Top events of August 2011

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

1. Agreement on Rosneft-Exxon Mobil strategic partnership in the Arctic

   This deal shows that world majors are close to the beginning of full-scale production in the Arctic. Whatever they say about new fuels, hydrocarbons remain the basis of the economy. Meanwhile, there are practically no easily accessible hydrocarbons. As a result, producers have to implement difficult projects such as deep-water shelf in Brazil or the Alberta bituminous sandstone in Canada. Production in the Arctic is also starting. Russia will be a pioneer in this sphere, e.g. production at Prirazlomnoe will begin soon employing a special platform that took many years to build. The Exxon-Rosneft partnership shows that the Arctic is not the future but the present. It turns out that it is not so difficult to sell Russian assets in the Arctic and find a co-investor, because major reserves in this region are in the Russian zone, which is acknowledged by all western experts. This is why many western majors were ready to enter the project. It is evident that the whole Arctic segment of the Rosneft-BP deal migrated to the deal with Exxon; as far as Black Sea assets are concerned, respective accords were signed back in January. But there is no asset swap. In this regard, the agreement is not similar to the failed Rosneft-BP deal, which means Russian authorities had to make serious concessions to the foreign counteragent. Obtaining a 5% stake in BP was a very important issue. According to the latest agreement, the Russian side could have claimed about 2% in Exxon but this did not happen. It means that an active phase of sales of minority stakes in Russian projects to nonresidents continues. Russia is hurrying to sell such stakes; it managed to use the oil spill at a BP platform in the Gulf of Mexico to its advantage to convince BP to exchange shares, but this did not work in the Exxon case. As far as access of Rosneft to production projects in the USA and Canada is concerned, clear-cut contours of these projects are not discussed yet, while a possibility of Rosneft being allowed to enter attractive projects is very small. The Russian firm is likely to be offered the deep-water shelf in the Gulf of Mexico or the Alberta bituminous sandstone that are difficult and complicated projects. But the main thing is to understand Exxon’s motivation: whether the deal is just a possibility for the western major to put additional reserves on its balance or we can expect the launch of the first well in 2015 as Exxon has promised.

2. Sharpening of Russian-Ukrainian gas relations

   Unfortunately in August we neared the brink of a third gas war. Everybody remembers the second gas row that unfortunately led to suspension of gas transit for the first time in the whole history of our supplies to the EU. Currently Kiev in fact refuses to honor the gas contract signed on January 19, 2009. At first it was done through a trial over Julia Timoshenko (the idea is simple – to find her actions illegitimate). Later they invented an absolutely brilliant idea of liquidating Naftogaz to pretend there is no contract. Thus, despite attempts to look decent, Kiev tries to find excuses and motives to get a very cheap Russian gas. Moreover, Viktor Yanukovich is poked by sponsors of his presidential campaign who logically ask him about the cheap Russian gas that he cannot provide. Kiev certainly uses its status of a transit state in fact to blackmail Russia threatening to terminate the contract. Further algorithm is clear: siphoning off natural gas from the system followed by suspension of transit. The scenario is monstrous for Russia that is just beginning to restore the previous volume of supplies to the European market thanks to some external factors. But it is important to convince Europe that Russia is a reliable supplier and Ukraine uses this factor. However, this game is very risky, because it turns Ukraine not even into a pirate state but into a thimblerigger that does not mind resorting to minor and unpleasant tricks instead of observing legal procedures.

3. Searches at BP office

   This contrast is interesting: on one side, the world’s oil and gas major is coming to Russia, while another one, BP, is again suffering searches. The western media immediately reminded Exxon of what dangerous country it is entering. On the other side, the BP story is more complicated than previous cases that were always portrayed as blows to nonresidents in Russia. The latest case is a dispute between private partners in the alliance, not with the state. Moreover, the disagreement was caused by BP mistakes. How could it fail to receive a legal written consent from AAR to make a deal with Rosneft? How could it trust these people being well aware of their way of doing business? One mistake led to another. From the procedural point of view, searches are logical, because a minority shareholder filed a suit against TNK-BP. BP representatives in the TNK-BP board of directors are among officials of the legal entity subjected to the searches. And it is understandable that the head of the Moscow bailiff service does not visit BP offices accidentally. State authorities seem to be engaged in this. Yet, it is interesting that the state acts on the side of the company that undermined an important deal. This means the Exxon and ÂÐ cases are interrelated. Since ÂÐ is replaced by Exxon, the AAR alliance is not to be revenged by state authorities as many observers believe. But the state may vent its anger on BP gradually forcing this company out from the Russian business. It can be replaced by another company: even if BP withdraws from TNK-BP, some other western major will occupy this place. However, it is too early to forecast that.

4. Agreeing new 60-66-90 taxation system

   It is surprising that many observers think this system encourages oil refining. Well, it indeed has some reasonable ideas but if we look exactly at how this system operates, we will see that it encourages only supplies of crude oil, not investments in oil products. For instance: what is 90? This is an export duty on petrol that is in fact a prohibitive tax. It is absolutely senseless to export petrol with such duties. It turns out that the state wants to satisfy the domestic fuel demand but not to encourage production. The idea to raise export duties on dark oil products is understandable, but it is not that radical. The main thing is that the export duty on light oil products is not seriously reduced. The third figure, 60, also draws attention. It means decline in the export duty on crude oil from 65% to 60%, which is the main bonus of the whole system. Actually oil producers should get a clear signal: “Don’t make fuel oil out of crude, supply crude and we will cut your export duties”. Revenues of oil companies will go up. Instead of investments in oil refining, oil companies will buy oil refineries abroad, while the government will facilitate crude exports. Thus, this system may destroy the domestic oil processing industry. The energy ministry is already worried about liquidation of unprofitable refineries; it has promised to adjust the excise system manually. This is a rather strange system, isn’t it? Several days after agreeing the document, the responsible ministry declared that excises should be regulated manually, otherwise an active process of shutting down refineries would start. This is definitely not the way to create incentives for refining.

5. Fuel prices growing, premises for new fuel crisis

   Prices are growing despite assurances of the opposite. The demand for fuel usually surges in autumn complicating the situation. The government is not eager to provide systemic solution of this problem; there is no desire to create the sector of independent oil processing. The government tries to manually adjust this system but it will not succeed. At some point in time it is possible to instruct oil companies not to increase prices, but this is a temporary solution. Moreover, the Federal Antimonopoly Service was surprisingly loyal towards oil producers the whole summer, which again demonstrated that it is a paper tiger whose roaring does not scare anybody.

6. Trans-Korean gas pipeline

   This topic surfaced unexpectedly. There is indeed a nice idea to settle one of the most complicated global problems, the situation on the Korean peninsula, by using Russian natural gas. The question is whether this should be done and whether politics is worth the money spent on it. We think this is a Soviet approach – solving political problems by economic assistance. This pipeline stipulates development of the gas supplies infrastructure in North Korea – the country that does not have money and is unlikely to have it in the future. This gas pipeline will provide North Korea with a serious political instrument of pressure. It is interesting that after these agreements Russian-Ukrainian gas relations again sharpened. We have suffered from Kiev and will suffer more but why creating another headache in the Far East – N. Korea is much poorer, crueler and much less predictable than Ukraine. Having completed construction of the Sakhalin-Vladivostok gas pipeline, we have to think how to dispose of this gas in Vladivostok. But it would be logical to build an LNG terminal at the end of the pipeline rather than stretching it further to North Korea increasing risks.

7. Libyan influence on world oil markets

   The revolution is actually over and its consequences are not as sad as expected. We have not entered the Libyan oil sector and have not invested big money in it. This should serve as a lesson to our oil companies that are running around the world looking for production assets, while development of Eastern Siberia is in fact failing and we lure nonresidents into offshore projects by offering extremely attractive conditions. As a result of this revolution, Libya is likely to be removed from the global market for several years. It will probably take two to three years to restore governance in the country and reestablish full functioning of the oil industry given that Libya is not a minor producer with 77m tons in 2010. Thus, we have good prospects but, unfortunately, our companies are roaming the world instead of developing production in our country.

8. Iran deprives Gazprom Neft of Azar field development

   Libya, Iran and other cases all over the world – we wonder, how many times our companies will have to make the same mistake to finally give up this hopeless strategy of playing global and to refuse attempts to be present in all regions in the world. In reality the main interesting deposits are already divided among global majors. There are high-risk countries left such as Iran, Libya or Venezuela where the situation may change cardinally after Hugo Chaves quits politics. This is why this strategy is doomed. Losing a project in Iran is not the first failure and, as we understand, it is not the last one – there is no sobering up yet.

9. Moscow and Minsk agree on gas prices

   Moscow has shown there is a model of normal relations with transit states, which is as simple as follows: control over a pipeline in exchange for reduction in gas prices. Belarus had to agree having sold 50% in Beltransgaz. Thus, its main pipeline system was handed over to Gazprom; in return Russia promised to decrease gas prices. However, it is not clear how big this decline will be; yet, Vladimir Putin has already declared about an integration discount. Actually this model can be employed in relations with Ukraine but Kiev resists believing that its gas transportation system is a guarantee of the country’s survival.

10. Ex-deputy minister of natural resources Sergey Donskoy appointed Rosgeologia head

    The state formed a special entity but it is not clear whether this will change its attitude towards geology. The amount of funds in the country’s budget allocated on geological prospecting this year is so small that it is not worth mentioning. Revival of geological prospecting is out of the question so far. Another important question is whether this is all about moving the official from one office to another or it symbolizes change in the attitude towards the sector. Sentiments are pessimistic so far, but we hope that first steps of Rosgeologia will be successful.