Russian Energy and U.S. Implications

by: Michael Fitzsimmons

Despite the peak oil skeptics, we once again today find oil hitting another record over $127/barrel. Natural gas has likewise been very strong and is trading around $11.40. Donald Trump said on CNBC Friday that the solution to high oil prices is to send a better negotiator to Saudi Arabia and "demand lower oil prices now." Trump sounds like a US Senator or Congressman.

As I exchanged emails with Joe Kernen about peak oil and how ridiculous Trump's blubberings were, T. Boone Pickens came to the rescue with very sound energy analysis and details of his huge wind farm in Texas. When asked about Trump's statements, Pickens chuckled a bit and said "Trump should stick with real estate". True that. As Pickens and peak oil believers realize, the only solution to the energy crisis is adoption of a comprehensive US oil policy. Here's a good start.

Lost in a lot of the oil analysis these days is Russia's role. Over the past 5 years or so, Russia has provided roughly 80% of non-OPEC oil production growth. This increase in Russia's oil production was just what the doctor ordered to match concurrent increased demand from China, India, the Middle East, and Russia itself.

That said, Russia's oil production peaked a few months ago and is now contracting - under the 10 million BPD average production rate of 2007. One can find multiple explanations for the decrease in Russian oil production: aging infrastructure, less Western oil company participation, high tax rates, or perhaps just Russian government officials asking themselves, 'why pump all out now when we can wait a year or two and get double the number of US dollars per barrel'. Or perhaps depletion rates are catching up with new production.

Realistically, the answer is probably a combination of all of the above. All that said, Russia has the world's 7th largest oil reserves at 80 billion barrels. Meanwhile, global warming is making Siberia and the Arctic ever more accessible to continued energy exploration and development. Russia will be a major energy player for many years to come.

One thing is for sure: the lack of a comprehensive energy policy in the US is playing right into Russia's hands. The same could be said about the Middle East. Our President and our politicians speak philosophically about how we are sending oil money to countries that want to attack us, yet their energy policies only serve to amplify and accelerate the transfer of US wealth to these countries.

Anyone who doubts how strategically Russia considers their energy resources has not been paying attention to Russian policy. They have Europe by the short hairs with respect to natural gas. They have pushed out western oil companies, for the most part, to make sure Russian oil reserves stay off western oil companies books. At the same time, Russia clearly understands the need for western know-how and investment. Note that Russia has made several agreements along these lines with companies like StatOil (NYSE:STO), ConocoPhillips (NYSE:COP), and Schlumberger (NYSE:SLB). These agreements are mutually beneficial and allow Russia to keep its fingers on the technology dials while increasing production and investment at the same time. It's one reason I can recommend STO, COP, and SLB for most investor portfolios. STO, in particular, will benefit from its European natural gas business, as well as its expertise in Arctic drilling technology. By the way, did anyone notice STO's outstanding earnings announcement on May 13th and the subsequent rise in the stock?

That said, the Europeans are attempting to fight back. Germany has deployed massive wind energy resources, as well as solar and geothermal. France of course has electrified their transportation systems and is now 70% nuclear. Europe is also beginning to tackle the difficulty of individual countries negotiating energy policy as opposed to negotiating on an EU basis. At the same time, multiple natural gas pipelines from Northern Africa are under considerations.

Back here in the States, what are we doing to combat Russian energy influence? Well, both the Canadian Arctic gas pipeline and the trans-Canadian Alaskan lower-48 pipeline have yet to break soil. Regulatory and governmental bickering continues. Meanwhile, the prices of pipe and oil services expertise has skyrocketed while the government continues to dilly-dally. So much for North American energy policy.

Awhile back I commented on Honda's (NYSE:HMC) natural gas automobile. Perhaps it's the engineer in me, but I wanted to compare the mileage cost of this natural gas powered vehicle with say, a Toyota (NYSE:TM) Prius. Well, I tried to find the tank capacity, in natural gas capacity, and I could not do so on the website. Wouldn't you think this would be under "Specifications"? It was not. Then I got sidetracked into trying to figure out how to fill up the car at home, and again the Honda website was no help here either. I finally concluded one would need to purchase and install in their garage a natural gas pump in the "Phill" at a cost of somewhere between $3-4000! I got sidetracked again looking for information about natural gas refueling stations across the country, and concluded rather quickly that the natural gas infrastructure just wasn't there yet.

So, trying to be constructive here, I have some recommendations for Honda and FuelMaker (who manufactures the "Phill"):

  • Make the Honda website a one-stop solution center!
  • Include nat gas fuel tank capacity in the "Specifications" section.
  • Bundle the purchase price of the Phill with the automobile.
  • Be up front about the costs associated with refueling at home.
  • Build out the natural gas refueling stations. A good start would be for Honda to commit to having a 24-hour a day natural gas refueling station at all Honda dealerships througout the country. That would be a good and dependable start.

Long term, of course, we still have the issue of declining natural gas production in Canada and the lower-48. It is imperative we get to work on the natural gas pipelines I spoke of earlier. It is also imperative that the US begin licensing and building LNG terminals on both coasts. Otherwise, it won't matter if we have natural gas powered transportation because the cost and availability will simply not enable its successful deployment.

Disclosures: the author owns COP, STO, and SLB.