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What to expect in 2011

The National Energy Security Fund introduces top-ten events in the oil and gas industry in 2011 and is ready to comment on them in detail.

  1. Privatization in the oil and gas sector

    Contrary to the widespread belief that the domestic oil and gas sector is being nationalized, in reality assets are being privatized. For instance, positions of private firm NOVATEK were strengthening in 2010. Many important events will occur in 2011; significant assets are being prepared for privatization. It will be necessary to decide on the scheme of selling Rosneft. There are already variants involving Chinese partners. In 2011 Rosneft will not be sold but a strategic course will be chosen, which is selling a controlling stake to loyal investors that will eagerly share a stake in the company with their Chinese partners.

  2. Russian-Ukrainian relations

    We should expect establishment of the joint venture of Gazprom and Naftogaz that will manage Ukraine’s gas transportation system. Ukrainian elites have come to realize this. Everybody understands perfectly well that seven to eight years after the beginning of construction of South Stream, Ukraine will cease to exist as a transit state. Viktor Yanukovich seems to have an intention to rule Ukraine for a long time. It is not ruled out that Russian PM Vladimir Putin also contributes to this. This is why the idea of the JV that used to make Mr. Yanukovich sick sounds even pleasing for him now.

  3. Gas talks with China

    This is one of the most important topics in 2011. Russia should not thoughtlessly put its head into the mouth of the red dragon; so far China does not have a desire to buy gas at high prices. If we sign an agreement that is absolutely unprofitable for us and start pumping gas from Western Siberia to China, i.e. from the deposits catering for export contracts with Europe, this will be an appalling mistake. We hope Russia will conduct adequate negotiations with China in 2011.

  4. Launch of two gas pipelines – 1st line of Nord Stream and Sakhalin-Vladivostok

    These pipelines are different from the point of view of economic efficiency. Nord Stream is the pipeline with actually ready contracts. This is not a purely Russian project but a Russian-European project considering that it comprises of four European companies – two German firms, one French and one Dutch. Nord Stream that five years ago was perceived as something awful will be finally completed and it turns out there is nothing awful in it. As far as the Sakhalin-Vladivostok project is concerned, it is more disputable. Efficiency of its construction and gas sale schemes raise certain questions. In 2011 a decision to build an LNG plant in Vladivostok may be made but it is much simpler to build new terminals in Sakhalin than to lay this pipeline.

  5. Planned launch of BPS-2

    It is another large infrastructure project. Its completion will inevitably result in the necessity to find an answer to the main oil question of modern Russia: what is Russia’s state export strategy? There are more and more pipelines being laid in different directions but production is not growing. Even the latest variant of the 2020 oil strategy shows that the state acknowledges soon beginning of stagnation or may be even decline in the oil sector. In this situation new pipelines will have to be filled. There will be not enough oil for all these projects. This is why it is important to define priorities for Russia: BPS-2 or ESPO meaning Europe or China?

  6. Decision on Shtokman project

    This project is probably not so large from the point of view of gas production but it is fundamentally important for Russia. Russia has few offshore projects so far but it is obvious that future production in the country depends to this or that extent on offshore deposits. On the other side, the project is very important from the point of view of partnership with nonresidents. There were problems in this sphere in 2010 and we would like to see more positive developments in 2011 inter alia concerning cooperation on the Shtokman deposit. We expect the final investment decision on the project to be made in Q1 2011 and the project will enter the phase of practical implementation.

  7. Third Energy Package

    In 2011 the Third Energy Package should be adjusted to law enforcement practices of certain states. This is a very topical issue. The matter is that this package is expected to rid Europe of dependence on gas suppliers. It is interesting how it will be applied on the regional level, because there are already visible problems with Poland where Gazprom renewed a contract. There were attempts to apply the Third Energy Package in Poland motivating it by the fact that the Polish market is one of the most monopolized in Europe. In Europe there is a widespread belief that prices of hydrocarbons are high because there is monopoly – if access to the infrastructure of certain states is liberalized, there will be alleged competition between gas producers. But the pipeline owner often does not have a big profit margin on markets considered to be monopolistic (the Polish market is almost 100% monopolistic). To have competition it is necessary to have a big number of gas producers competing for access to the pipeline, i.e. the oversupply of gas is necessary to have competition. Many experts are confident that the gas oversupply will continue for a decade on the European market. In reality we observe that there were failures already in 2010. It is not clear whether the EU will be fully honest with gas producers especially in the situation when it fails to ensure competition between them. This topic will be the hottest for Europe in 2011.

  8. Gas Exporting Countries Forum and Qatar

    In 2010 Qatar made an important decision – to suspend investment decisions on building new terminals until 2014. The year 2011 will be very important in terms of whether Russia and Qatar will manage to work out a common export strategy. This is something that may scare Europe. This will enable them to control the world market and ensure comfortable prices in the future. A large GECF meeting is scheduled for November. It is very important to avoid turning this event into a mere formality.

  9. Future of shale gas

    The near future should show how viable expectations from shale gas have been. There are reasons to believe that its production volume in 2010 to 2011 will not be as large as in 2009 even in the USA. Its output is unlikely to grow at the same pace as in 2005 to 2009. This is why the year 2011 is a vitality test for the shale gas revolution. There are obvious risks. Firstly, this concerns prices. In 2010 the gas price was rapidly going down on the American market, which saw the amount of investments in shale gas production falling compared to the period from 2005 to 2009. The second problem concerns technologies. Shale gas production is nearing big cities making environmental problems topical, which raises the demand for new technologies.

  10. Prices of hydrocarbons

    It is clear that prices may drop during some small periods of time but in the medium-term perspective prices will certainly remain high. The number of the population is growing and the demand for energy resources is advancing. There are no serious grounds for decline in oil prices. We think the situation around gas will be interesting. Discussions on switching to spot prices will certainly continue but even in 2010 spot prices were above prices stipulated by long-term contracts. This testifies to the fact that the world is to face energy deficit, which obviously rules out low prices of oil and gas.

 


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Analytical series “The Fuel and Energy Complex of Russia”:

State regulation of the oil and gas sector in 2023, 2024 outlook
Gazprom in the period of expulsion from the European market. Possible evolution of the Russian gas market amid impediments to exports
New Logistics of Russian Oil Business
Russia’s New Energy Strategy: on Paper and in Fact
Outlook for Russian LNG Industry

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