Top events of August 2010

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

1. Blackout in St. Petersburg

   It is remarkable that RAO UES reforms started with a blackout in Moscow when a substantial part of the capital was left without electricity and neighboring regions also were in a complicated situation. That time we had a catastrophe because of a usual transformer at the Chagino substation. Anatoly Chubais said then that our main task was to facilitate investments in generating facilities and urge private owners to upgrade equipment. Two years have passed. RAO UES does not exist; there is a liberal market but not a single objective of the reforms has been implemented. There is no reduction in electricity prices; there are no radical changes in the situation with fixed assets. On the contrary, after the reforms there was an accident at the Sayano-Shushenskaya power station last August. And there has been in fact a similar blackout in our second capital, which testifies to the fact that the situation in the electrical energy sector is hardly changing; after Chubais left RAO UES the electrical energy sector unfortunately has not moved to a new qualitative level.

2. Defining tender conditions on Trebs and Titov deposits

   This is an indicative event for the sector because the number of interesting oil and gas assets belonging to the state is reducing. Previously Vladimir Putin managed to distribute such assets among major clans with almost no conflicts or if there were some they did not become public. However now there are few such deposits and there will be war for every one of them. This is why no wonder the energy ministry has conflicts with Rosnedra over tender conditions. Each body lobbies the interests of its own companies. In this case the Trebs and Titov tender may become a kind of a Svyazinvest case during Medvedev’s term in office. During Yeltsin’s presidency a conflict around Svyazinvest led to sharpening of administrative conflicts between two clans resulting in very serious administrative consequences. We will follow the developments.

3. Launch of Bushehr NPP

   Russia was trying to implement this project for many years. There were a lot of emotions around it. There were even fears that Israel would bomb Iran. Nevertheless, the fuel is being loaded and the facility will start generating electricity in September. The Bushehr NPP does not remove questions that exist currently around Iran. The main paradox is that by assisting Iran we complicate our relations with Western countries. And Iran is undermining us intending to supply gas to Europe, although in August the Nabucco consortium refused to consider Iran as a resource base for the project. Thus, it turns out that we are helping the country that treats us as competitor on the European gas market. In this regard, there are doubts about adequacy of our policies towards Iran and neighboring Turkey.

4. Continuation of Gazprom-Naftogaz talks on gas consortium

   The negotiations continue with Ukraine being in fact brought to bay. Russia already showed the “stick” and now there is the “carrot” in the form of Alexey Miller’s proposal to sell gas to the Ukrainian population at Russian domestic prices, which by the way caused quite an emotional reaction of Ukrainian authorities. Energy minister Boiko definitely got entangled in his lies saying that the Ukrainian population was anyway buying gas at Russian domestic prices. However it is known that following a 50% rise, prices for different categories of the Ukrainian population vary from $90 to $118 while in Russia’s Belgorod the gas price is about $65. Kiev understands that Russia’s proposal may be offensive but beneficial because it will help Ukraine remain in the transit business and obtain 5% in Gazprom, the world’s largest gas company. And finally this will bring money for Ukraine to renovate its gas transportation system – this is something Kiev cannot get from the EU. It is necessary to produce the political will and cede the pipeline. It is indeed difficult to give away the last instrument of pressurizing Russia. But Ukrainian president Viktor Yanukovich has to decide what is more important for him – the country’s strategic interests or momentary interests of his clan. Further developments will depend on this.

5. Sharpening of Russian-Belarusian relations

   Despite creation of the single customs area, the conflict went too far in August. There was information war. Alexander Lukashenko in fact acts as the chief PR officer of Russian liberal oppositionists. But the reality is that having refused to buy Russian oil, Minsk failed to find a cheaper one on the market because Venezuelan oil is substantially more expensive. The statistics shows that in H1 oil deliveries to Belarus felt by actually 50% but the most important thing was that Belarusian exports of oil products dropped by 40%. This is a blow on the Belarusian economy caused by the policy of avoiding Russia.

6. Presentation of the Northern Sea Route and condensate supplies by Baltika tanker to China

   The story is simple: there is the Yamal LNG project and its owners try to sell a 49% stake to nonresidents. But the project is so technically complicated that nonresidents certainly ready to participate but at the same time they would like to understand what bonuses they will get for that. There is also resource nationalism because it is becoming more and more difficult to produce hydrocarbons, which is testified to by the BP platform story. The Yamal LNG project is very complicated: it is not just about producing gas and building a gas liquefaction facility. The main thing is to ensure gas transportation in conditions of in fact two meter thick ice. And under these circumstances NOVATEK owners try to show nonresidents that they have possibilities to secure tax benefits and state participation in implementing the Northern Sea Route project. We are witnessing the situation when the state is solving problems of a private company, NOVATEK, which is rather untypical for Russia considering speculations about nationalization in Russia and pressure on private businesses.

7. ConocoPhillips decides to withdraw from LUKOIL

   This is a very negative decision for Russia. This case shows that NOVATEK managed by clans close to Putin is able to ensure benefits while Alekperov’s LUKOIL cannot. ConocoPhillips was tired of waiting for the easing of taxation procedures inter alia on Black Sea projects. The fact that ConocoPhillips has left the shareholders’ capital of LUKOIL is a kind of signal to Russian state authorities that nonresidents are not ready to work without “carrots”. Development of deposits is becoming more and more technically difficult and costly, while Russia is unable to develop them independently. The most interesting thing is that after ConocoPhillips’s move the state gave in slightly: Alekperov was promised preferences on Black Sea projects; moreover, the Korchagin deposit project was launched. But preferences were only promised. ConocoPhillips’s decision may become an alarm signal to the state forcing it to make some real concessions to non-residents.

8. Continuation of the second YUKOS case

   The situation is developing in a very interesting way. In his TV interview PM Vladimir Putin said he did not know about the second case at all. On one side, it is difficult to believe in this. Such people as industry and trade minister Viktor Khristenko and Sberbank CEO German Gref could not testify in court with evidence rather supporting Mikhail Khodorkovsky without Putin’s sanction. It is difficult to imagine that Khodorkovsky will be released in the near future, while the term of his imprisonment on the first case will expire soon. But the logic of the second trial shows that it is likely to collapse. This is probably the tactic of driving the case to absurdity: the second trial may be followed by the third and the fourth with less and less attention being paid to every next one. Khodorkovsky is unlikely to be released especially in the period of another transformation of power in Russia related to a possible return of Putin to the presidential post.

9. Opening of the Russian section of ESPO up to Chinese border

   The pipeline finally reached China – something Igor Sechin was long striving for. The ESPO is put into operation so quickly that opening ceremonies are followed by accidents. Decisions on oil supplies to China are absolutely economically ungrounded. NESF still seriously doubts that Russia will benefit from this: the matter is that profitability of oil supplies to China is currently lower than to Europe. Previously a pipeline to China was considered an additional opportunity for Russia, but at the ceremony of launching the pipeline Putin straightforwardly said that the European direction of exports had a competitor. It turns out that China is a competitor of exports to Europe. The is the first time the PM admitted that in order to supply oil to China Russia needs to take it away from the European direction. Meanwhile, the economic efficiency of oil deliveries to the PRC is rather questionable and doubtful.

10. Government initiatives on introducing infrastructure tax

    During the period of preparations for the elections the search for money continues. The finance ministry actively pursues oil companies and Vladimir Putin agrees to the necessity to raise the tax pressure. We know that Gazprom and Transneft will have to make the biggest tax payments – but these companies need money badly. For instance, Gazprom’s investment program is expected to be around 800bn rubles next year. Transneft needs to build ESPO and BPS-2 and the firm does not have enough funds for them. And in this situation they are to pay an additional tax. But it seems, according to Putin’s logic, there is no other way – the elections should be held comfortably and these are usually oil firms that pay in Russia. The return price of introducing this tax is likely to be growth in domestic fuel prices and reduced investments in production projects, because infrastructure is such a favorite “child” that it is hardly possible to refuse it.