Top events of May 2011

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

1. Failure of Rosneft-BP deal

   This was the main project in the Russian fuel and energy sector from mid January. The story kept us in suspense for four months but, unfortunately, it collapsed. Versions about the AAR consortium’s greed also collapsed. Russian owners of TNK-BP were made a fantastic proposal: they were offered $32bn for half in the company that at the beginning of the year totaled $41bn; some $9bn in BP shares was also suggested. The consortium will never get such an offer again. It is obvious that AAR was aimed at breaking down the deal. We can only conjecture who asked Mikhail Fridman to reject in fact $10bn, because this is actually the company’s loss. It is clear that the future of this deal is strongly linked with political negotiations on the fate of the Russian state. We understand very well that Rosneft is unlikely to find another company now that like BP will be ready to swap its shares with the Russian major. AAR’s consent will cost a lot, but this is not the question of money. This is probably the question of the future construction of Russia’s political system.

2. Continuation of fuel crisis in Russia

   The fuel story that emerged suddenly stayed in the spotlight; almost every week there were negative reports from different regions. Meanwhile, the situation is very clear. During the election period the state wants to manage the fuel market manually, i.e. instructing large companies to freeze prices. Majors agree but find ways to reduce supplies to the domestic market refusing to sell fuel to independent retailers. It is absolutely obvious that if the state wants to cope with the fuel crisis systemically, it is essential to deal with the monopoly on the domestic market of oil products. For many years NESF has been pointing out that it is necessary to stop taking some half measures like creating an exchange of oil products to develop the domestic market. It is obligatory to cure the roots of this disease. An oil exchange obviously will not help, if there is no large independent oil refinery. We have been reiterating this simple proposal for several years and finally we are heard. At the end of the month such initiative was voiced – to create an independent refinery, allocate some assets of one of the vertically-integrated companies and establish independent oil processing on its basis. Meanwhile, FAS head Artemyev even promised investigation like the Standard Oil case – breaking up companies into several firms. It is clear that if a plant is taken from some VIOC to carry out experiments on its basis, this will not bring positive results. Meanwhile, independent refining is efficient medication to cure monopoly on the domestic fuel market, which was proved in the USA, where the price of A95 petrol is slightly higher than in Russia, but given crisis developments, Russia may soon leave the USA behind in this issue.

3. Construction of sea section of Nord Stream first line

   Surprisingly this event was not resonantly covered in the Russian press, although this is the project that was much debated about. Nobody believed in this project, there were lots of arguments against, even chemical weapons on the Baltic seabed were mentioned, there was a lot of talk about ecology and the necessity to ensure permit almost from every fish in the Baltic Sea. But finally there is a project that directly connects the Russian Federation and consumers in the European Union. This is a large breakthrough; its first consequence will be reduction in gas transit through Ukraine already next year.

4. Talks with China on oil prices and gas contracts

   This was Mr. Igor Sechin who declared that we may exchange concessions on oil for concluding a gas contract. This approach is certainly interesting but it turns out that Russian companies Rosneft and Transneft had probably made some mistakes when they signed their contract. We do not know its details but there are speculations in the press about some coefficient Ò that indeed links oil prices to the distance from a deposit to the Chinese border. If this is true, it is strange as oil is an exchange commodity and its price does not depend on the price at the well or transportation price. There are absolutely different principles of pricing in this case. Our probable mistake once again shows that China will use any mistake by Russia to its advantage. One should not expect hugs and economic concessions from Beijing. This is a difficult negotiator that uses any blunder of the opponent; this is how China perceives Russia whatever strange it may seem. There should be no haste in gas talks; moreover, there is no such necessity.

5. Economic crisis in Belarus, possibility of sale of Belarusian energy assets

   The Belarusian model of the so-called economic miracle is falling apart. NESF always said there was no economic miracle in Belarus but there was parasitizing on cheap Russian energy sources. However, there is quite a number of people who would say this is not true but there is some innovation complex in Belarus that manufactures high-end components. But it seems these components are not saving the Belarusian economy that is drying up without life-giving water in the form of Russian money. The collapse of the economy began according to the worst case scenario. Belarus will not survive without Russian credits; moreover, no one else is going to give it money. Lukashenko may give himself airs saying he will not sell anything but, sorry, when things are so bad, part of property will have to be sold. First of all, this may concern half in Beltransgaz, oil refineries and potassium production facilities. It is not Lukashenko who dictates conditions today. We think there will be no comfortable conditions on buying Beltransgaz, especially in the situation when Russia has finally implemented its project of reducing dependence on Slavic transit states – the first line of the Nord Stream gas pipeline.

6. Continuation of gas talks with Ukraine

   Ukraine is an amazing country. At first, it said Russia would never build Nord Stream. It has been built and now Kiev is wondering whether they will lose $750m next year? Yes, you will. But there is a possibility of agreeing on the joint management of Ukraine’s gas transportation system. But no, they are afraid of this. Everything will end up with construction of the second line of Nord Stream soon. Ukraine will be wondering again. Then building of South Stream will begin. In several years Ukraine will have no transit; it will be looking around wondering how it has lost more than $3bn annually. Nevertheless Kiev keeps thinking it is saving its face; it does not want to make concessions, while PM Azarov almost every day in fact asks for discounts on the gas contract. There are absolutely no grounds for any discount; this is why, the Ukrainian soap opera is likely to continue. Sooner or later Ukraine will find out that its gas transportation system is not required and nobody will negotiate discounts.

7. Presentation of South Stream project in Brussels

   It is interesting that in Brussels South Stream was always perceived as anti-European project. But the reality changes, the alternative Nabucco project is apparently dead. In this situation Brussels had to concede and provide a ground for the presentation. Although EU energy commissioner Günter Ettinger speaking about the Third Package said it should be applied to South Stream, we understand that the situation has already changed. Brussels is ready to take South Stream as project that Europe needs. It will be very difficult to live without Russian gas.

8. Germany decides to abandon nuclear energy

   NESF long ago claimed that the future of the nuclear renaissance was limited as it was devised as means to struggle against supplies of Russian energy sources. But after Fukushima everything changed. Germany is shutting down its nuclear power plants. It will be followed by Switzerland and later, probably, by Sweden and Finland; then France will be under pressure. What will Germany replace nuclear energy with? First of all, this will be natural gas. Germany will need 34bn cu m. This is a huge amount but not exorbitant. If Berlin provides guarantees of such demand, even Russia alone will manage to find this volume. So, this is a rather positive piece of news for us.

9. Debates on taxation procedures in Russia

   Unfortunately, the discussion of the 60-66 taxation system is turning into a soap opera. The reason is simple: a single integral taxation policy seems impossible in Russia. Russia is finally shifting to the procedure of taxation preferences, when taxation of a project depends on the administrative resource and connections of the project’s owner.

10. Surgutneftegas leaves MOL

    One of the most mysterious stories over the past few years has finished. The Russian company had no links with the Hungarian firm. Surgutneftegas is one of the most conservative investors. Everybody knows that Vladimir Bogdanov is an old Soviet oil industry worker, in the finest sense of this word, who lives according to his laws, saves money and has accumulated $20bn already. He never bought anything and suddenly purchased MOL shares. Fortunately, he withdrew from this deal as there was no reason in it. But unfortunately Surgutneftegas’s decision will not become a signal to other Russian oil companies. Some Russian oil firms keep roaming the world looking for new projects: in Guinea, Venezuela and Iraq. Probably someone finds some element of energy charm in the process of turning into a global company. But on the whole, this is a serious problem for the country as money is leaving Russia’s upstream segment.