Regulation of Oil and Gas Sector in 2019 and Prospects for 2020

It is our tradition to finish the year with a concluding report that sums up the main events and trends of the year.

The year 2019 clearly marked a new role of the oil and gas sector in Russia. Now it is not just the main donor to the Russian budget, but first of all the main hope for an acceleration of economic growth.

The government has finally decided to rely in economic policy on major Keynesian projects. Ideas of institutional improvements are abandoned until a better time – there is simply no time for this, a quick result is necessary.

Meanwhile, grandiose projects creating jobs and demand for products of other industries exist in fact only in the fuel and energy sector and in transport (and again, only in combination with oil and gas, as the situation with the Northern Sea Route demonstrates).

Interestingly enough, the search for new giant projects coincides with discussions about the future of hydrocarbons which have reached Russia too. The idea that oil will soon become unnecessary became a good argument for the Finance Ministry: why incentivise the production of a commodity that has no prospects? It is better to try and increase tax collections.

The Energy Ministry responded to this with the concept of monetising reserves: it is based on the idea of accelerated oil production, including with the help of tax incentives. “Let’s extract and sell oil while there is still demand for it,” the Energy Ministry assures. The Ministry somewhat contradicts itself though, as at the same time it acts as the main lobbyist for the OPEC+ deal that restricts national production.

The main scandal of the year was of course the affair with impure oil getting into the Druzhba pipeline, which resulted in a real war between Rosneft and Transneft.

On the export front, the greatest hit was the showdown with Ukraine and construction of bypass gas pipelines that went on against a background of debate over what is more necessary for the future gas market: pipeline gas or LNG.

The report presents in-depth consideration of the following 2019 intrigues:

• Oil production in Russia with the OPEC+ agreement in effect

  • Preliminary production results of the year for the country and VIOC
  • The fight of two strategies: price war through increase in production and regulation of the global oil market through its decrease
  • The attitude of regulators and companies to the OPEC+ deal, its changed terms, and renewal prospects

• The Druzhba case

  • The export pipeline accident resulted in serious discussion about reform of the oil quality assurance system. It also became a perfect test for the new system of government regulation of the sector launched in spring 2018 after the presidential election and the formation of the new Cabinet
  • It was the Druzhba accident that clearly demonstrated that the new system of government control of oil and gas works with major difficulties and absolutely fails to cope with the function of arbitration in disputes between “big” companies

• The accession to the Paris Agreement and the beginning of serious discussion about energy transition

  • The subject is becoming strategic. For instance, if Russia admits that oil is a commodity that is leaving the market, then it is unclear why form a new tax system designed to stimulate investment in new projects
  • The climate subject in Russia is not just scary stories about warming; it is an attempt to justify a number of government decisions discriminating against the industry

• Major projects in oil and gas: what will the industry receive for accelerating economic growth?

  • The government believes that only giant projects in the real sector Soviet-style can help the economy
  • The oil and gas industry has become the main generator of such projects: this concerns LNG, gas-based petrochemistry, pipelines, and the production cluster in the Arctic which, as an idea, has become a natural extension of the “Arctic mania” that has ultimately captured the minds of government officials and “state businesspeople”
  • For oil and gas this presents a perfect chance of wangling tax preferences and other subsidies from the state: the Cabinet can afford this in a period of budget surplus and an overflowing National Wealth Fund. But will the budget pie be enough for everyone?

• Pipelines versus LNG

  • The issue of choosing the priority in the gas industry development
  • LNG projects continue their triumphant march across the country. But at the same time debate begins about how much the state benefits from “gas cannibalism” when LNG drives Russian pipeline gas away from the European market.

• A medium-term forecast

Contents of the report: