Top events of January 2010

The National Energy Security Fund introduces top-ten events in the oil and gas industry in January 2010 and is ready to comment on them in detail.

1. Oil conflict with Belarus

   Unfortunately it is either a gas or oil dispute with Ukraine or Belarus that remains a bad New Year tradition. The Belarus case can be interpreted in different ways. From the financial point of view Russia has unconditional arguments. For a long time Belarus was getting oil with an almost 70% discount with preferential duties. Very large money was earned on refining and further sale of these oil products. The situation should have been fixed long ago considering that pragmatism in relations with post-Soviet states is one of the slogans of Vladimir Putin's policies. We finally approached Belarus with this idea of pragmatism. In the end the solution was found but it is unlikely to be a final one. It seems we have beaten Belarus but in what way? Is it a win or a loss if you always subsidize your neighbor, then reduce subsidies but continue subsidizing it anyway? The problem has not been finally settled; some 6.5m tons are still to be pumped to Belarus duty free. This is the amount Belarus requires for its domestic market. Nevertheless, the Belarusian president considers this to be a temporary decision, which means difficult talks are yet to come.

2. Ukrainian elections and beginning of new "gas" year

   Fortunately we managed to escape another "gas war" but unfortunately Ukraine should not be left unattended. This peace cost almost $8bn in fines Kiev was to pay to the Russian budget in compliance with the take-or-pay system. If Moscow had been more stubborn, a gas war could have begun in the heat of the Ukrainian election campaign. Having refused to take up the hatchet, the Kremlin thus supported Ukrainian premier Yulia Timoshenko who has qualified to the second round of the presidential elections. We are facing most interesting developments in Ukraine, as neither Ms. Timoshenko nor Mr. Yanukovich is a pro-Russian candidate. Yanukovich criticizes the gas contract important for Russia because the document is associated with his election rival. Timoshenko criticizes the idea of a gas consortium that is also important for Russia. What is going to happen when the elections are over? Ukraine is bankrupt, Naftogaz is bankrupt, there is no money, the gold and currency reserves were used to make the December tranche; there are no pro-Russian candidates. The situation is entangled. We will try to untangle this web of questions in a new report.

3. Turkish PM Recep Erdogan's visit to Moscow and energy project negotiations

   Turkey became Russia's important energy partner in Europe very quickly. Three years ago Turkey considered Russia as a dangerous rival and strived to provide transit of Central Asian gas supplies and hindered transit through Bosporus and Dardanelles. And then such a radical change! However, it is a forced one, because Russia needs to exclude Ukraine from the transit chain while the sea route may run either through Ukraine or Turkey. The latter is interested in placing as many transit pipelines on its territory as possible to have a stranglehold on Europe, because finally both Russian and anti-Russian pipes will run through Turkey. The talks are not simple, and Ankara is rather unreliable partner. By the way, Turkey has not granted final permits to lay a sea section of South Stream; corresponding talks will continue until this November at best. Political problems also should not be omitted; this concerns the issue of Karabakh. Turkey has always been actively involved in Caucasus affairs. This is why there are a lot of pitfalls in the Russian-Turkish partnership; one should not be surprised if a fantastic boom in our relations will be later replaced by some coolness.

4. Sechin vs. Kudrin: war for zero duties on Eastern Siberian oil

   In January Russian finance minister Alexey Kudrin again "made us happy" having forecasted a budget deficit that certainly should be covered by oil and gas revenues. It is interesting that there have been much talk about the necessity to remove the country's dependence on oil and gas revenues but as soon as money is finished, everybody looks for it in the oil and gas sector where the situation is unfortunately far from being optimal. One can understand Kudrin, because the preferences provided to Eastern Siberian oil require additional investigation. The question is whether exports to the East are an end in itself that must be reached at any price? Why oil supplies to the East, to China, should be implemented at the zero tariff rate? These are the Chinese and our oil companies that will benefit. It is not for the benefit of the Russian budget. NESF is convinced that deputy PM Igor Sechin will manage to retain tax preferences on supplies to the East. By the way, it is not ruled out this will be done at the cost of companies supplying oil in the European direction. The same thing happens to transportation tariffs in Russia. This is a very strange policy of paying quite a substantial price for diversification.

5. Accident at ESPO

   A feverish desire to create the infrastructure of hydrocarbon supplies to China at any cost results inter alia in such consequences as an accident at the Eastern Siberia-Pacific Ocean pipeline. This occurred amid constant assurances that this is one of the new oil pipelines that rule out any accident. The pipeline was officially launched not long ago, and the first oil spill is definitely an alarming sign. May this be a case when hectic rush is not necessary?

6. Sharp rise in January gas production

   It is rather difficult to forecast the gas market development. Strong frosts in Russia and Europe are behind the record high gas output in January. Meanwhile, just half a year ago the situation with the demand for gas seemed to be very hard. Europe often exaggerates the scale of competition on its market and possibilities of reducing imports of Russian gas. In reality the situation needs to be additionally studied and explored, if a mere drop in temperature can change the general picture so seriously.

7. Gazprom and E.ON decide to close last year's contracts

   This is an important topic because Europe insists on the gas demand decline and requests revising long-term contracts. Last year could have become a precedent in this regard, as part of contracts was done in line with the take-or-pay system stipulating fixed volumes of gas Europe is to pump. But last year the demand for gas decreased 7.5% in Europe; this is why Europe proposes Gazprom to voluntary refuse fines. But this is a system developed by Europe not us. It is aimed at guaranteeing the amount of supplies to the market for gas buyers. The market indeed dropped. But is this a long-term decline? There is every reason to believe that the situation in 2010 will differ from that in 2009. There will be no decrease but growth in imports. Nevertheless, Gazprom made concessions. The contract has been saved; there will be fines but their amount won't be that considerable - the sides managed to work out a scheme securing the contract implementation and E.ON is not to pay fines in the amount the document initially stipulated.

8. Rostekhnadzor to carry out comprehensive checks of oil and gas firms in 2010

   Rostekhnadzor is considered by many as one of the services impeding businesses; this is why oil and gas companies should expect nothing good from these comprehensive inspections. Given a selective approach, it is not ruled out that they will become an element of fight for property in Russia, since violations can be found with anyone.

9. Dismissal of deputy energy minister

   In late January Russian deputy energy minister Vyacheslav Sinyugin was replaced by Andrey Shishkin. On one side, the responsible for the accident were found. On the other side, this is reflection of the struggle between clans for control over the energy sector. This is why current processes in the sector, e.g. HR changes in Inter RAO UES and RusHydro, as well as the idea of creating a single company, show that war between clans for the remaining state property in the electrical energy sector has started. Rotation on an important post of deputy energy minister testifies to the change in the balance between clans in this situation.

10. Reshuffle in Russneft

    Mikhail Gutseriyev is coming back to the company's top management. The situation in the Caucasus is so complicated that the federal center even has to get him back. However, general inconsistency of the decisions made testifies to the fact that the center does not know what to do with the Caucasus - following the decision to return Gutseriyev, Alexander Khloponin was appointed presidential envoy to Northern Caucasus; yet, these are absolutely different appointments. Nevertheless, Gutseriyev's men are returning to the company. However, the most interesting things are yet to happen to Russneft: negotiations with Sberbank and Sistema are still underway. Thus, the company will have new shareholders. Sistema buys assets for someone else, which means Russneft will change owners at least two more times.