Top events of May 2010

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

1. Accident at BP oil rig in the Gulf of Mexico

   This was probably the major event in the reported period. Although this happened far away from Russia, this catastrophe may directly influence the Russian oil industry. Firstly, US president Barack Obama under the pressure of public organizations decided to give up large projects on the US offshore area. This means western majors will experience difficulties investing in the USA, which may force them to redirect resources into other areas. And Russia can well start competing for this money. The second moment is about the increased attention to ecology. At the first stage, when it was necessary to demonstrate growth in shale gas production ecological difficulties related to its production were not mentioned. But now when the world’s attention is focused on ecology we can raise the topic of ecological characteristics of the gas that competes against piped gas and in the future may become a rival to Russia’s liquefied natural gas posing serious threats to us. The third point is related to different conspiracy versions of this accident, e.g. BP that has lost about half of its value is rumored to be taken over soon. In this regard, it is interesting who will be a beneficiary of such a complicated operation. On the whole, this accident is unlikely to cause decline in the whole oil industry, because there are no alternatives anyway. By the way, it is necessary to point out that a project of oil production on a 1.5km deep sea bottom is fantastically difficult. And this is a modern image of the oil industry. This is certainly a big accident with a huge environmental damage. But just look at the complexity of the project on the ocean bottom: 1.5km deep, a state-of-the-art rig. Thus, this accident has once again showed that oil production is not just a dangerous business but also a hi-tech business. Ecological standards in this sector will be toughening and the sector will certainly react to them.

2. Tragedy at Raspadskaya mine

   The coal industry has always been considered an example of triumph of the private business that took the industry out of the crisis. In reality these were preferential coal transportation tariffs introduced before Putin’s presidency that helped the sector overcome the crisis. That was the secret of the success. The private business was saving on production expenses, including on mine safety, created a payment system, according to which a miner’s wage depended on production volume, which made them change registration figures of methane counters. And whatever it is said now, i.e. it was a tragic coincidence – such tragic accidents had happened before, e.g. an accident at the Ulyanovskaya mine in 2007 – they all had the same causes and the same consequences. Unfortunately, nothing has changed. Excuses of the private business do not convince anyone. We see the result of their “labor”, including numerous casualties. A decision to reinforce powers of Rostekhnadzor has been made; and here is a new problem. As soon as the state loosens control over businesses the latter feel at ease economizing on everything and first of all on the future – on safety, ecology, which is a typical approach. When the state toughens the grip, another problem comes to the forefront – red tape and racketeering by state establishments that do not allow businesses to develop. This is the main problem in Russia: we cannot find a balance between bacchanalia of free market and strict activities of state regulators. There are reasons to believe this is what the coal industry is facing. Rostekhnadzor may become an instrument of property redistribution, not an efficient regulator.

3. New Belarusian initiatives

   On one side, Belarusian president Alexander Lukashenko made a wise proposal – to sell the pipeline and the Mozyr refinery. On the other side, the attitude towards this person is similar to a well-known tale about a boy shepherd and wolves: the boy would cry for help when there were no wolves to fool the villagers who would run up to help him for nothing. But when wolves really came and he cried for help, nobody believed him. The same situation is with Lukashenko: nobody in Russia really believes him looking for some hidden meaning in each of his statements. And the Belarusian president provides grounds for such doubts: he soon left for Azerbaijan to negotiate oil supplies and is still continuing talks with Venezuela on expanding oil deliveries. Unfortunately, Mr. Lukashenko is engaged in blackmail trying to exert pressure, although his country’s budget is on its way out. Yet, we are certainly interested in the Belarusian pipeline.

4. Continuation of energy dialogue with Ukraine

   Developments show that the pipeline system is a political weapon for Ukraine, not for us. There was indeed a proposal to take over Naftogaz by Gazprom. Kiev refused to cede its gas transportation system, although it realizes that South Stream will be laid soon and there will be no necessity in Ukraine as a transit state. “But this will happen later, not now. We have several years to use the pipeline as an instrument of pressure on you”, Kiev thinks. Thus, Ukraine directly shows that the pipeline for them is more than just a pipe. This is an instrument of political pressure on Russia. This is an object of national pride. Kiev sacrifices strategic relations with Russia to a momentary conjuncture, i.e. Ukrainian elites think first of all of today; unfortunately nobody in Ukraine thinks of what will happen in 7 to 10 years.

5. Russian president Dmitry Medvedev visits Turkey

   Closer cooperation with Turkey is a response to Ukraine’s irrational attitude towards the Naftogaz-Gazprom merger. South Stream will certainly have to be built. This creates serious strategic risks in our relations with Ukraine. But, unfortunately, Turkey also makes use of it. Ankara tries to obtain as many concessions from Russia as possible. One of them is Russia’s participation in laying the Samsun-Ceyhan oil pipeline. Oil transit through Bosporus and the Dardanelles has always been a problem for Russia. To bypass these straits the Burgos-Alexandropoulos project was drafted, according to which oil was supposed to be delivered from Bulgaria to Greece bypassing Bosporus and the Dardanelles. Just several years ago Russia’s main task was to avoid Turkey in transiting oil from the Black Sea to the Mediterranean Sea. And now we are to join a project on transiting oil through Turkey. Thus, firstly Russia tried to escape Turkey but now Russia is throwing itself into Turkey’s arms. At the same time, the political situation in Turkey and a foreign policy conjuncture change very quickly. For example, in early June relations between Turkey and Israel got complicated and Ankara suggested that Israel should be removed from the Blue Stream-2 project. It means Turkey used and will use these pipelines to exert pressure, including a geopolitical one, on Russia. This should be taken into account. Turkey does not have these pipelines yet but it is already using them as instruments of blackmail. This is why many questions arise about what flirting with Turkey may lead to.

6. Turkmenistan refuses to provide Russia with tender to build East-West gas pipeline

   Turkmenistan is consistent in its anti-Russian policy. It may have been partially provoked by an accident at the Central Asia-Russia gas pipeline a year ago. Starting in fact from Q2 2009 Russia stopped buying Turkmen gas. Ashkhabad’s reaction was very harsh. Now it stakes on forcing Russia out of Turkmen business and reducing transit via Russia. But this policy is rather expensive because Turkmenistan cannot find another buyer as good as Russia. Neither Iran nor China is ready to pay as much as Russia. But today Russia is not ready to buy the same volume of gas from Turkmenistan as previously. It is obvious that our strategic paths are diverging more and more, which creates risks both for Ashkhabad and Moscow.

7. YUKOS case

   Charges brought against Mikhail Khodorkovsky look quite impressive. He is accused of stealing 350m tons of oil, which looks rather disputable supported by testimonies of witnesses. Such “cyclopean” accusations and politicization of Khodorkovsky’s figure take us away from one of the fundamental topics in the contemporary Russian discourse: the role of private capital in the oil sector development. Policies of private companies in Russia in the 1990s were aimed at ensuring maximal returns in a short period of time and refusing investments in long-term development of enterprises and the industry in general. Profits were maximized with accelerated production of oil from upper layers, but they were definitely saving on companies’ future. Now we are going to harvest the results of those policies that inter alia will manifest themselves in serious decline in the oil output that will soon start in Russia. By bringing such accusations against Khodorkovsky the state somewhat devalues this important topic about an efficient investor in the sector.

8. FAS success in fighting domestic oil cartels

   The Supreme Arbitration Court upheld claims of the Federal Anti-Monopoly Service (FAS). This is quite a long story; an important precedent was created. These days it is impossible to comprehend how much oil costs, because one has to deal with one and the same company starting from production and then to refining and selling petrol. So, it is this company that decides what prices to set within this chain. It is common knowledge that until we have a well developed sector of independent oil refineries not included into vertically integrated companies, there will be no competition on this market and no low prices as a result. This is why FAS is absolutely right in fighting a collusion of companies on the petrol market. We hope that the court’s decision will be a precedent and it will change the situation on the Russian market.

9. Gazprom is obliged to provide data on free capacities available

   The fact that Gazprom controls the whole gas transportation system and prevents independent companies from developing has been debated for a long time. On one side, in Russia there are practically no problems with access to the pipeline system. Only Rosneft faces such problems that are rather political. Everybody knows about relations between Gazprom and Rosneft, or, to be precise, about relations between their political supervisors. This is the reason for Rosneft’s problems with gas transportation.

10. Discussion of Russian domestic gas prices

    Gazprom again put forward the scheme of equal profitability of gas supplies to the domestic market. The idea is simple: the domestic gas price should be based on the European price less the price of transit and less export duties. Gazprom proposed to have transitional coefficients until 2014, i.e. to introduce the formula in 2011 and use reducing coefficients. Obviously there is a question: how this will influence the standing of our industry? There is some nervous reaction already. So far PM Vladimir Putin is cautious about it. But for Gazprom it is important to launch this formula; the company can provide discounts but what is important is to change pricing. Earlier we considered special pricing on the domestic market as a necessary subsidy to the Russian economy but now, according to Gazprom’s initiative, this is going to be some business model. Everybody will have to mind Gazprom’s business interests and not to complain about our cold climate asking for cheap prices. It is important for Gazprom to change the attitude at first but how many years it will take is a secondary issue.