Day: December 4, 2017

Oil, Gas, China and Rum. Interview with Rhod MacKenzie

To learn more about Rhod’s company click here.

 

Mark: Hey, folks let’s learn something new about the oil and gas industry.

All right. It’s been awhile, but we have Rhod MacKenzie with Rusmininfo back on the show.

How are you doing today, Rhod?

Rhod:I’m good, Mark. And you?

Mark: I’m doing good.  It’s — you and I both been busy and then, we had all these storms come through and it’s just been awhile, but you know one of the things I want to talk about it if anybody’s followed us for any length of time is you and I got this oil price thing pretty darn close didn’t we?

Rhod: Well, we last spoke in December and oil was $51 and the doomsayers were saying it will go to $30 or even down to $20. Yeah, here we are sitting today and Brent’s at $58.83, WTI is at $52.05, so I think we’ve pretty much called it as it would be over $50 for the foreseeable future.

Mark: Yeah. And so, we’re getting ready to do our predictions for 2018 next month which is just a week or so away. But, we see that the price is probably going to stay around there regardless of what happens regardless of what OPEC does regardless what the United States does.

Now, the only thing is if for some reason hostilities break out into actual conflict in the Middle East, you’ll have a spike in oil prices but it’ll be a temporary spike. You know the U.S. is producing a ton of crude and gas, Russia is producing a ton of crude and gas regardless of the sanctions, both countries are exporting and I think that we’re seeing and I’ve said this before, this is the beginning of the destabilization of OPEC.

You know where Russia and the U.S. and other large producing countries once they start exporting, OPEC has less and less control over global prices.

Rhod: Well, I’d like to sort of disagree with you slightly there.

Mark: Okay.

Rhod: We recently in Russia had a visit from the king of Saudi Arabia.

Mark: That’s right.

Rhod: He went to Riyadh, the King actually came into Russia with a thousand people in four jumbo jets. He took over every five-star hotel within a 10-minute radius of the center of Moscow and they even changed the deco for him.

Anyway, what is culminating this has happened already over the last six to nine months is apart from OPEC, you know, OPEC and Russia is working hand in hand as they’re the two biggest producers of oil, Russia and Saudi Arabia to actually stabilize. As we talked last December, less is more. If you produce less, you get more money because the price stabilizes.

Russia is now working as they say hand and glove with Saudi Arabia and the other members of OPEC drawing in other people who are not part of OPED into making sure that the oil price stabilizes. Now, that’s good for everybody.

Mark: Right.

Rhod: For producers for consumers because there’s a level of stability. And I think that’s going to continue.

Mark: Yeah. So, I agree with you and this is funny because you and I usually agree upon everything. And one of the cool things about both — both of the countries we live in is it’s actually really nice you can disagree and still be friends.

So, one of the things that we saw coming when Russia started working with OPEC, you know, that’s something from United States’ point of view that from an economic point of view we shouldn’t want that to happen because now you’re looking at two biggest producers in the world partnering together which then gives them leverage over global prices.

And I’ve been saying for years is that we need to revamp our efforts to  work on our relationships with Russia because I as an American we rather Russia and the US be partners as far as oil prices than Russia and Saudi Arabia or Russia and Saudi Aramco. So, you know it’s where it is because of our politics and it’s — but I just don’t think it’s best for the U.S. And, you know hopefully in the future as we get things stabilized hopefully are relationships with — between us and Russia can improve because the Russian people are great people.

And it’s one of the things I’ve run into in one of our conferences recently is we had somebody — had a couple of delegates from Russia and they were talking about the differences in what the news reports in the relationships between us and Russia and what the Russian people believe, right? The Russian people at this point and correct me if I’m wrong, a lot of them are kind of worried that the United States the people in United States don’t like Russia and that’s not true at all, but that’s been fed by our media not by actual real people and real event.

Rhod: That’s correct. I mean I don’t run into many Americans in Ufa, but I run into quite a few on my trips up to Moscow. And, yeah, I mean the whole attitude has been ramped up by the media. I mean you might find this ironically funny, but Rex Tillerson who’s the Secretary of State when was he was CEO of ExxonMobil in 2003 received the Order of Friendship medal from Russia because of his contributions to the friendly relationship between the U.S. and Russia.

So, hopefully some sort of reset can happen. We would certainly welcome it and the Russian people would certainly not demonize and we’ll go into that later in the program and I’ll show you some when we get to the alcohol section of it.

Mark: The alcohol section. You know it’s us, we have an alcohol section which fits in perfectly, right? So, what else is going on?

Rhod: Well, basically Russia and the sanctions have pretty much failed.

Mark: Yeah, I agreed a hundred percent. We just need to remove what’s left, but, yeah, a hundred percent they haven’t done anything.

Rhod: I mean it’s record gas exports to Europe and despite everything Russia share of the market in Europe has gone from $33 to $37 this year and will continue. Russia has displaced Saudi Arabia as the largest exporter of oil into China and that’s only going to continue.

And also, from a perspective that might be slightly worrying is Russia and China are now trading oil in one.

Mark: Yeah. I’m a little worried about that too.

Rhod: Yeah. Well, obviously that’s a huge amount I mean the volume of trade is signed then the oil deal over a period of 20 years is $400 billion. That $400 billion dollars that are not going to be in dollars.

Mark: Right.

Rhod: So — plus Russia and China are two of the largest countries with gold reserves and they’re actually backing this trade with gold. So, if Russia sells China oil, it gets physical gold back in return, not pieces of paper. So, so that’s quite an interesting concept of what will go forward. Iran is now trading if — with China again in its own currency and that was only going to continue.

Mark: Yeah. So, what do you think about the LNG exports from the U.S.? We’re starting to enter the European market, is that just such a small percentage that it doesn’t really show up…?

Rhod: Very small.

Mark: Yeah.

Rhod: Very small. Mark, basically you’re exporting a little to Lithuania and a small amount to Poland. But, basically you cannot compete in price with pipeline gap.

Mark: Right. I know that.

Rhod:  It’s just too expensive. So, basically it’s a thing that Americans won’t make any money. I mean the real place to sell LNG is the Asia Pacific.

Mark: Yeah, Asia Pacific, of course.

Rhod: Yeah. That’s the other biggest consumers of LNG because they don’t have a lot of their own gas.

Mark: Right.

Rhod: So, Japan, Thailand, other parts of Indochina, etc. Those are the places that are premium markets for LNG which is why Yamal which is the biggest project in Russian history which is going to cost about $35 billion in its three different phases is going to stop exporting almost totally its LNG to Japan to South Korea and to China.

Mark: Hey, Rhod let me stop you right here because if this is the first time anybody is watching us, let’s talk a little bit about what you do. You don’t sound like you’re Russian, so it sounds like you’re from another part of the world.

Rhod: Yeah. I am from another part of the world a place called Scotland.

Mark: Okay.

Rhod: But, I’ve been in Russia for 26 years for the last 13 of them I’ve been in a city in the Ural Mountains, an oil and gas center called Ufa which is spelt the way it sounds which is U-F-A.

Mark: Yeah.

Rhod: In fact, it’s the only city in the world with airline called is exactly — has exactly the same number of letters in it as the name of the city.

Mark: That makes it convenient even when you’ve been drinking you can still get home. And so, you have a company called Rusmininfo, what do y’all do?

Rhod: Basically, what we do is we gather from over 2,000 different Russian language sources from a local regional and national level in Russian concerning the oil and gas sector. We translate it from Russian into English and we fly that out to our clients. It’s so categorized, so if you’re interested in drilling or seismic surveys or petrochemicals, you only get the news that you actually require, nothing more nothing less.

We have an archive going back 10 years, so if you want to do a research paper on what has been happening in Russia. But not only Russia, we cover as Azerbaijan, we cover Uzbekistan, we cover Kazakhstan, and Turkmenistan which is, again, Turkmenistan has one of the largest gas reserves in the world .

Mark: Yeah. And so, other companies if they want to do business in Russia, you actually help them figure out what projects are being started, where they are, what’s the budgets, what’s the scope of the project. So, you basically hand them the data or the information on these large projects all over Russia?

Rhod: That’s correct. I mean some of my clients for example one of my most famous and well-known clients within oil and gas industry is Wood MacKenzie.  They take a fair bit of my data and put it into all their high- priced reports.

Mark: Yeah. We know Wood Mac very well. So, yeah, if you’re a company out there and you’re looking to do business in Russia, Rhod’s company helps you shortcuts and figure out where is the best use of your time and money so you can actually go in make the deals and start making some money and start actually doing some good work out there.

All right. So, I’m sorry, anything else?

Rhod: Yeah. Basically, it’s any part of the sector. I mean my sort of catchphrase is we cover everything from finding it to refining it.

Mark: Yeah. Yeah. So, any project any company out there that’s looking to do business in Russia, reach out to Rhod. He’s a great guy.

Let’s go back. All right. So, we’re – we’re talking about this Asia Pacific LNG market. Is Russia’s starting to look at that market?  Are they starting to look to maybe export LNG and compete?

Rhod: Well, one of the major projects that was started in the 90’s and already shipped 10 million tons of LNG is on Sakhalin which is just above Japan. And Japan and China are the two biggest recipients of that. But, this project of LNG in Yamal which is one of the world’s largest gas fields is a joint venture between a Russian company called Novatek, Total, and the Chinese National Oil Corporation.

As I mentioned earlier, the total investment into it is more than $30 billion.

Mark: I didn’t even know – I didn’t even know that was even there. Wow, that’s really cool. So, they were actually kind of first to the Asia Pacific LNG market?

Rhod: Yeah.

Mark: Yeah.

Rhod: They compete directly with the Australians who obviously are a major LNG producer in that region. But Sakhalin has been going since I think 2003.

Mark: Yeah. It was interesting to watch what happen when Japan had their – tsunami and the country as a whole start to look somewhere else other than nuclear. And the thing it’s interesting to me about that is I’ve seen the data, nuclear is one of the safest ways to generate electricity there is, but when public perception runs the wrong way, then you have a shift in what you want to use to power your country and that’s where LNG is fallen in is is Asia Pacific their populations are coming out of an agriculture society, so they need more electricity. And at the same time there’s public sentiment against nuclear which is strange because it’s so safe, but it’s — it’s the way the world runs.

Rhod: Well, I think you’re correct that is relatively safe as long as you don’t build it in an earthquake zone.

Mark: Yeah. Right. Yeah.

Rhod: But, you are absolutely correct. One of the reasons that Gazprom’s exports to Europe are growing is the fact that Germany closed down its nuclear power stations.

Mark: Yeah. They’re inner wind program no matter what you read has been a dismal failure. [Laughs] And so – and, yeah, the only people that really are benefiting — the German people are suffering because their price of electricity is going up to the point that it’s driving out manufacturing which is Germany’s bread and butter you know.

Rhod: Yeah.

Mark: And it just benefits countries like Russia and everybody else that sells them gas. And the funny thing is they’ve actually increased coal-fired plants to fill in the gaps from the renewables which actually made CO2 emissions worst, but the public doesn’t know that.

Rhod: Yeah. I mean we’re in the process of finishing off by one of my major clients, Nord Stream the Nord Stream II pipeline which will actually double the amount of gas that goes under the North under the Baltic Sea into Germany and then to OPAL which is another interconnecting pipeline that then ships black gas down to Austria which can then be routed to Slovakia to the Czech Republic to the many southern republics.

Plus, there’s another pipeline that is going across the Black Sea and that’s called Turkish Stream and that basically will be able to gasify not only Turkey but with extra threads will goes into the Baltic States.

Mark: Yeah. That infrastructure is so important for the financial well-being of companies that export gas. It’s — people don’t realize how much pipelines are in this world. I can’t remember what the stat is, but I know here in the just in the United States if you took all the pipelines that are in the ground and connect them, you’d  go around the earth like 17 times you know and that’s just here. And that’s one of the constraints globally.

So, there’s other parts of the world have huge oil and gas fields that are recoverable, but they don’t have to infrastructure such as pipelines to move it around, so it ends up being cheaper for them to import it even though they have their own. You see that happen in Mexico.

Rhod: Yeah.

Mark: Yeah.

Rhod: Yeah. That’s correct. I mean Transneft which means oil transport company translated into English. Neft is the Russian word for oil, right? So, they have 68,000 kilometers of oil pipelines.

Mark: Yeah. That’s crazy. I mean that’s — and the funny thing is the general public has no idea it’s even exist because most of it is underground. It’s like an interstate system underground to move goods around.

Rhod: Yeah. You’re absolutely correct.

Mark: Yeah.

Rhos: So, basically everything in Russia is getting better. Last couple of years have been tough, obviously the oil price going down, but this year the government benefitted by around $60 billion just by the oil price stabilization because they budgeted last year for 2017 oil at $45 if they took the mean average between the previous year of $40 and $50.

And, you know now they’re looking at it from a perspective of hang on a minute maybe $50 to $55 is going to be the mean level for the future.

Mark: Yeah. And I  think so too and you’re starting to see U.S. and European companies figure out that’s the new future and so, they have to learn how to be profitable in that world. And you can be, it’s just you can’t be ridiculously wasteful like you were when oil was $140 a barrel.

Rhod: Of course. I mean what you have to understand that once you take the initial investment in Russia into the infrastructure and putting things together the average extraction even at difficult fields as we call them here is between $10 and $15 dollars a barrel.

Now, compare that with the U.S. and where even the shale oil, etc, shale gas, they really need $50, $60 even $70 to actually make money because they’re so indebted. I mean they can’t afford to invest.

Mark: Yeah. It’s interesting we’re starting to see the business models start to change. So, you have the cost to get to the oil, but the other thing a lot people don’t realize there’s a cost to get it out of the ground. It’s called lift cost.

Rhod: Yeah.

Mark: Then, you have to transport it and what’s traditionally happened in the U.S. is that everybody did this on credit, everything from the small mom and pop operators to the largest ones, they would borrow money go do the work and then have to pay that money back with some interest and it was this machine that they were always trying to stay ahead of have enough money to pay my loan debt my bill for that month, but I have to make more money because I know I’m going to borrow more money.

And so, we’re starting to see companies move back toward a cash basis which just makes more fiscal sense, right? And there will be times where companies have to borrow money, but you don’t want to borrow money to keep your operations running so you can borrow more money and it just it’s, you know, that just doesn’t work well especially in the volatile market. So, a lot of companies unfortunately didn’t figure that out and they went out of business, people lost their jobs.

But, we’re starting to see companies move toward more cash basis which I think makes more sense. And I think it’s going to even out these peaks and valleys a little bit. They’ll — it’s still a commodity still a global commodity it’s still up and down, but if we can just level it out so it’s not as much that, just benefits everybody.

Rhod: Well, I think you’re absolutely correct. And what you have to understand this is the last two years of the volatility of the oil prices being in the $30s then the $40s and low in the $50s is investment into new deposits, the finding of new deposits went.

Now, as you aware as I’m aware, it’s six years seven years from finding it to getting out the ground and there’s a lot of expense goes into that. Now, major companies in the West have continued to cut back on investment into being able to find new fields etc focusing cost-cutting on economies of scale that they could get in their current activities. So, they’ve actually neglected the finding of new deposits and the finding of new oil.

That’s going to come back and haunt them and the actual oil price three four or five years down the line you know. Those companies will find that their lack of investment into finding new oil and it’s going to cost them.

Mark: Yeah. So, it’s called exploration is what we call it in the U.S. Exploration’s budget has shrunk dramatically over the last five years. But, you actually bring out a point that I wanted to tell our audience. A lot of people think that companies like Rosneft or Chevron has went out and looked everywhere in the world where there’s oil. They know they only look where they could drill in the next few years.

So, the reserves the amount of oil this planet has – it grows every year because we find new oil. It’s one of those misconceptions where people think that we know where all the oil is or the big companies and they don’t, they only it  — it only makes economic sense to spend that exploration money on what you’re going to drill in the immediate future.

The other thing that’s happened is new technologies, new geosciences, new sensors allow us to find oil where previously we couldn’t. So, the amount of oil and gas in this planet is it’s not technically unlimited, but you might as well think of it as unlimited. You know nobody worries about running out of sand to make glass or run out of iron ore to make steel. It’s the same way with oil and gas, we’re not going to run out of it. We’re going to quit using it, we’re going to hit peak demand before we hit peak supply.

So, just as a good point you brought that about the whole exploration part because a lot of people don’t understand that it’s all…

Rhod: Well, also many of your people who might be watching this don’t actually understand is Siberia which is just one part of Russia makes up 60% of it has a population of 11 million people and most of those are in six cities. The rest of it has been explored to a limited extent. That’s where some of the major gas fields are some of the major oil fields, but I say some of them Gazprom extracts and basically covers its extraction with new finds every single year. So, Gazprom produces let’s say 5 billion cubic meters of gas on its balance it’s already replace that by geological exploration and finding.

So, you have to understand is you imagine a country the size of America that only had a population of 7 million.

Mark: Yeah. It’s vast amounts of nothing. [Laughs] And I say nothing as far as I mean there’s like no people at such a sparse population.

Rhod: Oh, yeah. I mean basically the majority of the Russian population are my side of the Ural Mountains you know and you have cities like Tyumen,  Tomsk, Vladivostok, etc, but very few of them are any more than a million people. And you can go a thousand miles north and there’s not a lot there.

Mark: Yeah.

Rhod: Apart from millions and millions of trees millions and millions of reindeers and arctic foxes and leopards and all sorts of amazing wildlife. And I don’t know if any of your viewers are into salmon fishing, but forget Alaska, you can fish in rivers and – but you have to get there by helicopter.

Mark: That actually sounds like fun. So, since most of our viewers are in the oil and gas industry, most some hunt and fish. So, it’s actually one of the podcasts we’re working on is the oil and gas to outdoors podcast because this industry has so many people that appreciate nature and the outdoors.

So, Rhod we’re getting kind of close to winding this thing down, is there anything else you want to talk about that’s going on?

Rhod: I think we pretty much covered. Let’s do it again in a month when — let’s do a year and what maybe in sort of one month’s time? Talk about I look back on the year and I can actually pull up some highlights, we’ll do some stats etc.

But, one of the things you touched on really at the beginning is the attitude between Russians — the Russian people and towards Americans and stuff. Your average Russian supermarket is huge, it’s not quite like a Walmart, but it’s getting there, right? And they have everything from live fishing tanks and live crayfish that you can take home in a bag full of water that’s still alive, right?

We have all this stuff and we don’t have people complaining that these fish are being maltreated etc. But, but the alcohol that is available in Russian supermarkets, I can buy wine anywhere in the world from Chile for whatever. But, just to amuse you, I’ve just got a selection from my own collection of alcohol I like to present for my guests when they come around for either my summer party on my Christmas turkey planning.

Now, this one’s going to amuse you. I can buy this for $20.

Mark: You’re kidding me. $20?

Rhod: That’s one liter of Jack for $20.

Mark: That’s crazy. And what’s crazy is it’s made in my own country, it should be cheaper here than it is there.

Rhod: And not only that, I can buy about six different types of it.

Mark: Wow. You know what’s funny about Jack Daniels, we just came back from Tennessee which is where Jack Daniels is made. The county that it’s made in is a dry county, so the residents can’t drink the Jack Daniels that are made in their county. It’s crazy.

Rhod: It’s very crazy. I mean we get all sorts of stuff. Now, you’re in Texas and of course you’re on the Gulf of Mexico and close to Mexico and this is quite popular with young Russians.

Mark: A tequila.

Rhod: Yeah.

Mark: Yeah. That’s really cool. And so, Rhod you’re saying it’s popular with young Russians? So, tequila is not popular with older people? Something relatively new?

Rhod: No. Basically, young people have seen it in the movies and stuff and decided to have shots of it, where the older Russian prefers his vodka.

Mark: Yeah.

Rhod: Or they are huge malt whisky aficionados.

Mark: Yeah. It’s funny, so here the younger population drinks wine and spirits not beer. And so, the beer companies are suffering from the younger generation because they don’t drink beers. It’s funny how generations have differences in what they want to consume.

Rhod: Okay. Well, next when we do it, I will pull up a selection of craft beers because that’s one of the biggest growth here is the young people drink more and more beers and less and less spirits.

Mark: Yeah.

Rhod: Right? This is quite amusing because we even get stuff like this.

Mark: I don’t even know what that is.

Rhod: It’s an aged rum.

Mark: Where’s that from? What part of the world is that from?

Rhod: That’s from Cuba.

Mark: Cuba. Okay. That’s pretty cool.

Rhod: One of the things I will amuse you with is being a British guy as you know I enjoy gin and tonic which is what I’m drinking. The actually make gin.

Mark:Wow. That is cool.

Rhod: This is actually made in Russia and it’s called Barrister because I think they thought it sounded like it was something very Eng…

Mark: That’s funny. And gin, if I remember it, gin is made from juniper berries? So, it’s something different.

Rhod: Yes.

Mark: Yeah. All right. That’s cool. So, you and I were to talk about this off the mic. We have in our budget for 2018 actually make a trip to Russia. We don’t have it approved yet, so we don’t know if we’re going to do it. But, I have been wanting to go to Russia forever and it’s, you know, it’s one of the biggest oil and gas producers or actually I think if I  — so, today’s…

Rhod: The world’s biggest oil and gas producer.

Mark: Yeah. Today, it is the biggest of all and gas producer. So, it’s, you know, it’s been a dream of mine. It’s fun to have you on the show. Any of our listeners if you’re looking to do business in Russia or if you’re curious if it makes sense to do business in Russia, reach out to Rhod. He can help you walk through all that stuff.

Rhod, I know it’s evening over there, it’s Friday you’re getting to enjoy some time with your family. Thanks for coming on the show.

Rhod: Mark, always a pleasure. By the way, I do hope you’re not reported to the congressional committee on collusion with Russians to interfere in the oil and gas industry in the USA.

Mark: Oh, don’t even get me started on that. That’s our own media just doing stupid stuff and what unfortunately people start believing that sort of stuff and it turns into snowball thing it’s like have some common sense, right? No. But, I’m not testifying there. Actually, I wish I was, but they won’t have me there.

All right, Rhod. Once you get back we’re going to put a link to your website in the show notes so if people want to check out Rusmininfo just got show notes click on link you’ll see what he’s doing.

And, Rhod we will have you back in the show in about a month.

Rhod: Excellent. Thanks, Mark.

Mark: Yeah. So, folks I hope this helped. We will see you next time.