Top events of June 2010

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

1. “Gas war” against Belarus

   There are many questions about the reasons for this battle. The whole set of factors was likely to be behind it. The need for pressurizing Belarus over the establishment of the Customs Union was definitely not the only motive as some experts claim. It is doubtful that Putin started such a complicated and dramatic conflict with Belarus for the sake of the Customs Union that is not in fact his mega priority project. Personal aversion of Russian authorities to Lukashenko coupled with their desire to force Belarus to sell its assets amid a complicated financial situation in the republic – it concerns a 50% stake in Beltransgaz and two refineries – is likely to have triggered that conflict. In addition, the oil dispute is not settled yet, and there is a desire to convince Europe of the necessity to lay South Stream and Nord Stream. Finally, the issue of the single customs space also played its role. It is also clear why the conflict occurred in summer, not in winter: gas consumption in Europe is lower now, which means it would suffer substantially less. In reality only Poland was in a risk zone. Yet, the conflict left quite a big number of questions unanswered with the main one being the problem of proprietary rights on the pipeline. Alexander Lukashenko was going to cut off gas supplies through the Yamal-Europe pipeline that belongs to Gazprom, not Belarus. This is an absolutely new situation. Now it turns out there is absolutely no guarantee that you can use your own property.

2. New initiatives in Russian-Ukrainian gas relations

   Ukraine was somewhat in the shadow of the situation around Belarus. But these issues are very closely tied. This is not only because Ukraine offered to increase gas transit through its territory demonstrating its transit reliability in every possible way, but also because the Belarusian case made the Ukrainian issue even more complicated. Previously it seemed that the main question was to convince Ukraine to give up Naftogaz. During the whole month events were developing around this matter with Ukraine making some fancy proposals. Responding to practically direct proposals to sell Naftogaz, Ukraine suggested allowing it to produce gas in Yamal or opening its offshore zone to Russian companies. Finally, there was a suggestion to build another pipeline through Ukraine, which is certainly absolute phantasmagoria. But now it is obvious that acquiring the pipeline system is half the work. It is necessary to ensure that this pipeline is operated in our interests. Moreover, Ukraine is in a hard financial situation just like Belarus. It is unclear whether it will manage to pay the June gas supplies even taking into account the discount. Besides, according to the Stockholm court’s ruling, Naftogaz is to pay for the 11bn cu m of gas that belonged to RosUkrEnergo and was taken from underground gas storages.

3. Vladimir Putin’s visit to Turkey, giving up Blue Stream-2 project

   On one side, Russia formally gave up something in reality it had refused long before that. The Blue Stream-2 project, meaning a pipeline to Italy, has not existed for a long time and is now called South Stream. There was an idea to lay a pipeline to Israel but since Tel Aviv has found additional gas reserves, there is no necessity to build such a pipeline. However, Russia once again showed it was ready to make serious concessions to Turkey. This concession is indeed formal but there are other steps towards Ankara that are not so formal: constructing the Samsun-Ceyhan oil pipeline, which increases our dependence on Turkey in terms of oil transit; a nuclear power plant in Turkey; gas prices and the gas contract conditions. There are many questions and Turkey demands many “carrots” just in exchange for its consent to lay South Stream on its territory.

4. GdF Suez joins South Stream

   Main formalities are settled. The company seems to get about a 10% block of shares from E.ni’s stake. This once again testifies to the fact that despite relatively stable relations with Ukraine, there is no fundamental solution of the transit problem. This is why Russia continues staking on the South Stream implementation. Despite some complication with Bulgaria, there are alternative variants with Romania, and it is important that more non-residents are becoming engaged in the project. It means South Stream currently is the top priority for Putin. The negotiations with the French just confirm this once again.

5. Struggle around export duties on Eastern Siberian deposits

   The finance ministry is winning so far, which is understandable amid a large budget deficit. President Medvedev delivered a budget speech and stressed that the budget deficit should be halved by 2013. But who will pay for this reduction on the background of the upcoming elections when pensions and other social payments will have to be increased? It is obvious that Putin, despite his love to the oil and gas sector, will have to impose additional taxes on oil and gas firms. And here comes the most interesting part: the search for a “sponsor”. A lot of fiscal ideas emerged in June. Hardly had finance minister Alexey Kudrin proposed to reestablish export duties on Eastern Siberian oil (everybody understands perfectly well that on the whole it is about one company and one deposit, which is Rosneft and the Vankor deposit, i.e. it means the tax on Rosneft and Igor Sechin), when Mr. Sechin rushed to reject it. People close to him, e.g. deputy energy minister Sergey Kudryashov, pushed forward an idea to introduce a tax on additional incomes of the gas industry. It was a hint that Gazprom, not Rosneft, should pay. Thus, Russian elites are trying to shift fiscal responsibility onto each other having received Putin’s signal. This story definitely will not develop in a simple way.

6. Results of Gazprom shareholders’ annual meeting

   The traditional annual meeting of Gazprom shareholders this June created a new sensation – it generated no breaking news. Except promises to dismiss Alexander Medvedev, there were no rumors about a possible serious reshuffle. Unlike last year’s event, there was no game against Alexey Miller. He went through this meeting very confidently. Now there are rumors about his competitors, e.g. Mr. Medvedev who got carried away by hockey too much and does not make shareholders happy with growth in gas supplies to the European market. By the way, Alexander Medvedev voiced a rather conservative forecast of gas exports to Europe predicting them to total about 146bn cu m per year.

7. Annual meeting of Rosneft shareholders, Sergey Bogdanchikov’s future

   A classical administrative scheme was implemented in this case: an indefinite-term contract that can be terminated at any time by a decision of the Board of Directors, i.e. Igor Sechin. Relations between Sechin and Bogdanchikov are known to be not very good, but the deputy PM long ago took control over the company and this time he demonstrated he could remove Bogdanchikov at any time. It seems Sechin could not find a more or less adequate candidature to replace the company’s president, but he solved this HR problem in a classical and, to some extent, elegantly Russian way.

8. Continuation of BP oil rig saga, Tony Hayward’s visit to Moscow

   On the eve of this visit deputy PM Igor Sechin contrived to send Hayward into retirement having declared he would leave for sure and his successor would be announced soon. So, Igor Sechin showed he is not only a big expert in the Russian energy sector but has some special knowledge about the fate of western majors. BP refuted Mr. Hayward’s resignation. However, everybody understands that Hayward came to Russia not just to apologize for the accident. The company needs money to pay fines and other related expenses meaning it may sell its property. BP has quite a number of assets in Russia including half of TNK-BP and slightly over 1% in Rosneft. Finally, there are possessions in the post-Soviet states, e.g. a substantial stake in the Shakh Deniz project that is a key one for “anti-Russian” gas pipelines like Nabucco. An interesting game seems to start in the future.

9. Continuation of Kovykta story

   There have been attempts to sell Kovykta for many years but they have failed so far. In June there were speculations about RUSIA Petroleum’s bankruptcy; this measure is necessary to avoid payments to minority shareholders in case a major stake is bought out by some large firm. Thus, the bankruptcy simplifies the procedure of selling Kovykta and makes the deal cheaper for a potential buyer. But the buyer is unknown so far. Besides, there are developments around TNK-BP, which simplifies this phase. It is possible that BP will not sell the whole company but may try to sell deposits. There are a few bidders for them and all of them are well-known. The fight for Kovykta will be desperate because this is not a simple asset but a fundamentally important one from the point of view of schemes of Russian gas exports.

10. NOVATEK secures special conditions for gas exports

    No wonder NOVATEK managed to agree with Gazprom. On one side, Gazprom retains its export monopoly. On the other side, it will get just a 1% fee for gas transportation; NOVATEK will sell its gas independently. Considering that NOVATEK’s shareholder is Gennady Timchenko there is nothing to be surprised at. The question is whether these new conditions of gas transit will help NOVATEK lure non-residents into its project.