Top events of June 2011

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

1. Disruption of gas talks with China

   At first glance this event seems to be negative but in reality it is positive. The desire to sign a contract by all means before the St. Petersburg Economic Forum aroused amazement, because there was a high risk to make the same mistake that we had made having signed a contract on oil supplies with China. Now the PRC wants a discount on the oil deliveries. So, it is quite wise that we demonstrated self-control on this issue. So far there is a $100 per 1,000 cu m abyss between the positions of China and Russia. All forecasts of experts that the PRC will have a surplus of gas supplies by 2020 are an undisguised PR campaign by Beijing. It is based on wishful thinking and dreams of winning a gas solitaire with LNG from Australia and Qatar and domestic coalmine methane. This is not going to happen; so, our tenacity is quite reasonable.

2. Russian President’s budget speech

   The role of the oil and gas sector was much spoken about. This is why many observers perceived Dmitry Medvedev’s speech as the call for strengthening the tax burden on the oil and gas industry. In reality the president’s report is not that unambiguous, because it underlines an encouraging function of taxes. However, an encouraging role can be understood differently; e.g. as decline in the tax burden on low production wells or new projects. We think Dmitry Medvedev’s speech should not be interpreted as direct order to the government to toughen the taxation pressure on the oil and gas sector.

3. Vladimir Putin speaks at United Russia conference in Yekaterinburg

   Although he spoke to the public in the capital of the Urals Federal District, a lot of attention was paid to the role of the oil and gas sector in Russia’s economy. It is good that the PM understands that despite talks about innovations development and Russia’s “hydrocarbons curse”, the oil and gas industry is anyway the core of our economy and the assumption that the innovations paradise will begin as soon as the country runs out of oil and gas is initially absurd. The collapse of the oil and gas industry will not lead to the creation of some other economy. The other thing is that Putin starts realizing problems in the oil and gas sector and he tries to disguise them somehow. For instance, there is a clear perception that we have reached the maximal oil production level. It is very likely that we have reached the limit and will not be able to produce more; yet, we are trying to show that this level is absolutely comfortable for us. It is interesting that in the gas sector there is a task to sharply raise production: in ten years the output is to exceed 700bn cu m. This is an ambitious task given that among major projects only the Bovanenskoe deposit has an investment decision. The main thing is that the oil and gas sector is again put on the central place in the Russian economy. At least the PM is not intimidating it. But on the other side, the situation in the oil and gas industry requires a more attentive approach, because processes observed there currently cause anxiety.

4. Discussion of gas taxes

   This shows that the state has no distinct taxation policy. The situation around the minerals production tax is simply improper: on Monday we are suggested one version, on Tuesday another, on Wednesday the third variant appears; all of them are not final. There is no common opinion. Already in early August finance minister Alexey Kudrin hinted at a possibility to make final decisions in the near future. But we have been waiting for them for half a year; several variants of final decisions have been already produced. The whole bargaining between the finance, natural resources and energy ministries and Gazprom enables us to make just one conclusion: the state does not have any distinct taxation policy in the oil and gas sector; the interests of all players are different; everybody pursues its own interests; in such conditions it is practically impossible to speak about some long-term considered fiscal policy.

5. Preparations for Gazprom shareholders’ meeting

   All interesting decisions were voiced beforehand; there was no breaking news. Moreover, Alexey Miller had prolonged his employment contract. Nevertheless, there were some interesting stories. Firstly, the election of Timur Kulibayev from Kazakhstan to the board of directors, which can be interpreted in just one way: Gazprom probably intends to make some serious acquisition in Kazakhstan in the near future. Mr. Nazarbayev seems to start accumulating cash due to political risks, which provides Gazprom with certain possibilities to play the game. Another intriguing move is the election of Vladimir Mau to the board of directors, because he is one of the prominent ideologists of the “oil and gas curse” idea. This is either an element of Putin’s traditional humor or a more interesting topic … We will see whether Mau’s deployment at Gazprom will promote debates on the gas giant’s restructuring.

6. Rosneft shareholders’ meeting

   The intrigue was obvious: who will replace Mr. Igor Sechin? He had to leave the post of chairperson of the board of directors following Dmitry Medvedev’s decision. Mr. Sechin obeyed the president’s instruction but did everything to keep the company under his influence. The board is chaired by Alexander Nekipelov, who has been working there for a long time with Sechin. This testifies to the supposition that Rosneft will remain under Sechin’s influence; no political changes are expected here. There is also an interesting question of Rosneft’s intention to raise its capitalization and the declared goal to turn into a global energy company. It is remarkable that Gazprom also voiced such intention not long ago. This idea of going global is like a fatal temptation. They all want to be global for some reason, although Russia possesses the largest reserves of hydrocarbons and companies have a lot of work in the country; they do not have to roam the world looking for some difficult projects.

7. Failure of foreign projects of Russian oil producers

   June was marked by a series of failures: LUKOIL admitted it was withdrawing from projects in Columbia and western Kazakhstan also hinting it was going to reduce its presence in Venezuela; Zarubezhneft declared about termination of a project in Cuba. Despite this train of failures, our companies keep making the same mistake. LUKOIL simultaneously stated it would actively invest in Iraq, North America; Rosneft declared it wanted to become a global energy company. It is interesting what can stop Russian companies if even a possibility of radical changes in those countries does not embarrass them.

8. Energy and political conflict with Belarus

   This story is definitely transforming into a saga. It is apparent that Vladimir Putin and Dmitry Medvedev do not take Mr. Lukashenko as close ally. They are tired of him, otherwise there would not have been such an information campaign against the Belarusian president. But it is absolutely not clear what to do with him. It is possible to break his resistance but who will succeed him? A pro-Russian politician? But it will be similar to Ukraine and Viktor Yanukovich who at the pre-election stage was also positioned as pro-Russian candidate. Thus, there is surrealism: on one side, there is cutoff of electrical energy supplies; on the other side, a credit is allocated. But if you want to pressurize him, you should be consistent, otherwise just forgive him. Thus, the whole June Russia was hinting it wanted to settle the property issue. Gazprom directly said it was ready to pay $2.5bn for 50% in Beltransgaz. But, firstly, Alexander Lukashenko does not actually sell anything. Secondly, there is a question of legitimacy of such property: if he is an illegitimate dictator, next authorities may contest the fact of selling property. This is why we think there is no full understanding so far what should be done with Lukashenko.

9. Sofia freezes talks on Belene NPP construction

   Rosatom was passionately arguing that Bulgaria needs so badly a nuclear power plant. But this was an absolutely strange decision to build an NPP on the territory of a large consumer of Russian gas. Why creating an alternative to the Russian natural gas? Rosatom claims that someone else may do it instead of us but this argument is very doubtful, because Russia could well support the anti-nuclear lobby in Europe. In Germany nobody speaks about shutting down NPPs and building others. On the contrary, Germany decided to refuse the nuclear energy at all. Italy conducted a referendum and decided not to build nuclear power stations. By the way, even France that was expected by some experts to profit from the crisis in Germany in reality does not have enough energy to satisfy the domestic demand on peak days. Thus, the situation is rather ambiguous. It turns out we started a project that we do not actually need. We have had some rough time with the project and now we are surprised that Bulgaria does not want to construct anything.

10. IEA posts golden age of gas report

    This is an interesting event because the International Energy Agency that has always been a mouthpiece of consumers of hydrocarbons mainly in the EU, always lobbied the scenario of low consumption of hydrocarbons. They even have a special forecast plan and the 450 Scenario – these documents are based on willingness to struggle against climate change, reduce emissions of greenhouse gases by 20%, etc. After Fukushima and African revolutions the IEA begins to see the point – “Hey, guys, we are going to have a golden age of gas!” and posts an absolutely new scenario. Thus, in addition to the low hydrocarbons consumption scenario there are expectations of sharp growth in the demand for natural gas. In this regard the report is quite symbolic. This is a kind of symbol of enlightenment of western energy intellectuals who probably became tired of their fantasies about low consumption of hydrocarbons.