Top events of October 2010

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

1. Government discusses Yamal projects’ development

   The meeting had been planned as discussion of the general strategy of the gas sector development but turned into a mass PR action for the Yamal LNG project that resulted in a special government decree. It is surprising that a private project receives bonuses from the state in the form of special taxation procedures and readiness to invest in its infrastructure development. However, considering that the project is implemented by NOVATEK, whose major shareholder is Gennady Timchenko, many questions probably fall off. But on the other side, it is interesting that the state in fact lobbies private projects amid speculations about nationalization of the oil and gas sector. Nonresidents that are offered to buy 49% in the project should be careful as they will have to share risks not with the Russian state but with a private company that may simply lift its hands at some point.

2. Another phase of Russian-Belarusian conflict

   The whole month we were waiting for the news from Minsk. In October Belarus was promising to replace Russia with Venezuela; Hugo Chaves visited Minsk, while the Russian side attempted to find some scheme. Russia made a sound proposal to retain the zero duty on crude but transfer export duties on oil products that Belarus receives to the Russian budget. Actually Kazakhstan proposed this idea: to collect duties at the Customs Union’s border. Yet, this question is not simple, e.g. there are different rates of export duties in Russia and Kazakhstan – they differ by more than 10 times. Minsk is hesitating so far. The Belarusian story is likely to get into our rating again.

3. Vladimir Putin visits Kiev

   A lot of things were expected from this visit: formation of a JV to manage Ukraine’s gas transportation system had been actively negotiated for several months already. Yet, no JV was established but the talks entered their final stage. It is not ruled out that at the end of this year or in early 2011 the deal will be signed, because the Ukrainian economy is hardly copying even with the so-called Kharkov gas prices, i.e. those with a 30% discount. In Q4 the price is already $252 per 1,000 cu m, and it will rise next quarter. Ukrainian PM Nikolay Azarov says Kiev agrees to $230. But why agreeing to $230, if we have a contract that even with a 30% discount stipulates the price of $252? This is very difficult. There should be no empty talks on this issue many months; sooner or later Ukraine will have to agree to set up the JV. This will help it retain this business, since $3bn in annual transit fees is a very solid amount for Ukraine.

4. TNK-BP decides to buy assets in Venezuela and Vietnam

   This deal was signed and TNK-BP made a deposit; the firm is also negotiating purchases of gas businesses in Algeria. It is interesting that TNK-BP buys assets of its parent company. BP has always been considered a parent as it has 50% in TNK-BP. Now the subsidiary is eating away assets of its parent company. But the oil spill in the Gulf of Mexico already cost $40bn to BP. The amount is huge; this is even more than the cost of the whole Yamal LNG project with infrastructure. One may assume that if there had been no accident in the Gulf of Mexico, BP could have used this money to launch quite a strong project of LNG supplies from Sakhalin. This could be much cheaper. $40bn is a fantastic amount; it is understandable why TNK-BP is buying these assets. But from the point of view of Russian interests, this causes dubious feelings. On one side, everybody is happy that Russian companies are going global: the deal was supported by deputy PM Igor Sechin, energy minister Sergey Shmatko and premier Vladimir Putin. On the other side, TNK-BP will pay $1.8bn only for the assets in Venezuela and Vietnam; another $3bn it is going to spend on the property in Algeria. One has to realize that these billions are taken away from investments in Russia. This is why one should be crying bitterly not blowing the trumpet: Russian companies refuse investing in new projects in Russia preferring work far abroad. This may add some global importance to Russia but let’s not lie to each other that oil output will keep growing in Russia. Let’s face it: even our own companies refuse considering Russia as the area of their investment priorities. So, this is a sad piece of news in our rating.

5. The only bidder for Trebs and Titov fields defined

   This just confirmed the previous suppositions. It was absolutely clear that the winner had been selected before. The Trebs and Titov tender was delayed for so long because administrative clans could not choose the winner. This is very Russian. We announce tenders on promising fields when the winner is already known. Bashneft belongs to Sistema, a temporary owner. Bashneft and Sistema’s another asset Rusneft will merge soon in addition to the Trebs and Titov fields. We think this will not be the last merger in the oil and gas sector in the next few years.

6. Russian authorities warn about possible replacement of Sakhalin-1 operator

   On one side, in this case everything follows the Sakhalin-2 project scenario; some state body puts forward claims against a foreign operator of a project and then this operator is offered to sell its stake. But there is a very important difference: when Gazprom joined Sakhalin-2 it had three foreign shareholders – Shell, Mitsubishi and Mitsui. But in Sakhalin-1 there is Rosneft. It is very exciting how Gazprom is going to enter the project, in which its main political and economic opponent participates. Everybody understands very well that Gazprom does not want to allow independent exports of Sakhalin-1 gas to China. This is why this case is much more complicated and comprehensive than the Sakhalin-2 case.

7. Russia and Poland agree on raising Russian gas supplies

   This event was expected for several months; there were very difficult negotiations. The end of the story is indicative: despite all objections of experts who claimed that no contract was needed, that Poland would soon have LNG and shale gas and that Warsaw would find other sources of supplies, it turned out that Poland had no other source but Russia. However they ground their teeth, they had to sign a contract on increasing supplies. As far as an operator of the Polish section of the Yamal-Europe gas pipeline is concerned, there are many nuances. It is obvious there is no free capacity in the pipeline until the contract expires. Besides, physically there can be no other gas in it except the Russian gas in the next ten years. With development of Nord Stream there will be a unique opportunity of supplying natural gas to Poland via Germany, and Warsaw realizes that. Poland may lose even those modest transit fees that it collects from Gazprom for pumping gas. This is a bitter reality. Poland may speak about diversification as much as possible but when you start calculating, the situation turns out to be somewhat different.

8. Dmitry Medvedev visits Turkmenistan

   The Turkmen leader at once proposed Russia to broaden purchases of gas, which is understandable. Turkmenistan used to claim it would cope without Russia; a pipeline to China was built but Beijing refuses to pay a good price, so when the situation worsened Ashkhabad realized that it had got into an uncomfortable situation. Russia already buys 10bn cu m but Moscow does not need it now because the demand for Russian gas has not restored in Europe. This is a bitter reality of Turkmen diversification: China is ready to buy but at a low price; Iran also wants to import gas at low prices; Russia is not ready to import gas at all. Europe seems to be eager to buy but cannot, because the problem of transit through the Caspian region is not settled. So, there is an amazing situation: there is gas, there are buyers but there is no money. This is why Turkmenistan asks Russia for assistance. But why should Russia help now if it has some oversupply of gas? Turkmenistan is interesting in perspective; this is why the game involving Central Asia will continue.

9. Rosneft signs contract on buying 50% in Ruhr Oel from Petroleos de Venezuela S.A.

   On one side, the state says about the necessity to develop its own refining capacities; on the other side, over the past two months the state company Rosneft has launched two large projects outside Russia: in September construction of a refinery in China began, in October the contract on buying serious assets in the German oil refining segment was made. So the question is whether the state reads what is written in its strategies or these documents are made for foreigners and experts? It is hard to image a stranger discord.

10. Fuel loading at Bushehr NPP

    The long-playing project is in fact over but new questions arise: what are other places where we are going to build NPPs? Or to be precise, are we going to build them everywhere? In October we promised to construct them in Venezuela and Vietnam. We offer to build a nuclear power plant to every country our president visits. Will we have enough resources? And the main thing is who will pay? These issues are still open; our nuclear program has very many blank spots.