Top events of April 2010

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

1. Russian-Ukrainian gas agreements and Putin's proposal to merge Gazprom and Naftogaz

   To a great extent this story looks extremely unexpected, because many observers consider the gas-for-fleet accords to be political. However, we believe these agreements should be viewed as a payment to Ukraine for its civilized behavior. The situation is that it is high time for Ukraine to understand that in seven to eight years there will be no transit though its territory. The proposal to unite Gazprom and Naftogaz, which is in fact a takeover of Naftogaz, seems to be an element of a combination of many moves. Firstly, Russia signed the agreement with Ukraine, which was then followed by more active preparations for building South Stream. Ukraine found itself driven into a corner. After that PM Putin showed his main trump - his readiness to step back but in a very tough way. Now there is no talk about a consortium but about management. This is a radically different proposal. In 2002 when a document on a gas transportation consortium was signed Ukraine deceived us demanding the right to re-export gas. At that time the situation was different. Over the past seven years no investments have been made. And what is the outcome? There is a pipeline system that keeps getting rusty. There is Europe that declares that Ukraine is not its problem but Russia's problem and that Russia should think how to deliver its gas to Europe and how to deal with Ukraine. Thus, nobody wants to invest in the Ukrainian pipe. Moreover, Russia has also given up Ukraine as a bad job meaning to say goodbye to it in seven years when South Stream and Nord Stream are built. In this situation there is a chance for salvation but under very strict conditions. For Russia this is definitely the most optimal variant: we retain the existing transit route of a 141bn cu m capacity, which is the cheapest way to deliver hydrocarbons to Europe.

2. Austria joins South Stream

   It is interesting that when we wanted to influence Ukraine we speeded up the process of creating South Stream. But a logical question arises: why do we need this pipeline if Naftogaz and Gazprom will merge? It is difficult to expect an additional 63bn cu m of gas to be pumped. Moreover, it is possible to expand Ukraine's transportation capacity from 141bn to 170bn cu m, in addition to Blue Stream and two pipelines via Belarus - these are quite serious amounts. In fact they are enough for Russia. It means the future of South Stream is under question. In May the fate of the main project may be decided; this is going to be the question of the year or even of the past twenty years: Gazprom taking over Ukraine's GTS. Only this variant gives some political stability. No consortium may provide guarantees, while proprietary rights are much more secure. Even if state authorities change in Ukraine they are unlikely to contest the deals. Moreover, Europe has already said that the Ukrainian problem is Russia's problem.

3. Beginning of construction of Nord Stream's sea section

   Certainly nobody will stop Nord Stream. Yet, if we get Naftogaz, the question whether we need Nord Stream will be raised. Ukraine's transportation capacity definitely can match the amount of gas supplies through both "Streams", but participants of the Nord Stream AG consortium have been already given guarantees of gas deliveries at least through the first line. Therefore Nord Stream will be obviously filled in. The question is just whether there will be the second line of this project.

4. Shtokman Development AG general director Yury Komarov replaced

   The issue of Nord Stream's second line is closely connected with the situation at Shtokman. Due to sharp growth in shale gas production, there is no clarity around LNG deliveries to the USA putting the future of the whole Shtokman project in limbo. This causes Vladimir Putin's dissatisfaction resulting in HR decisions. There is likely to be a task to provide some impetus to the project. On the day when Komarov's dismissal was officially announced, the prime minister in Murmansk declared Russia would not give up Shtokman and would develop it. Putin still counts on restoration of the demand for gas in Europe.

5. Rumors about shale gas revolution in Poland and development of Russian-Polish gas relations on the background of the tragedy

   Just several days before the tragic death of Polish president Lech Kaczynski there had been an article posted causing a stir. The article read that Poland would soon start shale gas production and its volume would even provide for the possibility of exports. One article was unlikely to have been noticed and the stir around it was not accidental. It had been planned to disseminate information contained in the article spreading rumors about Poland's shale gas. It is worth mentioning that the Polish president had time to visit Lithuania where he started negotiations on laying a gas pipeline to pump shale gas through. However prospects of this kind of fuel in Poland are rather vague over several reasons. Firstly, this is ecology. Secondly, this is a price. Shale gas is not that cheap and price parameters of some US projects should not be applied to Poland, because shale gas deposits are absolutely unique and the gas price is unique at each deposit. By the way, in terms of prices the first Hungarian projects have already surpassed the spot market price range. Thus, if Europe expects these gas prices to be close to the spot market prices (the current prices are about $170 top $180), certainly nobody will invest in Polish shale gas. And it is no coincidence that on this background Poland signed a long-term agreement with Gazprom on additional gas deliveries. While Europe in general was reducing Russian gas consumption last year, Poland was increasing it as it had few other options. Warsaw is building an LNG terminal in Swinoujscie but this facility will be launched in 2014 at best and there are some grounded doubts about this to really happen. Its capacity will be just 2.5bn cu m of gas, which is not enough for Poland. Thus, LNG is good but only Russian gas is a guaranteed reality for Warsaw.

6. Meeting of Gas Exporting Countries Forum in Algeria

   Europe has been scaring Russia with Qatar lately saying that Qatar will be glad to replace Russia on the European gas market. The Qatari gas is indeed cheaper and its spot prices were sometimes at $120. And Europe is confident that Qatar's main task is to oust Gazprom from the market. But in fact Qatar's main objective is to earn money. Why does Qatar sell gas cheap, at about $120 to $170 on the spot market? This is because Qatar is trapped. The USA provided it with false forecasts of development of the US market assuring this Persian Gulf state that the demand for LNG would be surging in America. And after Qatar had built its plants and brought new tankers, Washington said it had made a mistake forgetting about shale gas and it was up to Qatar to do anything with its gas. And Qatar had to ship this gas to Europe. But it is absolutely not interested in selling gas with a minimal margin. Even supplying gas at $100 Qatar will have a small profit, but this does not mean it will be satisfied with it. This is why Qatar has started negotiations with Gazprom. So far one cannot say that the forum has really matured; there is still some adjustment going on inside it. It is important to have a signal from Qatar that it is not going to squeeze Gazprom out from the market by all means ensuring at least a minimal profit. Qatar is more interested in selling smaller amounts at a higher price; and this is becoming more evident.

7. US decision to start production at a previously closed offshore area and a big accident in the Gulf of Mexico

   It is interesting that these events coincided. Hardly had Barack Obama declared about readiness to open access to offshore projects, when a platform in the Gulf of Mexico sank. As a result, Obama said he was taking back his statements. This is to Russia's advantage because if the USA does not produce oil at its shelf, it will keep buying it from the Persian Gulf states, and thus we will transfer our competitors there as pressure on the European market remains and we do not need excessive competition. Another important moment: America will begin examining ecological issues of projects on its territory more attentively. And in this case more attention will be paid to shale gas projects, because currently there is a inquiry pending consideration at the US Congress about the necessity to check chemical composition of reagents used in hydraulic fracturing process when shale gas is produced. Some experts are confident the structure of these chemicals brings irreparable damage to the environment, because hazardous substances get into waste water. So far, servicing companies refuse to disclose the composition of the chemicals saying this is a commercial secret. However, with the recent surge in attention to ecological matters there are grounds to believe that the shale gas issue will be scrutinized. Usually they turn a blind eye to ecological problems of shale gas production.

8. Belarus against Russia

   In April the Belarusian president became one of the leading newsmakers. Firstly, the first tanker from Venezuela arrived in Odessa. Belarus intends to start full-fledged oil supplies from Venezuela replacing Russian oil on its market. This is obviously a political decision because, according to our estimations, economic difficulties with such supplies inevitably emerge. Nevertheless, Lukashenko insists on this project. The main task for them now is to switch the Odessa-Brody oil pipeline into a reverse mode - something even the Orange coalition in Ukraine failed to implement as the economic expediency of that project was absolutely unclear. Now Lukashenko wants to revive something even Yushchenko could not. A more interesting thing is that Russia asked Lukashenko to sell oil refineries but he refused and declared he was ready to do it in favor of Venezuela. The route of Venezuelan oil transportation is very interesting as it is evidently anti-Russian. Finally, few observers paid attention to another strange statement of the Belarusian leader. He said the Russian company Slavneft, which is one of the shareholders in a Belarusian refinery, would not get profits from processing Venezuelan oil. From the point of view of the corporate law, this is absolute imprudence. It looks like there are some "white" and "black" shareholders. Russian stakeholders will not receive dividends from operations with Venezuelan oil. Thus, the Belarusian president once again reminded Russia what a reliable partner he is. Simultaneously Hugo Chaves also showed he was a "worthy" partner as by supporting Lukashenko in his endeavor he played against Russia.

9. Sharpening of the situation around Kovykta

   Gennady Timchenko was rumored to be planning to buy Kovykta. Meanwhile, the situation is explained very simply: Gazprom was comfortable for a long time having deprived TNK-BP of a possibility to independently develop Kovykta and in fact was waiting when TNK-BP would be ready to sell the project at the price suitable for Gazprom. TNK-BP wanted to gain maximal preferences when suddenly Rusneftegaz showed its interest in the asset. The latter company is known to be under strong influence of deputy PM Igor Sechin. As a result, TNK-BP obtained a possibility to play between Gazprom and Rosneft, between different companies, different administrative clans. Now we see that Vekselberg is leaving TNK-BP for the Skolkovo project (Russia's Silicon Valley) that he is more interested in. Khan is rumored to be planning to quit the company. It looks like that there is no one to sell Kovykta. As a result, probably to provide an additional commercial "weight" there are speculations about the emergence of a third buyer, although the latter refutes such interest. Further developments are very interesting. However, formally speaking, we understand that the state has a possibility to withdraw the license at any moment and more likely to transfer it to Gazprom.

10. YUKOS case

    The second Khodorkovsky case started. Everybody understands that he is unlikely to be released, but some news is possible on this topic, e.g. Rosneft assets were sequestrated. From the point of view of international prospects, some consequences are possible. But one should not forget that a more serious action is in the Hague court and its rulings may have far more serious consequences than the attachment of Rosneft's property.