Top events of January 2011

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

1. Rosneft-BP deal

   This was definitely the breaking news in January. NESF has always stressed that investments and technologies are important and we welcome foreign companies in the Russian upstream segment. No matter how many times one reiterates that Russia is a hopeless country but a simple analysis of reserves shows that there is actually no other country to invest. Political risks in other states are much higher. Are risks in Egypt, Venezuela or Iran lower? This is why it was absolutely evident that the situation would improve for nonresidents. Such deals are very positive. Let’s hope that the FID on Stockman will be made in February or March, as this is a very important project. The exchange of shares is very important as it means a more serious bond. The Khodorkovsky case is different from natural reserves. They can speculate as much as they want about terrible Russia but when you are offered a stake in the reserves this is a too serious prize to reject it, which has been confirmed by this deal with BP.

2. Scandal with TNK-BP dividends

   When we talk about foreign investments it is implied that the state pressurizes someone. But in reality nonresidents often have serious problems with private partners. And Russian shareholders in TNK-BP are quite well-known for their greed; they have been involved in many notorious cases in Russia. It is clear they do not want to break the BP-Rosneft deal that was earlier personally sanctioned by the Russian Prime Minister – Aven, Fridman and Vekselberg are not crazy to fight against the PM. They are simply trying to take something away from BP and they are likely to succeed. This is the way our private business acts in Russia; they are as litigious as their counterparts in the West.

3. Sharp rise in petrol and kerosine prices

   Kerosine prices have surged by more than 20% over the past few weeks; petrol prices have also shown strong growth. Actually the advance in fuel prices is not something extraordinary. This clearly results from state policies stipulating high export duties on crude and in exchange allowing oil producers to loot the domestic market that is divided between monopolies. The Federal Antimonopoly Service was puffing its cheeks last year threatening to organize the “Rockefeller case” in Russia. In the end the mountain in labor brought forth a mouse: no monopoly was broken, out-of-court settlements were concluded with everybody. Oil firms just look for a pretext to raise prices. We understand very well that growth in world oil prices is not connected to advance in petrol prices, because excessive revenues from growing world prices are collected by the state in the form of export duties. There is no link; this is just a pretext and excuse. This tendency is likely to continue and prices at €1 per liter are not something unbelievable even in the pre-election year.

4. Discussion of tax changes for the oil production sector

   The “60-66” program is being actively promoted now. Its logic is very interesting: it stipulates growth in export duties on oil products and decrease in duties on crude. After 15 years of statements about the necessity to develop oil processing we decide to “develop” it by raising export duties plainly reducing export potential of our oil products. It is not clear where to dispose them. This means the end of development of the Russian oil processing sector. Well, we appreciate this frankness of the state. At least the 15 years of idle talks are over. It is interesting that the “60-66” procedure was viewed as temporary – it was to start in 2011 and in 2012 an absolutely new long-term system of taxation of the oil and gas sector was to be in place. The fact that consideration of the “60-66” scheme has started only this year means that the whole 2011 we will be examining the temporary scheme and will put it into practice in 2012; but it is absolutely unclear when we will have a permanent procedure. Our forecast is simple: soon there will be no common taxation procedure at all; all major projects will have their own special methods discussed within the triangle of Putin, Kudrin and representatives of a particular company, e.g. the current situation around Vankor.

5. Talks on Russian oil supplies to Belarus completed

   At the end of 2010 Alexander Lukashenko was not hindered to be comfortably reelected; Russia agreed to his conditions of collecting duties being reassured by the fact that it had not received anything from Belarus before. Now Russia is to get at least duties on oil products. However, export duties on oil products are about 55% of export duties on crude. The finance ministry has calculated that we presented approximately $4.5bn to Lukashenko. After the elections Lukashenko fell out with the West. Then we decided to increase the price of crude supplies, which led to suspension of the deliveries. This case ended with Lukashenko having agreed to pay $46 per ton of oil, i.e. one billion was won back. Many other bonuses were also promised like construction of a nuclear power plant in Belarus, which is absolutely silly given construction of a similar NPP in Kaliningrad. Why do we need to build a competitor in the neighboring state and reduce the demand for liquefied natural gas? This decision is extremely stupid and the NPP probably will not be erected at all. We expect all these agreements to stay in force only for the next few months maximum and Belarus is likely to appear in our rating in the negative context later.

6. Ukrainian PM says it is impossible to develop Ukraine’s GTS without participation of Russia and EU, Energy Commissioner Oettinger says EU has no intention to take part in modernization of Ukraine’s GTS

   In spring 2009, when Viktor Yushchenko was Ukraine’s president, the country signed a declaration on modernization of its gas transportation system with the EU. The accord stipulated European investments in its development and upgrade. Ukrainian experts were confident that Europe was ready to invest but no money has been allocated to Ukraine to modernize its GTS so far. The EU’s new pragmatic energy commissioner honestly said there would be no investment. The European Union can be understood: except Russian natural gas and gas from Central Asia sanctioned by Russia, nothing else will get into the Ukrainian pipeline. And if Russia builds South Stream, Ukraine will not be needed. Why investing in the pipeline that is useless without Russian gas? So, this is quite an evident decision. We hope it will sober up Ukraine, although they still claim they will replace gas with straw and will build ten nuclear power plants. Finally, in January Nikolay Azarov promised to bring some mysterious platform from Singapore to produce oil in the Black Sea.

7. Southern Corridor, Jose Manuel Barroso’s visit to Azerbaijan

   Europe is in panic, this is why it is feverishly tries to promote Southern Corridor, although it realizes that Azerbaijan does not have the sufficient amount of gas to fill Nabucco. Moreover, two other European pipelines, ITGI and TAP, claim this gas. So, Southern Corridor is senseless without Turkmenistan. The question is how to lay a pipeline from Turkmenistan to Azerbaijan? The distance is not long but Turkmenistan will not start building the pipeline without serious guarantees by the USA and the EU of protecting it against Russia. Guarantees cannot be made; moreover, China plays on our side. The PRC buys Turkmen gas at low prices because Turkmenistan has no other way to sell it. As soon as Turkmenistan has a pipeline to Europe, it will immediately start pressurizing China on prices. Beijing does not want it, this is why the USA has to mind not only the reaction of Russia that can well lunch war in the Caspian Sea region. This is why Barroso may talk about the necessity to lay the pipeline as much as he wants but he realizes perfectly well that the political Rubicon needs to be crossed in this case. Turkmenistan also realizes this. It may be left face to face with China and Russia that will simply tear it apart. Azerbaijan openly expressed its point of view: either the EU helps settling the Nagorny Karabakh issue or there will be no gas. Thus, Europe looks for some non-politicized gas suppliers but it gets into politics anyway.

8. Blackout in Moscow Region

   Even if there had been no freezing rain, the power cuts would happen anyway sooner or later. We many times indicated that the power grid is a weak link of our electrical energy sector and that repair services were completely abandoned as a result of RAO UES reforms. What happened in the Moscow Region was quite predictable. And with the repair still underway for a month already, representatives of our energy sector cynically declare they will build power transmission lines from Central Asia to Pakistan via Afghanistan and invest money in such projects.

9. Inter RAO approves development program, declares intention to buy 49% in Nortgaz

   Inter RAO is definitely not going to stop and will ask Gazprom for a 51% stake in Nortgaz. Given NOVATEK’s success and the fact that Inter RAO is headed by the son of Mr. Kovalchuk, the largest shareholder in Bank Rossiya, Inter RAO may well get this asset. The most interesting thing is not that Inter RAO is forming a chain from a gas well to electrical energy sales. The most important issue is what will happen to Inter RAO. We think its privatization is not far off. The whole January Inter RAO was a kind of a vacuum cleaner. The company passed such a development program that it reminds of RAO UES of Russia in miniature: at first the monopolist was divided and now the reverse process has started. We are confident this is being done to sell the assets later to loyal entities that may be linked to relatives of the current head of Inter RAO.

10. Transneft, Rosneft discuss possibilities of swap of Kozmino port and Vankor-Purpe pipeline

    Rosneft certainly is not concerned about Kozmino, because the company stakes on deliveries to China. Rosneft has in fact refused the idea of building an oil refinery in the Far East, this is why it is doubtful that it will agree to Transneft’s conditions. Transneft is likely to get this pipeline but it will have to pay something, i.e. our pipelines are not the most fair and unambiguous element of relations in the energy sector.