Top events of February 2010

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

1. Presidential elections in Ukraine over, Viktor Yanukovich's initiatives on creating gas transportation consortium

   The issue of Ukraine will remain being rather painful both for Russia and Europe. Even if Russia builds Nord Stream and South Stream to fully replace Ukrainian transit, this will take quite a lot of time. Ukraine will remain a transit state for 15 years at least. It is important for Russia that the Orange Revolution epoch represented by Yushchenko is leaving. But the election of Yanukovich as Ukrainian president does not mean immediate fraternization and Ukraine ceding its positions. Behind Yanukovich there is quite a powerful industrial lobby of the Donetsk Region and the country's eastern regions that really needs cheap Russian gas. According to the current contract signed on January 19, 2009, Kiev buys Russian gas at $302.5 in Q1. This is substantially higher than the price for all industrial enterprises in Ukraine. The national economy cannot work with such a price. The Ukrainian government is facing a necessity to either increase gas prices on the domestic market, which is fraught with unpopular decisions and decline in Yanukovich's rating, or to push for reducing the price of Russian gas. Viktor Yanukovich suggested returning to the idea of establishing a gas transportation consortium; he expected that at first the prices would be cut and then negotiations would follow. But Russia has already made similar mistake: the idea of the consortium emerged back in 2002. The sides had already signed necessary documents when Kiev proposed an absolutely fantastic idea of buying gas at the border and providing Naftogaz with a possibility to re-export gas. As a result, Ukraine was supposed to become a re-seller of gas, not a transit side. One should be ready for such tricks this time again. By the way, such position fully contradicts Europe's philosophy - a pipe's owner cannot impede activities of the gas owner. Thus, Yanukovich's victory at the presidential elections in Ukraine does not mean settlement of all problems in bilateral relations. Moreover, the fact that the new president has serious industrial sponsors stipulates a clear course aimed at reducing gas prices, while Yanukovich's experience of working with ex-president Kuchma reflects all typical characteristics of Ukrainian politicians and first of all their inclination to ruses and trickery. So, watch out.

2. Kudrin vs. Sechin: struggle around Eastern Siberian oil preferences

   Deputy Prime Minister Igor Sechin is a consistent adherent of expansion of oil supplies to China. He is ready to make any budget concession for that - this concerns both export duties and oil production tax at Eastern Siberian deposits. Russian finance minister Alexey Kudrin has an absolutely different point of view; he understands that the budget deficit is rather serious and it is impossible to get out of this situation. It is interesting that in Russia there is a point of view that the oil and gas sector is a weight on Russia's economy but nonetheless everybody is living at the expense of the oil and gas sector. Now it turns out that expenses on oil production are growing quite strongly. This means that in any case the budget will not get as much oil and gas revenues as it was two to three years ago. And this is quite a serious dilemma: no new economy has been created in Russia while the oil and gas sector is no longer capable of generating new revenues. This creates a fundamental contradiction reflected in Kudrin vs. Sechin face-off.

3. Second accident at ESPO

   There are more and more questions about validity of attempts to redirect Russia's exports policy and hectic construction of new pipelines to China. This is obviously a conscious political course based on very serious economic losses of the Russian budget. Increase in the pace of construction has already led to several large accidents, although the oil pipeline was launched just less than two months ago.

4. Creation of oil control system and Omsk meeting

   The idea of establishing the oil control system reflects administrative struggle for control over exports. The system's creation is actively lobbied by Igor Sechin but Russian president Dmitry Medvedev, who has rather complicated relations with the deputy PM, publicly supported this idea at a meeting in Omsk. All administrative clans in the oil and gas sector would like to secure control over exports. This is why the question who will directly supervise the oil control system is the most exciting.

5. Replacement of governors in Russia's oil and gas producing regions

   Staff rotation occurred in the Khanty Mansi and Yamalo Nenets autonomous areas of the Tyumen Region. Those were quite specific appointments. On one side, Gazprom's lobbyist Natalia Komarova became the head of the oil region. On the other side, Dmitry Kobylkin associated with NOVATEK became governor of the region related to Gazprom's sphere of interests. However, one should remember that the influence of governors in these areas is incomparable to the influence of companies. For instance, in Yamal the role of Gazprom and its "generals" heading Gazprom's production subsidiaries is by many folds higher than of a governor.

6. Alexander Ryazanov resigns as Stroytransgaz head

   There are rumors that Alexander Ryazanov may become the government head of the Khanty Mansi Autonomous Area. This is interesting news as one can trace growing influence of NOVATEK and its shareholders, if this appointment takes place.

7. Sayanogorsk meeting, Putin's discontent with failure of private businesses to implement investment programs

   Private companies received energy generating assets in fact at laughable prices. This was the way Chubais's doubtful philosophy of "how to form class of proprietors" was put into practice - let's give them assets for free, they will learn how to manage them and will become very responsible owners. As a result, energy generating assets were given in exchange for promises of future investments. When those laughable prices were mentioned, it was omitted that future additional issues had been promised in exchange. Generating assets were taken with promises of launching new capacities. But then everybody started complaining about the crisis and no new capacity was created. This is why Prime Minister Vladimir Putin is formally right. Yet, businesses could also argue that the promised capacity market had not been created, i.e. the state was to pay at fixed prices for new generating capacities. However, the market was not created and businesses kept silent. By the way, Putin said that a long-term concept had been signed. But so far the document lacks the main thing - the prices. The capacity market will not work without prices. Yet, businessmen's silence was evidently the result of their reluctance to invest. Even if all necessary conditions were created, there would be no required amount of investments anyway.

8. Possibility of uniting several gas producers

   The situation is very interesting. Merger variants can be different. It is important to note that changes among independent gas producers are closely connected to a possibility of selling 19 something per cents in NOVATEK by Gazprom, which makes Gennady Timchenko's group in fact the sole owner of this company without unnecessary for them participation of Gazprom. NOVATEK will become a very promising company. There is no doubt that the number of news reports about NOVATEK will be growing; moreover, the company has already ensured positive dynamics: its production and sales on the Russian market are advancing. NOVATEK is obviously a rapidly growing and dynamic firm on our market and the secret of its success is clear - this is its shareholder Gennady Timchenko.

9. Prospects of changing Shtokman development concept

   Gazprom has to acknowledge that its plans to enter the American market were too optimistic. According to initial plans, part of Shtokman gas was to be liquefied and delivered to the USA. Now, due to shale gas, the US market will be saturated with domestic gas. Shtokman Development AG chief Yury Komarov declared about possible cancellation of plans to build an LNG plant. Besides, the adoption of final investment decisions on the project has been rescheduled for a later date.

10. Last permit to lay Nord Stream issued

    Despite many words said about ecological threats posed by the project to the Baltic Sea, all necessary permits for construction have been secured and the project will be launched. Even the change of a political regime in Ukraine will not stop this project as too many efforts on negotiations with European officials have been made. Moreover, Russia made serious concessions to Finland and Sweden related to timber exports; talks with Denmark were not simple either. But it would be nice to avoid making this project the most expensive in terms of laying one kilometer of pipes. We would like this project to be successful not only in terms of ecology but also from the point of view of optimizing financial expenses.