Foreign Policy Blogs

Russia's energy quest moves to Africa

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 of the domestic producers and Medvedev’s international investment strategy, Deputy Prime Minister Igor Sechin RUSSIA-CABINET/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.



    David Abraham

    David S Abraham has expertise in the analysis of geopolitical and economic risk as well in energy issues. At the White House Office of Management and Budget, his work included overseeing natural resource and foreign assistance programs, and serving on the interagency trade policy committee. In his previous role as a sovereign risk analyst with Lehman Brothers, subsequently, Barclays Capital, he advised the firm on geopolitical and economic risks in developing countries. He has also consulted for a variety of organizations including the United Nations Support Facility for Indonesian Recovery, RBS Sempra Commodities, ClearWater Initiative and a small German consultancy. David earned degrees from Boston College and The Fletcher School at Tufts University and proudly served as a Peace Corps Volunteer. His written work has appeared in a variety of publications, most recently in The New York Times, The Providence Journal, and He speaks Lithuanian and is a Term Member at the Council on Foreign Relations.

    Area of Focus
    Geopolitics; Economic Risk; Energy Issues