do 100kbpd per $1B USD plus $1B USD fixed.  Of course I haven't readjusted for the dollar since QE2 kicked off.  Also the article doesn't specify that they plan on pumping the max 700kpbd through the pipeline, but my gut is telling me in addition to strategically safer, it's cheaper to build up north even before it starts operating or being delayed by both emminent domain and environmental lawsuits.   

falak pema's picture

You would be one of the few to risk his neck in refining these days...Unless you had backing of partners with access to oil and to hot money...

Urban Redneck's picture

Access to the oil is a lot harder to find than willing investors, but apparently there are some guys in Canada...  However, I prefer third world regulatory hurdles, since they can usually be reasoned with, unlike the US where the most effective solution seems to be to buy some congressmen and get all the mahor law firms on retainer.  But I need to get up in six hours-

Johnny Lawrence's picture

In Soviet Russia, oil produces you.

BobPaulson's picture

Cross link to the WWII Russia post yesterday: It was all about the oil...again (or I guess this case, before). June 6 was highly motivated by the desire to beat the Russians to Berlin. Their version of Manifest Destiny extents to about Lisbon.

Monedas's picture

We took our time ! We played the Russians and the Germans well ! Look at the KIA figures ! We care for our soldiers, sailors and airmen ! Monedas 2011 God Bless Ike and Churchill and all our men in harms way !

cougar_w's picture

What Putin is waiting for is peak oil to materialize as a Western concern. Russia has no real industrial base anymore, and little use for the stuff domestically. Putin will sit back while the MENA suppliers commit seppuku, then show up as the global oil Czar with the last proven and productive reserves. Having a complacent populace and centralized control run under the RBN, Russia will be in position to trickle out a life-saving 8M BPD long after Gwar is in terminal decline.

Russia might even end up with the last modern mechanized military, or at least the last military with any fuel.

The board is set, and the pieces are in motion. The rules are as old as the world. Someone is going to win but winning has nothing to do with making the first move, only the last.

BobPaulson's picture

That's a ways off. The US could restrict fossil fuels to only agriculture and military and stay fueled for a long time. It wouldn't be fun for the soccer moms in the exurbs though. Can you say "Cuba"?

cougar_w's picture

The US could restrict fossil fuels to only agriculture and military

How, exactly? And if you were a politician how would you break the news to the folks back home who intended to make use of those millions of miles of freeways (built at great public expense) to get to work?

And what about the airline industry, and the auto industry, and the warehouse-on-wheels industries, and GDP, and trade balances? Those aren't going to evaporate in the night because some central planner decides to fuel Big Ag and Big Def.

You can say it, but you can't make it happen. When this shit hits that fan, there will be no answers.

hedgeless_horseman's picture

How, exactly?

Ever read One Second After?  An EMP would make one hell of a false flag, and could effectively restrict fossil fuel usage in an instant.

BobPaulson's picture

An example of what you can do in a panic, even when people are distant from the problem, is the Canadian war mobilization in WWII from 1939-1942 when the U.S. was not in and the invasion of mother England was a terrifying and realistic prospect (I choose this story because of second hand knowledge of it, not because it's the best example). When my parents and grandparents talk about that time, it is TOTALLY different from anything I have experienced. The commitment to the war effort was absolute and unconditional even though the prospect of Canada being invaded was nil. Almost all the production capacity was going on boats to the UK and Russia and a weak sparsely populated hinterland constructed the world's 4th biggest merchant navy. Everybody rationed everything, and people who wasted resources were subjected to massive peer pressure not to do so.

It is not at all unconceivable to imagine people mobilizing and making HUGE sacrifices if they are woken up out of their consumerist stupor. For me that is one thing that keeps me hopeful, that if people figure out we are in trouble, they are capable of acting.

Malachi Constant's picture

How, exactly?

Like this: "In the interest of public safety and national security, all civilians are hereby prohibited from driving any gas-propelled vehicle until further notice." Or, as they used to open all depressing announcements in the USSR, "In compliance with workers' wishes..." Only terrorists can disagree.

topcallingtroll's picture

Interesting take on russia.

Our military is working on plasma laser powered robots that can obtain energy from any organic carbon source, even dead soldiers and their uniforms!

Plus we still got coal to oil and natural gas and some petroleum.

I am sure we will use it for important stuff too, like a mechanized army ( sarc)

hedgeless_horseman's picture
We don't want to fight but by Jingo if we do

We've got the ships, we've got the men, we've got the money too
We've fought the Bear before, and while we're Britons true
The Russians shall not have [us by the balls because of BTUs]

From: http://en.wikipedia.org/wiki/Jingoism

equity_momo's picture

Very astute observation cougar but the industrialized age will end how it began : with the major threat(s) to US/UK global dominance being taken down several notches , a la Germany and Russia circa turn of the 20th century.   That means the spooks have some shit stirring to do between China and Russia.

cougar_w's picture

They will try, probably, but the spooks are no longer in the driver seat. That was a temporary situation brought on while super powers were too afraid to cross one another.

That fear is all but gone.

Real bullets always end the palace kabuki play of espionage. And then whoever can project power the furthest and fastest, wins. Genghis Khan and Napoleon and Julius Caesar are all laughing at us from their graves.

equity_momo's picture

Well the spooks im referring to were actually high powered diplomats in the British monarchy and ruling elite pre WW1.   Im not talking about the mopes that run around with badges.  You understand how and why WW1 came about im assuming - there is a liklihood the Western Arc will once again try to unsettle the rising threat of any nation becomming dominant - china and russia.

Bicycle Repairman's picture

"Russia might even end up with the last modern mechanized military, or at least the last military with any fuel."

LOL.  Nice use of cold war talking points.  That all you got?

cougar_w's picture

I'm not debating anyone. It's no real concern of mine, and the discussion is only vaguely interesting.

samsara's picture

This was supposed to go here...

 

You are right.  Look  at a few New Year's eves ago.  See the kind of pressure they can exert.  5 below  and  they cut off the nat gas....

The future is going to be very exciting...

ZeroPower's picture

The RUB is still way too illiquid to actually be a reserve currency, but the recent interest in RUB denominated bonds (and hello developing CIS/CEE region) make Russia quite an attractive space for FDI.

And corruption, well... toss up between Africa or Russia being the worst case here.

BobPaulson's picture

If I were investing in a concept, I'd be long corruption. It's in a global bull right now.

One of my biggest fears is if the high-level mega-kleptocracy of the US were to translate to the personal level in the same way we see in third world countries where people have given up on society, it would/will make life very tedious and annoying (I'm saying that as somebody living in Mexico here).

Self enforcing law and order (not the jack-boot enforced kind, but the peer pressure enforced kind) is an incredible lubricant to society. Just simple trust makes SOOOO many things much easier day to day.

Bay of Pigs's picture

"I'm long corruption"...

Hahaha...nice one Bob.

GoinFawr's picture

Excellent points Bob. "Money makes the world go around" is really/has always been, at its core, "Trust makes the world go around".

Oh regional Indian's picture

Well said. Very insight-ful.
ORI

topcallingtroll's picture

Sadly it is moving to an individual level.

When you try to comply with a complex regulatory structure at great cost there comes a point where people throw in the towel and just start looking for ways to ignore the law.

As this habit becomes more engrained it generalizes to all business and social activities eventually.

Healthcare is a good example. Also anyone who runs a small business is knowingly or unknowingly violating several laws to remain successful.

When law and regulations start harming your way of making a living it eventually is ignored and deep cynicism and self interest begin to rule all activities on a personal level.