Top events of 2009

The National Energy Security Fund introduces top-ten events in the oil and gas industry in 2009 and is ready to comment on them in detail.

1. Ukrainian gas “docusoap”

   The year 2009 was marked by permanent gas talks with Kiev. After a new contract every 7th day we winced at the question whether Ukraine would pay for gas or not? Unfortunately, we are entering the year 2010 with the unsettled problem. Ukraine in no way wants to realize that Europe struggles against Russia as supplier, but for Kiev this fight is irrelevant. Ukraine is a transit country: if there are no supplies from Russia, there will be no transit through Ukraine. This also concerns oil issues. Ukraine is depriving itself of money. Both Nord Stream and South Stream were actively developing in 2009. The current potential capacity of these gas pipelines makes it possible to manage without Ukraine. But does Ukraine need this? The gas serial has not done any good either to Russia questioning its reliability as supplier or to Ukraine. But Russia can find an alternative transit route, although an expensive one, while Ukraine cannot find any alternative. Meanwhile, gas transit projects considered by Europe bypassing Ukraine have not succeeded yet.

2. Success in Nord Stream and South Stream development

   There are two especially important moment. Firstly, this is the obtaining of ecological licenses for Nord Stream from Scandinavian countries. Now the construction of the sea section may start. The second important point is participation of foreign companies in this project. Moreover, we were observing a conflict between South Stream and Nabucco throughout 2009. By the end of the year it became clear that Nabucco’s resource base was under question. Europe found 14bn cu m for this pipeline, though it needs at least 31bn cu m. This amount is nowhere to be secured without Iran and Turkmenistan. Meanwhile, at the end of last year the latter showed who was expected to be its main partner – this is China. And the launch of a gas pipeline from Turkmenistan to China was a blow at Nabucco rather than at Russia. Production in Iran is also a very complicated question. For the sake of the diversification idea Europe is certainly ready to promote the Nabucco project in every possible way, but it is developing rather heavily so far. Yet, we should point out that Russian projects are also rather expensive. It would be cheaper to agree with Ukraine. Moreover, it is already now obvious that South Stream is considered not only as a way to deliver additional gas but it is openly called an alternative to transit via Ukraine.

3. Revision of conditions of buying Central Asian gas

   Russia is now in fact a transit country, not a reseller. There is no problem in this; one just has to remember that Gazprom will earn from transit only, not from reselling gas. But the main thing is that Russia will not get revenues to the budget, since Turkmen gas is considered a temporary imported commodity, i.e. Russia is deprived of a 30% export duty. This is why there is a strategic task to redirect Turkmen gas to China and develop its own upstream projects. A successful contract and a year break do not remove key questions of the industry from the agenda.

4. Catastrophe at Sayano-Shushenskaya power plant

   Unfortunately this accident became a logical result of the electrical energy sector restructuring. The reform was conducted rather hastily and no element of it succeeded. There is no competitive market leading to reduction in electrical energy prices; on the contrary, they are rising. There are no large investments to allow upgrade of fixed assets. The catastrophe at the Sayano-Shushenskaya hydropower plant that was maintained in a purely utilitarian manner was the result of that. Maximum allowable norms, including vibration of five turbines, were violated for several months. But the plant continued working: there was a record water inflow and electrical energy output. The consumer attitude towards Soviet assets is a destructive philosophy.

5. Adoption of the law on energy efficiency

   This was the hit of the year with much fuss about it. But unfortunately it obviously did not become breakthrough. It was mocked as “the law on lamps and meters”. And it was unclear how to install those meters in houses. There were ambitions plans with the law regulating everything. There is an idea to decrease the specific energy consumption in the next three years. But the law’s authors have not explained how to do this. This is why everything will develop in the same way as it happens in Russia: governors will be instructed to save electrical energy and they will cut off power. Unfortunately this used to occur in Russian regions. This simple way may become very popular.

6. Debates about the law on oil

   The energy ministry put forward an initiative to draft a new law on oil but nobody understood what it was all about. It is interesting that throughout last year state authorities were speaking about the necessity to establish a dialogue with the expert community – and there it came, this bill on oil that had not been discussed with nobody and that is still being worked out behind-the-scenes. Meanwhile, discussion of the bill on oil could have set a precedent for cooperation between state agencies and experts.

7. Diversification of Russian oil supplies: ESPO launch and beginning of BPS-2 construction

   Diversification is probably very important. But we are laying pipelines to the West and the east amid a 1% growth in production in 2009. So, the question is why we need to build so many pipelines if the production is not increasing? It would probably be more expedient to give priority back to the production sphere. The second question that emerges after analyzing the situation is what will be a priority for us? These pipelines cannot be filled in, if the current level of production remains.

8. Oil contract with China

   The example of the signed oil contract with China testifies to the fact that it will be difficult to satisfy all existing demands. Russia has already taken credits secured by future supplies. But how will we retain our presence on the European market implementing the Chinese contract and having a 1% growth in production? Why are we laying ESPO and BPS-2 if the oil production is not increasing?

9. Europe adopts Third Energy Package

   This is a very important event because Europe is actively fighting monopolies and trying to liberalize access to its infrastructure. In Russia many perceive it as a threat because we have always had plans to get assets in the European infrastructure. In reality due to the 3rd energy package the EU, the infrastructure owner, will have to develop it while we should get access to final consumers. So, the 3rd energy package gives an advantage to Russia. Yet, Europe itself has not sorted the adopted package out. Besides, the top brass of the EU bureaucracy is being renewed; there will be a new figure of the commissioner for energy; it will probably be possible to come to an agreement with this official.

10. Government intends to sell part of state property in the fuel and energy sector

    It is interesting from the point of view of defining long-term tendencies because everyone talks about strengthening of the state’s presence in the sector. But in reality it seems we will finally observe a new wave of privatization in the oil and gas industry.

11. Discussion of geophysics future

    During a crisis we always economize on the future. Expenses on exploration drilling dropped sharply, especially in Q1. This is a tremendous problem: hardly had the revival of geological prospecting begun when prices went down and expenses on the future were again cut. It is a sad moment especially considering that production costs of every barrel are going up substantially in Russia: this year this advance is likely to be 25% at least. In fact economizing on the future is like biting the hand that feeds you. The government tried to find some new bureaucratic ways but in fact we are observing a fight of clans for control over the sector, which does not solve systemic problems.

12. Timchenko’s confession

    Throughout last year Gunvor’s owner Timchenko was revealing secrets: he turned out to be a shareholder in NOVATEK and Stroytransgaz. The latter manages large deposits, including Yuzhno-Tambeiskoe in Yamal. In terms of the year results Timchenko can be recognized one of the major figures in the fuel and energy sector. NESF described Timchenko’s activities long ago, but now he publicly declares about his assets and claims in the sector. It seems these assets will secure some credits to be taken to make some purchases. There are grounds to believe that Timchenko will be the person of the year in 2010 not because of revealing secrets but because of buying some serious assets in the Russian fuel and energy sector.

13. Shale gas revolution in the USA

    Everybody in Europe began revising forecasts. The current mainstream idea in the expert community is that shale gas production will sharply rise in America. LNG will be supplied to Europe and nobody will need Russian gas. But this interpretation is rather cunning. It is pointless to deny the changes occurring on the American market. But the USA has always been the world’s second largest gas producing country. Besides, the LNG market was not so capacious. Moreover, one should remember that in 2008 to 2009 China finally became a gas importer. And gas imports will be seriously developing. Although there is some decline in the demand for gas due to the economic downturn, this won’t last forever. This is why the shale gas revolution in the USA should not lead to conclusions that the layout of the world energy business has fully changed.

14. Launch of three large production projects – Uvat, Tolokan and Vankur

    This is undoubtedly positive news. However, much fewer deposits are launched than one would like to. Decline in production in Western Siberia is becoming more and more obvious and even such seemingly serious projects just allow maintaining production at the previous level not providing any considerable growth.

15. Opening of LNG plant in Sakhalin

    Russia’s first LNG production plant opened in February 2009. This is a good example of cooperation with non-residents. It is important that Russia has finally entered the LNG market. This is definitely the breakthrough of the year. On the whole, Sakhalin projects are developing quite successfully, including oil projects. This is why the dynamic of Sakhalin projects shows that there is some prospect in the oil and gas industry: we can explore new areas and we can cooperate with non-residents successfully.