Entering the Russian Market and Good Cognac. Interview with Rhod Mackenzie

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

As usual, we have our favorite guy in Russia, Rhod Mackenzie on Skype. How are you doing today, Rhod?

Rhod: I’m good, Mark. I’m good. Unfortunately, summer’s over.

Mark: Yeah. Unfortunately summer is over. Kids are back in school, streets are a mess with people who don’t know how to drive, but, you know, it happens every year.

Rhod: Yeah. Well, the biggest noticeable poor thing for me is nine days ago the temperature was +35 Celsius. Today, it’s what we’ve got what we call English weather is drizzle and +10.  That’s a big, big move in temperature.

Mark: Yeah. We’re not – we’re no anywhere close to +10 Celsius here. We’re still in the 30’s.

Rhod: Right.

Mark: And, we’ll be for the most – the rest of the year. So, Rhod let’s do what we usually do, let’s talk about oil prices.

Rhod: Well, when we discussed it last time, our consensus, again, was $50 a barrel. Now, it’s fluctuated since we last had a conversation down to $44 and now, as I noticed it’s $49.61. So, our predictions just seem to keep rolling along.

Mark: Yeah. It’s funny the population out there doesn’t really understand the dynamics of what’s going on because it’s not just supply – oversupply and demand, it’s also market speculation.

Rhod: Yeah.

Mark: And, speaking of that, there are some stuff in the news about Russia and OPEC talk about production caps. That speculation is going to drive prices up.

Rhod: Yeah. That did drive it from $44 and whether it works is anybody’s guess. I don’t really see it actually coming off because as we know these partners are not the most reliable even to each other.

Mark: Right.  Yeah. And, it’s hard – one of the things about OPEC, you know, and I’ve said this before I think we’re seeing the beginning of the destabilization of OPEC because their strength was their unity. When they set numbers everybody is stuck to it and that’s what gave them leverage. Well, now, not everybody is sticking to it. I think you’re starting to see the castle start to crumble.

Rhod: Yeah. That’s mainly economic factors. They’d enjoyed the boom and rolled out the commodity price obviously of oil which was the biggest boom of all with oil $120, $130 a barrel and they spent like it was going to last forever. And a lot of the systems Venezuela, Nigeria, and even Saudi Arabia have felt a much greater impact to their budgets.

Mark: Yes. So, we’ve predicting this it will cost Venezuela’s government to be overthrown. It is horrible there. They literally can’t feed their people and it’s not, you know, when people get to the point where basic survival needs aren’t being met, things have to change.

Rhod: Yeah. I think that was the part of the problem digress lightly with the Arab Spring in North Africa and across in the Middle East. It was the shortage of flour.

Mark: Right.

Rhod: And, you can’t feed your family that was caused by various drives and a bad harvest in various parts of the world including Russia. And, Russia at the time actually banned the export of wheat to make sure that the price of wheat stayed a reasonable level in Russia. And, when you cannot feed families and do the basic things, that leads to insurrection.

Mark: Yeah. And, I mean it should. I mean, you know, when you have – when you have governments that can’t take care of his people they need to be replaced, you know, hopefully not with – not a huge loss of life, but still they need to be replaced.

Rhod: Yeah. So, that’s really the sort of situation. Here in Russia, the mass media in the west and you have to remember apart from people like yourself and a few others out there, 90% of the media is controlled by six major global organizations.

Mark: Yeah. And, the concept of fair and honest journalism has disappeared back during the Oliver North scandal whenever that was, early 80’s.

Rhod: Iran-Contra scandal in ’86.

Mark: Yeah. Yeah. And now, they figure out they can make money on it. Since they can make money on it, it’s all about ratings and what gets the best ratings is bad news, so they never report the truth or the good stuff, the other side.

Rhod: Yeah. I mean things are more than just stable here. Russia has not fallen to pieces, everything is kind of normal. In fact, let’s have a look at a few bits and pieces.

I was reading some stuff by a guy called Jonathan Kollek. He’s the head of Eurasia for Trafigura who are the world’s largest oil trading company. You’re probably familiar with him. Yeah?

Mark: I know. Yes.

Rhod: Yeah. He was talking about production of oil in Russia and he basically came out and he said almost every single Russian oil company is profitable at $20 a barrel.

Mark: Right.

Rhod: Now, that’s been borne out by the fact in the first half of the year, every single Russian oil company except one was able to pay dividends.

Mark: Yeah.

Rhod: Right?

Mark: And, it’s the decline in the ruble has in some ways only helped them because they’re getting paid by large an American dollars.

Rhod: Yeah. I mean the dollar is the commodity price bench, so, yeah. So, and with the export, I mean you have to remember 37% of Russia’s oil goes straight into Europe.

Mark: Right.

Rhod: So, the EU imports 37% of its oil. So, that’s a substantial market. Also, 35% of its natural gas by pipeline. So, yeah, the earnings are there and of course, the cost is in rubles. Russia’s oil production far from dropping has actually increased.

Mark: Yeah. It was interesting…

Rhod: Gone from 10.5 to 10.8. And, according to Goldman Sachs and I’m not really sure about the figures because they were predicting oil at $20 a barrel about three months ago. But, they reckon that Russia will increase in 2017 to 11.5 million barrels a day.

Mark: Yeah. It’s – those production numbers from everybody. So, Russia, the Middle East, the US, they’re slowly creeping up even when we’re still in this low crude price market.

Rhod: Yeah. I think its efficiency is in other parts of the world including Russia and obviously the low cost base. When you have your cost in rubles and you’ve already absorb the impact, I mean Russia’s oil companies have pretty much reduced the debt using the foreign oil revenues. So, they get paid in dollars, they paid it over dollar debt. They can afford to run the ruble debt with being financed by Russian banks.

Mark: Right. So, what else in the news as far as oil and gas that you ran across lately?

Rhod: Again, it’s all in media that Russia is – excuse me – nobody’s really taking any notice of it, but there’s a few people who actually have. I mean Rex Tillerson who’s the CEO of Exxon Mobil. He was speaking in Russia about a month ago and says I’m looking forward to the ending of sanctions. We’re in constant talks with US government, so we can protect our interest in Russia and we’re grateful that they have not taken steps that would worsen the situation. We’ve had to suspend ten major projects, but we look forward to them being reactivated in the future.

Mark: Yeah. And the other thing that’s going on in the media which aggravates the crap out of me is, you know, we had our cold war, it’s over with. Russia was one of our major allies in World War II. We would have not won the war without Russia.

And, here in the US, the media is constantly talking about how Russia is being aggressive and not a good partner to US and I’m – that needs to stop because it’s not true. You know with the sanctions, we’re still doing trade back and forth. You know the Russian people like Americans – American is like the Russian people and I wish the media would stop trying to make that – make that something that doesn’t exist.

Rhod: Yeah. I mean your astronauts going to the space station via Russia. They are trained in Russia.

Mark: Right.

Rhod: Your satellites that you do send out on your own are sent there by Russian rockets.

Mark: That’s not what Elon Musk would say, but yes. [Laughs]

Rhod: Yeah. The majority of them are currently sent out by them. But, let’s go back to I’ve just spoken about Rex Tillerson. BP which in other oil major very active in North America. Robert Dudley has been here in various guises not just as head of BP, but he was actually head of a joint venture called BP-TNK.

Mark: Yes. I remember that.

Rhod: Which BP-TNK sold to Rosneft and BP now have a 19.75% share. He said that we will continue to be in Russia for the very long term. We are not going to increase our stake in Rosneft, but we are increasing the number of joint ventures that we are going to do, currently plan and we will plan in the future.

Mark: Yeah.

Rhod: Right. Shell for example, Ben van Beurden, the CEO, again, has recently been in Russia and they’re doing a number of projects. They’ve been active in Russia for more than twenty years. They’re involved in a number of projects in Sakhalin-2. They’re involved in two LNG projects that in the pipeline one in the Baltic Coast and one for the Far East.

So, again, he’s saying that we are here for the long haul, we stay within the boundaries of sanctions although we wish they didn’t exist, we’ll adhere to them. But, other than that, it’s business as usual.

Mark: Hey, here’s a question out from left field. So, you had the Brexit, right?

Rhod: Yeah.

Mark: How do you think that is going to affect the sanctions?

Rhod: The sanctions are currently very, very shaky between countries like the Visegrad Four which is the Czech Republic, Slovakia, Hungary. They don’t like the sanctions because they’ve had the closer relationship with Russia trade-wise.

The French already passed a bill in parliament asking for sanctions to be ceased because their agricultural sector was very, very badly hurt.

Mark: Yeah. And the country is already in trouble before that. Yeah.

Rhod: I mean the whole of Europe is even Germany has economic problems. The only one that currently doesn’t have one is the UK.

Mark: Yeah.

Rhod: They’ve confounded all of the economists and all the doomsayers etc producing month after month a much improved figures. So, I’m not sure because sanctions are political decisions made by politicians. We’ve had the German foreign minister here in Yekateriburg which is reasonably close to me. It’s only 600 kilometers, so you know we think they’re neighbors you know, talking things of economic forum.

We’ve had the Japanese prime minister at the Far East economic forum along with the Chinese prime minister. They’re all talking up doing more and more business.

If Europe wants to isolate itself from trade with Russia, the only people who are going to suffer are Europe.

Mark: Yeah. Yeah. I saw that in the news where Japan is actually doing a lot of more investing and more joint ventures with the oil and gas giants in Russia.

Rhod: Yeah. I mean they’ve been there for a while. In Sakhalin-2 which Exxon Mobil is the operator of and owned 30% of that. Mitsui and Mitsubishi are both partners in it.

Mark: Yeah.

Rhod: And have been for for sometime. There are also the Japanese companies are heavily involved in providing equipment for the Far Eastern petrochemical cluster.

Mark: Yeah. It’s a – this is a good point people that are listening or watching us right now. Can you start to see how global this industry really is and no matter where you are in the world, there’s other parts and pieces that you need from other countries and it’s all intertwined. It’s truly one of the most global commodities out there.

Rhod: Absolutely. As is the technology, as is the services, as is the equipment. I mean this year in budget of the major Russian oil companies, they are going to spend $10 billion on equipment from outside of Russia.

Mark: $10 billion. That’s a big check.

Rhod: That’s a big check and that is broken down into probably small $5 million here, $10 million there, $25 million, etc. Thus, they are up for grabs.

Mark: Yeah. So, that’s a good point, let’s stop real quick. So, if this is the first time you watch Rhod and I talk, Rhod has a company that if you’re interested in doing business in multiple sectors in oil and gas, he has the data. He knows where the projects are, he knows the budget, so we don’t get kick off.

So, Rhod talk about that just real quick.

Rhod: Yeah. I mean basically we have a huge database of everything from finding it to refining it. We know who’s drilling, who’s doing seismic survey, who’s planning on petrochemical complex, who’s building currently a petrochemical complex, who’s building pipelines, who needs pipe coatings, who needs whatever.

And, also, we know the distributors we know who the major distribution companies are. So, if you’ve got a product or a technology and you want to enter the Russian market, we can help you find somebody to distribute for him.

Mark: Yeah. And, real quick, what’s the name of your site, so people can find you?

Rhod: Rusmininfo.com.

Mark: Yeah. And, people we’ll put a link in the shown notes so you can just click on it.

All right. So, back to what’s going on.

Rhod: Yeah. There are lots and lots of positive thing. Yeah, Russia’s growth is pretty bad, but it’s certainly no worse than Italy, France, or half of Europe.

Mark: Right.

Rhod: And, that was caused by the lowering of the oil price and sanctions. Fortunately, Russia has a lot less debt. It doesn’t have a huge burden of debt and the companies have always maintained low levels of debt.

Mark: That’s a cultural thing in Russia as a whole though.

Rhod: That’s correct. Because we’ve seen from ’91, ’93, and ’98, the currency collapsed and the value of your savings disappeared, etc. So, a level of prudence has always been something built into the Russian psyche.

Mark: Yeah. And, that’s really how it should be. It’s one of the things, you know, I love my country, I’m very patriotic, but there’s a  couple of things that bother me. One is the willingness of the American people to assume debt because that’s not a good way to lead your life or run your business. The other thing that bothers me and once again I mean I did four years in the Marine Corps. I served my country.

But, most Americans have never left the US and they don’t realize how good they have it here. Most of the world doesn’t have a Starbucks in every corner, people don’t have two cars and there’s a Home Depot and Lowe’s. And, you know, we have it really well and a lot of the world would love to trade places with us.

Rhod: Yeah. Life here in Russia is actually pretty good. We can get pretty much anything and everything in the supermarkets. And those products that were affected by sanctions which were mainly food and agriculture products, we just source from elsewhere.

Mark: Right.

Rhod: Yeah. I mean if you can’t get bananas from Ecuador, you get them from somewhere else. We actually get ours from Ecuador at least when I look at the labels. The tomatoes that used to come from Turkey, we get from elsewhere.

And, actually one of the costs that is lowest here is the cost of energy. So, they’re actually building huge greenhouses basically to grow vegetables, so growing tomatoes is -35 outside the countryside and inside the huge polythene or whatever they call them is subtropical because the energy cost is so low.

Mark: Yeah. It’s almost amazing to think that that makes financial sense, but obviously it does because they’re doing it.

Rhod: Yeah. So, the oil and gas industry here is still moving forward. Russia has the track record over the past eight years and will continue to do is replacement of reserves. So, the seismic surveys, the geographical exploration, etc is continuing.

So, for every bottle they drill out, they manage to replace it with buying geophysical methods and reserves.

Mark: Yeah. And that’s not just in Russia. One of the things a lot of people understand, no company goes out and tries to find oil and gas reserves in the world if it doesn’t make physical sense. They look at what they need in the immediate future and then as we go through time, technology changes so the geo data and seismic activity gets better so you can find reserves that they missed before and that – that’s going to continue to happen forever.

So, yeah, it’s every year the amount of recoverable reserves on the planet goes up because we just find more of it.

Rhod: Also, the new technologies developed in various parts of the world have actually made were unprofitable fields and almost run out fields maybe 25%, 30% of the oil was hard to recover, the technologies have developed over the past ten years particularly have may not extremely profitable.

Mark: Yeah. So, the well stimulation techniques allow you to go back to existing formations that you couldn’t recover and now, you can recover. And that once again is because of technology and as we go through time it will be more and more and more of that.

Rhod: So, the basic point, Mark is the big companies the Chevrons, the Exxon Mobils, the Shells, the BPs, they’re all here and they’re all here for the long run. The technologies are developing and a few are having a tough time trying to sell in the US or the Latin American markets or the African markets and so whatever. Russia is still a place for opportunity. The companies have money and they are spending it

Mark: Yeah. So, Russia is – are y’all still number one in production?

Rhod: We are still number one and we will continue to be number one.

Mark: We’ll see. [Laughs] But, regardless, the point I’m making is Russia is the number one producer in the world which means they need stuff, people, technologies, products, ideas.

So, if you’re an oil field service company or you have a great idea or you’re looking to expand your presence globally, reach out to Rhod. Once again, the links will be in there. He can facilitate that with real data. He actually knows where the projects actually are going on.

So, Rhod, it’s – I don’t want to go too long, but noticed you were drinking something.

Rhod: Yeah. That’s just – that’s a Coke.

Mark: Okay.

Rhod: I’m going to have something afterwards, but let’s do our little spot. As I told you we can get everything here and you know I’m a bit of an aficionado of quality alcohol.

Mark: Yes. Me too.

Rhod: Good. Well, this one is – got great historical significance. The Second World War in February 1945, Franklin D. Roosevelt, Joseph Stalin, and Winston Churchill sat down in Yalta in Southern Russia to plan the peace basically and what was going to happen.

Now, everybody has heard about Winston Churchill and his speeches etc, but some, in the movies or you’ve seen it here, rather a voracious appetite for quality cigars and quality alcohol.

Mark: Right.

Rhod: Now, what is not well-known is Russia produces something other than vodka. In the southern region of the Black Sea which is very similar to the Mediterranean, they grew grapes, they grew wine, and they make their version of cognac.

Now, Mr. Churchill was so enamored by the local cognac, he took a whole truckload home with him. And, the local distillery were so delighted they named the distillery after him.

Mark: That is cool. That is really cool.

Rhod: So, there you go, that’s a Russian cognac. And, I assure you it might [stock] with some of the best cognac. This is another from Southern Russia.

Mark: Yeah.

Rhod: Again, it comes in very nice bottle, quality. When I say it compares to the highest quality in France, trust me because I know. This is…

Mark: Oh, yeah.

Rhod: So, that’s one of my favorites, but it’s rather expensive, so I don’t drink it on a daily basis.

Another of my favorites, this is actually Armagnac so you may be familiar with this one.

Mark: Yes.  And so, you want to explain the difference between cognac and Armagnac?

Rhod: Different region.

Mark: Different region, that’s right. Yeah.

Rhod: Of France.

Mark: It’s funny. So, in France, the grapes are named after the region or the types of liquor make its name after the region where the rest of the world is named after the grape. So, it’s one of the differences. Yeah.

Rhod: So, that’s my tip. So, if you get the opportunity and you see a bottle of Russian or even Armenian, I think Russian is pretty good, but the Armenians are probably producing even better, again, similar sort of climate.

In fact, the professor of Russian and Eurasian studies at Birmingham University who’s also a senior fellow at Chatham house in London was visiting Moscow. He’s actually quite a good friend of mine. He said, “Can you pick me up on board local ArArAt Dvin?” He said, “My friend considers it the best cognac in the world.”

Mark: That’s cool.

Rhod: And I said, “I’ll have a look.” I managed to locate a bottle here in Ufa. It’s not cheap, it was about $130 for the bottle. But, he swears by it, so…

Mark: Yeah. Make him happy.

Rhod: More things than vodka here in Russia.

Mark: Well, Russia actually makes some high quality wines. A lot of people don’t know that. I mean some of the best wines in the world come out of Russia. And I know the people from France are probably cursing me right now, but I’m just telling you that I had it. They’re extremely good. And they’re actually not expensive.

Rhod: That’s the thing about alcohol here. The tax level on alcohol is so much a lot like tax levels on everything here like income tax for example is a flat rate of 30% whether you earn a million dollars or you earn ten thousand dollars.

Mark: Yeah. I’m jealous. It’s not like that here.

Rhod: I know.

Mark: [Laughs] All right, Rhod, look, I really appreciate your time. We’ll put links in the show notes. If you have an interest in doing business in Russia, Rhod is the guy you need to talk to.

So, Rhod thank you so much.

Rhod: Thanks, Mark.

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