Top events of March 2010

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

1. Gas talks with Ukraine

   Some breakthrough was being expected for a month but uncertainty continued. It is clear that Viktor Yanukovich’s sponsors now want to get bonuses to cover expenses on his election campaign; so they are sending him to Russia to secure lower gas payments by all means by April 7 already. Russia obviously wants the current contract to be honored and if Ukraine desires a rebate, there should be some weighty arguments for that. So far Kiev is failing to exchange politics for gas, since Russia is not really eager to do so yet. In the current situation Ukraine is facing two most dramatic problems: firstly, Europe is not willing to pay for Ukraine. Secondly, Russia in fact does not really need the Ukrainian gas transportation system as much as in 2002 when the sides signed agreements on establishing a gas transportation consortium .

2. Russian president Dmitry Medvedev holds a special meeting on energy efficiency in the Khanty-Mansi Area

   This meeting once again showed that energy efficiency was one of Medvedev’s most favorable projects. Meanwhile, it is clear that there is no strategic vision on this issue so far. Associated gas has been spoken about not for years but for decades; it was mentioned at the Khanty-Mansi meeting too. Then there is this fuss about bulbs: first there were discussions about energy saving bulbs, now it is about LED ones … Unfortunately there is no progress so far. And it is obscure how to apply the law on energy efficiency in regions. Corresponding administrative decisions are interesting and symptomatic, e.g. Dmitry Medvedev is trying to turn the commission for the fuel and energy sector into a commission for energy efficiency. This reminds of previous practices when administrative rivals and dangerous competitors were commissioned to deal with development of agriculture. The fuel and energy sector commission is chaired by deputy PM Igor Sechin who has rather complicated relations with the Russian president. In this regard, there are definitely many questions. How will energy efficiency be developed further? Everybody understands that it is necessary as it will provide for saving billions of rubles or even dollars. Yet, when it comes to practical implementation the work becomes paralyzed.

3. ConocoPhillips declares about selling 10% in LUKOIL

   This is quite an important event. The matter is that the situation with production is very complicated in Russia. Output growth is falling in Western Siberia; huge investments are necessary in Eastern Siberia deposits. Meanwhile, companies, including LUKOIL are cutting their investment programs attributing it to the economic downturn. Production costs are constantly increasing, there is not enough money in the country; there seems to be tax incentives but revenues can still be taken from the oil and gas sector only. In this situation the government asked non-residents to enhance their activities in Russia. But non-residents need guarantees and access to new deposits. It is not accidental that Conoco top managers directly pointed to the fact that LUKOIL is not acquiring licenses. It is obvious that non-residents are trying to somehow pressurize the Russian government in this extensive game. This is a very alarming signal. This may be a mere coincidence but the government has said this year it will surely announce the names of future holders of licenses of the strategic oil deposits named after Trebs and Titov – the ones LUKOIL has always bidden for. Thus, Conoco is showing that if Russia is interested in strategic partnership it is high time to pass from words to deeds.

4. Nord Stream receives credits from European banks

   The project is obviously to materialize in any case: permits and money have been obtained. Considering uncertainty around Shtokman, this deposit may be more actively engaged in the project. There are questions concerning construction of pipes in Germany, i.e. Nord Stream’s problem focus is now shifting from its underwater section to the land section in Germany where it is necessary to lay two pipes to reach consumers. Meanwhile, it is very interesting to see how they will operate under the conditions of enforcement of the Third Energy Package.

5. Idea of merging Nabucco and South Stream publicly voiced

   NESF mentioned about prospects of such a joint project almost 1.5 years ago. This idea seems to be reasonable. Currently both Europe and Russia may make a rather dramatic mistake. Europe is confident that it will take gas in other places while Russia is sure it will sell gas to other consumers. In several years when decisions have been made and infrastructure has been built it may turn out that everything was just illusions. We need projects to show we are still partners, not enemies. South Stream and Nabucco are still considered rivals. This situation should be revised. On one side, there is an illusion that if we apply a little bit more pressure, the Nabucco project will collapse and we will become winners. Definitely there is success: e.g. signing an accord with Croatia. Zagreb’s desire to join South Stream is interesting as Croatia is already building an LNG terminal on the island of Krk. But anyway we should not demonstrate our triumph over Europe. South Stream is a European project and it is no coincidence that the French want to join it. This is why integration of South Stream and Nabucco would be positive. Russian energy minister Sergey Shmatko has so far given his negative view of the idea to combine the two projects. However, we understand that as long as Vladimir Putin has not voiced his opinion the decision will not be made. So, let’s wait for official statements.

6. Struggle for tax preferences for Eastern Siberia continues

   There was behind-the-scenes squabble for the whole month between Russia’s finance minister Alexey Kudrin and deputy PM Igor Sechin. The situation around taxes is very indicative: on one side everybody understands that tax preferences are important for Eastern Siberia. But on the other side, it is clear that there is no other sector but the oil and gas industry to generate revenues for the country’s budget. This is why an unpublished Solomonic decision was made: preferences will remain if money for the budget is found somewhere else. As a result, Igor Sechin is looking for the money in other places.

7. Escalation of oil conflict with Belarus

   Belarus is probably one of the places Mr. Sechin will try to take money from. It is possible to cut preferences for the Union State and the money saved to add to Russia’s budget to ensure that the companies operating in Siberia receive preferences. Igor Sechin is known for his ability to achieve a goal set, which makes Lukashenko very nervous. This is why the Belarusian president was making loud statements the whole March – first it was an agreement with Venezuela on oil supplies, then a statement that Venezuelan companies would participate in privatization of Belarusian refineries. And his latest idea was to deliver Venezuelan oil via Ukraine through the notorious Odessa-Brody pipeline. This pipeline has always been considered an anti-Russian project. Currently it is operated in a reverse mode. Even the “Orange coalition” failed to launch it because it is unprofitable. Yet, Lukashenko is going to transport Venezuelan oil through this pipe, which is absurd from the economic point of view. There are questions considering its political implication: who is Lukashenko for us? Is he a political partner? If he is, how much does this partnership cost? If there is no partnership, what we are waiting for?

8. Gennady Timchenko’s companies buy GEOTEK Holding

   Timchenko’s empire is expanding; now he is entering the oil service. Last year’s tendency – making Timchenko’s empire public and showing new assets – continues. Timchenko has always been the oil trade king, and now he is entering upstream. If it turns out that he has long been in upstream, this will be the last segment he exposes his assets. So far there is no such information.

9. YUKOS case development and its consequences for Russia

   This case was again highlighted. It is clear that the decisions being made concern Rosneft’s American assets where its business is rather unserious. Yet, there is an effect. Let’s wait for the main showdown – court hearings in the Hague. They may bring much more troubles to Rosneft.

10. Vladimir Putin participates in launching second power generating unit of Volgodonsk nuclear power station

    The second large nuclear project of late was launched. The first one was signing an agreement on building the Kaliningrad nuclear plant. This testifies to the fact that Rosatom intends to speed up construction of power units in Russia and abroad and reach the level of one to two units per year. Yet, problems Rosatom is going to face are also clear. First of all this is an HR problem, not even the money problem. Moreover, the problem of the machine-building sector is outstanding – it may not catch up with construction of nuclear power units. Previously it seemed there would be shortage of concrete or building capacities, but during the crisis there appeared possibilities to find additional capacities. Nevertheless, there are many questions regarding prospects of implementation of Rosatom’s plans. Moreover, in March there was much talk about projects abroad, e.g. in Turkey, India that Putin visited, China and obviously Iran.