Russian Oil, Gas & Spirits. Interview with Rhod Mackenzie
Mark: Hey, folks let’s learn something new about the oil and gas industry.
All right, by popular demand we’re bringing back Rhod Mackenzie.
Rhod: Hi, Mark. How are you?
Mark: Very good. Rhod is a fascinating person. So, Rhod is – actually, Rhod before I tell your story, why don’t you tell your story. Talk about where you’re from and where you are now and what do you do?
Rhod: Okay. I’m a Scotsman. I was educated in Scotland in the university, but for the past 24 years I’ve been living in Russia. For the past 10 of those, I’ve been living in a place called Ufa that most of you would struggle to find on the map. It’s just at the bottom of the Ural Mountains which is the dividing point between Europe and Asia in Russia. I run an oil and gas information in – excuse me – oil and gas information site called Rusmininfo where we covered everything from finding it to refining it.
Mark: Yeah. And so, one of the things that’s great is my audience will get to hear from behind the scenes what is really going on in Russia versus what we hear in the media.
So, Rhod let’s talk a little about the oil and gas industry in Russia and in general. What’s going on in your end?
Rhod: Well, it’s been a difficult year all over the world for the oil and gas industry, but Russia has come out of it better than most. There’s two reasons for that; one is the devaluation of the ruble against the dollar and of course oil and gas and most commodities are denominated in dollars. The ruble has gone over the last eighteen months from 31 RUB to the dollar to today’s 69. So, as you can imagine you’re selling in dollars, but your cost is in rubles, you’re suddenly got a bit of a margin to play with.
So, Russia kept pumping oil out of the ground and pumping gas out of the ground and it’s kept on in fact is going to increase its oil production this year by around 1.5% and gas by 4%.
Mark: Yeah. And so, that’s really cool. So, I never thought about that because the devaluation of the ruble the cost internally in Russia has been cut dramatically.
Rhod: Absolutely. If you have fixed cost even if you give a percentage pay rise were still denominated in rubles, so you’re right. And most Russian oil companies’ breakeven point for investment return, etc. is around $30 a barrel and for a certain companies like Rosneft which has got the biggest reserves and my local oil company Bashneft is about $20 and it’s lift cost as in operating lift cost is between $4.5 and $6.
Mark: Right. And…
Rhod: Right up to the fact that there’s a very flexible tax regime here which means that the higher the oil price the higher you pay, the lower the price as a percentage you pay. So, the government wins on the high prices and it gets a lot left to the budget, but your margins pretty much stay the same whether oil is $100 or if it’s $40.
Mark: Right. Let me back a little bit. People, my audience who don’t understand, lift cost is actually the cost that you get in that oil out of the ground and move it somewhere. You add that to your actual production cost which is cost of actually getting that oil.
So, Rhod do you have a couple of projects maybe you want to talk about that are highlighted?
Rhod: Yeah. I mean the major project that’s going on at the moment and that affects the whole of Europe is the Nord Stream pipeline. It’s been operating since 2011 and it goes directly from Russia through the north – the Baltic Sea directly to Germany. Now, that is planned to do another two branches of it in parallel, so that one and that’s mainly to bypass Ukraine.
Now, Russia’s not doing that specifically on Gazprom in its European partners like Wintershall like Total. They’re doing it because of the aging infrastructure of the Ukranian gas transportation system. This was built in pre-Soviet times – well, in Soviet times like in the 970’s and 80’s. And there’s been a complete lack of investment in that, so this aging infrastructure isn’t going to last too long. And Gazprom and its partners are thinking, well, why don’t we just do what we currently got and pump it straight using a new pipeline and of course the EU is looking to diversify, but it’s got another way of diversifying too.
The UK’s gas production has dropped dramatically as is Norway’s and Holland’s. They were the other main exporters of gas in Europe. Now, there is no other way that they can get it without huge space they’re talking about the southern corridor from Azerbaijan, but given the relationship in the past between Europe, the US and Iran, I don’t see them as being a reliable supplier.
Mark: Right. So, what is your view on the future? You know the US is building a lot of LNG plants to export liquefied natural gas to the rest of the world to other markets including Europe. Do you think somewhere down the road in the future that that will actually hurt Russia’s market?
Rhod: I don’t actually see it because I think the major prefer LNG has been the Asian market who are still growing and have a voracious appetite for LNG and are prepared to pay the price. Given the cost of LNG as transportation and then distribution across Europe makes it pretty much uncompetitive against pipeline gas direct from Russia.
Mark: Yeah. That’s interesting. So, what other projects are going on in your neck of the woods?
Rhod:Mainly things like looking at how to — how to – sorry, wait for a second – how to get on to the heart to develop the projects. That’s the things like the Bazhenov Shale which has got huge reserve, but they’re very similar to a share fields in the Midwest. They’re now beginning to develop the technologies here as opposed to importing the technologies to be able do that.
Mark: Yeah. And so, those fields probably won’t come online until the price of crude goes up a bit?
Rhod: That’s correct. I mean the mature fields nothing is going to change dramatically, I mean Alexander Novak who is the minister of energy here made a statement yesterday, he said, we’re not looking to increase our production, we’re not looking to decrease it. Things are going to be relatively stable until 2019. That’s when the mature fields will start have plateaud and then stop would slide in production. So, there’s a little bit of time before things dramatically change.
Mark: Yeah. Interesting to see what happens moving forward because there’s a lot of well-stimulation technology that probably can help those mature fields, but because of the sanctions I don’t believe we’re allowed to bring that technology in, but it exist.
Rhod: That’s correct, I mean it does. Unfortunately, you mentioned sanctions and let’s not get into the politics of them. There’s a major import substitution program going on here with a lot of the technology institutes and universities, etc. and the Chinese are getting involved. They are looking to work with Russian institutes and develop the technology. They are several years behind, obviously the technology is being developed in the west particularly in the US in all its experience, but like everything the space race, etc. people catch up.
Mark: Yeah. Yeah, of course, right. There is no secret sauce, it’s just engineering and research and of course the Chinese and the Russians and anybody else in the planet that wants to spend their time can figure it out as well.
So, forward a little bit further, I want to let the audience know if you’re interested in any of these projects in Russia where Rhod has a complete database of not only all the projects, but timelines, deliverables, budgets, project managers, contact information. We’ll put a link up, Rhod to your website in the show notes, but if anybody’s interested in these projects they can go to your website and they can actually explore and see these projects in their entirety, correct?
Rhod: That’s correct. Also, finishing off is not just the database, but a full information set that will list every single deposit with these reserves, how long it’s been in operation, how long it’s intended to be in operation, who the operators are, and what it’s production figures are. That will be ready by early February.
Mark: And so, everything you need. And, Rhod real quick, what is your website name even though we’ll put a link up?
Rhod: It’s www.rusmininfo.com.
Mark: Yeah, perfect. And, folks we’ll put a link up into the show notes. So, you know, we have a bit of an alternative media company here and you were just talking to me a minute ago about you have some friends that are actually doing the same thing, let’s talk about that in a second.
Rhod: Yeah. Basically it’s a site called Russia Insider and the mainstream media, The Telegraph in the UK and La Monde in France or Washington Post or New York Times, they all are trying to cover the same things in the same way, but in America there’s things like Zero Hedge, and large number of sites that are alternative medium. And these guys are working with them, I know people like Stephen Cohen, etc. to produce an alternative view from the mainstream of what’s really happening in the politics that affect Russia and relationship between America and Europe and Russia. And the most interesting fact is both of them are Americans.
Mark: Yeah. That is too funny. So, there’s Americans in Russia running this alternative media company?
Rhod: That’s correct. Charles has been in Russia for about ten years and he’s a journalist and he felt that the mainstream media was not reflecting what was really going on and wanted to do something about it. I’m obviously helping him. One of the other guys behind it is a guy called Vladimir Rozianko. Now, he’s as Russian as you can think of caviar and vodka, but he’s actually he’s American as apple pie. He was born in Cleveland, Ohio. The grandson of a Russian émigré who emigrated to America in 1952. He’s been in Russia for only two years and he is actually part owner.
It’s well worth to read, I’d say it has great English coverage of all sorts of things from geo-politics to culture and it’s a great way of learning about Russia.
Mark: Yeah. And what is their website?
Rhod: It’s called Russia-Insider.
Mark: Yeah. And, folks we’ll put a link in the show notes of that as well. So, Rhod one of the things that you and I also have in common is our taste for fine spirits, right? And you have a particular taste for single malt scotches, is that right?
Rhod: I have a particular taste for good cognac and good malts. You’re absolutely correct.
Mark: Yeah. And you actually have a couple with you that you really like?
Rhod: I have one particular one which is Dalmore 18 year old. It’s a great drop and it’s actually from the Speyside valley which is where Glenlivet, Macallan, and some of the other more famous malt scotches come from. I particularly like this one because that is my clan badge from my family that Mackenzies which is this silver stag’s head.
Mark: How cool is that? And, here’s what makes me want to come and visit you. How much did you pay for that?
Rhod: Well, during the devaluation of the ruble against the dollar, the supermarkets didn’t actually increase their prices. So, I went to the supermarket and bought up pretty much as much as I could at the old prices. So, this time last year, it was 80 rubles to the dollar, so I was picking that up for $70.
Mark: US $70 and if I were to go by there right now, that is well over a $120 bottle?
Rhod: Oh, it’s $150.
Mark: Yeah. Yeah. It’s almost worth the plane ticket coming to Russia just to be able to buy spirits at that discounted price.
Rhod: Unfortunately, you’ll get caught at customs and they don’t like you carrying more than 2 liters.
Mark: Damn. Okay. Well, it’s was worth the thought.
Rhod: Russian customs, US and UK customs.
Mark: Okay. So, the US – so coming back in the US, I’d get caught.
Rhod: That’s correct. You will just have to enjoy the holiday of tasting.
Mark: You know I – we’re doing this via Skype because I’ve yet to get over there, but I will somewhere in future we’re going to do this in person. I will get over there, we will record a session in person because I love the Russian people, I love the Russian food, I want to spend some time over there with you.
Rhod: You are more than welcome. And certainly I love you to come in the summer, we’ll visit St, Petersburg and you can see the White Nights where it doesn’t get dark. One of the world’s most beautiful cities, visit Moscow again, lots of art lots of culture and lots of fun.
Now, the other bottle I have is – most of your viewers will remember the Second World War and Roosevelt, Stalin, and Churchill came together at Yalta and sorting everything out. Well, Churchill was a big fan of cognac and while in Yalta he discovered Russian cognac and he enjoyed it so much he actually got a container load shipped back to the UK. And when the Soviet Union collapsed the distillery decided they wanted to capitalize on that link with Winston Churchill and here we have it, Churchill Cognac as you can see; picture of Churchill, picture of Big Ben and a picture of [Anatovich].
Mark: You know what? How cool a story, how much history is involved in that bottle? That is just really a cool story.
Rhod: It’s amazing. I was very surprised when I discovered it. I actually discovered it in the supermarket, I never heard of it and then once I purchased the bottle, I actually did the research on the whole story of how and why.
Mark: Yeah. And so, it’s a Friday morning here in Houston, Texas in the US, but it’s actually Friday night where you are which means you can enjoy that cognac right now.
Rhod: Absolutely. And when you come here you can do this.
Mark: Yeah. So, folks we like this information from Rhod so much we’ll try to do this once a month. We may not always get it exactly thirty days apart, but we will make this a regular show.
So, Rhod I want to thank you so much for being on the show today.
Rhod: Thank you, Mark. It’s always a pleasure to have a chat and talk to people who are interested in what’s really going on in the world of oil and gas and outside their own little territory.
Mark: Yeah. So, this is just great stuff. So, folks I hope this helped. We will see you next time.