Top events of March 2011

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

1. Fukushima accident

   This is an extremely important event in terms of development of the world energy market. It may mean the end of the “nuclear renaissance” but certainly not the end of the nuclear energy sector. Plans of building new nuclear power plants will be obviously revised and cut. However, Russia should not panic, because if NPPs in Germany are closed, the demand for gas in this country will rise. According to our estimations, it will amount to as much as 35bn cu m. Japan will have to increase gas imports, since there is no other alternative for this nation at all. So, Russia has an opportunity to play gas games and Fukushima is opening this door of opportunity for us.

2. Military operation in Libya

   Although everybody knows that Libya’s share in the world oil output is just 2%, the war has sent the prices to some $110 to $120 per barrel. No wonder, as the market reacts to the assumption that this revolution and the protracted war are definitely not the last. The operation continues and there is nothing they can do with Gaddafi so far. What if Algeria or Saudi Arabia follows the same path? The latter is already in panic and threatens the world community with oil prices at $300 per barrel if something similar happens there. And this may happen, because Bahrain and Yemen were blazing in March. The situation is not calm; but for those not believing in the “oil curse”, high oil prices are just an advantage.

3. Stockholm arbitration court rules on Rosneft-BP deal

   This decision shows that the private business in Russia may well struggle against the deal, in which Vladimir Putin has a serious interest. We drew the picture where Putin rules everything and everybody and he can send to prison almost everybody. But Mikhail Fridman is still doing fine and nobody can do anything to him. So, this deal is a precedent in Russia; it also shows that not everybody abroad is happy with active involvement of nonresidents in the Russian project.

4. Gazprom wins Kovykta

   The long-lasting saga has finished – Gazprom finally received the Kovykta license but paid a high price. Actually it is unwise to create artificial competition for the entry to Asian markets. If some other company had obtained the license, it would have turned out that the next step would be abolishment of Gazprom’s export monopoly; but from the point of view of negotiations with China on gas prices, the idea of banning the export monopoly looks very questionable.

5. Alexey Miller’s tenure at Gazprom prolonged

   An early decision to prolong his employment contract was likely to have been made by Putin because he sees that conflicts in elites ruin the whole system. By delaying this decision until May 31, Putin would observe a wave of discrediting evidence against the Gazprom CEO aimed at putting forward other candidates. This is why the prime minister closed this opportunity. Putin realizes that the system of checks and balances may fail; this is why the contract was prolonged, which is certainly Alexey Miller’s big success.

6. China demands cutting price of ESPO oil

   This is a very significant case. China proved to be a very difficult negotiator; it interprets to its advantage the already signed contract and has a strange approach to pricing. Unlike gas, oil is an exchange commodity and its price is set at the exchange. But for some reason China wants to link the price of oil to transportation costs. How can the price depend on transportation? Oil prices depend neither on production costs nor transportation costs; they are set on the exchange depending on how much the market is ready to pay for this commodity. Now when negotiating gas prices Gazprom should think twice before making a decision.

7. Wintershall Holding GmbH joins South Stream, Vladimir Putin visits Serbia and Slovenia, proposal to build LNG plant at Black Sea

   These events are certainly connected with each other. The idea of building an LNG plant at the Black Sea meant that Russia was gradually withdrawing from the South Stream project. This caused a very nervous reaction of our Balkan partners who are very keen on this project. This especially concerns Serbia and Slovenia. On one side, Russia has to urge Ukraine to hand over its gas transportation system – to ensure this Russia has to make South Stream look more and more realistic (this is why the German company is engaged in the project). On the other side, if Ukraine surrenders, what will happen to South Stream? Some alternative ideas are required and one of them is the idea of building an LNG facility. Following a light panic caused in the Balkans by this idea, Vladimir Putin visited Slovenia and Serbia where he again promised to implement South Stream. Yet, this is not the last news item about this pipeline project.

8. FAS introduces antimonopoly amendments

   The Federal Antimonopoly Service is still puffed up saying it will organize a Russian case similar to that against Rockefeller’s StandartOil that was split into 34 companies. If we study the text of these new antimonopoly amendments, everything looks wise and sound. But there are big concerns about their implementation. FAS proved its ability to give itself airs and propose wise ideas, but it did not demonstrate its ability to put them into practice. This nice antimonopoly project may fail.

9. Dmitry Medvedev’s initiatives on changing composition of boards of directors of state oil and gas companies

   This is interpreted as a strong idea to breakup state capitalism, but let’s be honest: boards of directors of many state companies are no longer important management structures. This is why it is still a long way to dismantling state capitalism. But this may speed up privatization in the sector.

10. Bashneft negotiating with India’s ONGC

    This is an interesting case from the point of view of broadening the presence of nonresidents in the Russian market and simultaneously this is a very resonant case. There is very strong resistance: in March an unexpected investigation was launched in India concerning the purchase by ONGC of Imperial Energy that owns several fields in the Tomsk Region. More than a year after the deal India suddenly decided the price had been overstated and the assets acquired were not so worthy. So, we see there is a big interest in Russia but not all players on the world energy market are happy about nonresidents again getting interested in Russian projects. This is why they impede BP, ONGC. These cases may have the same political implication.