Top events of September 2011

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

1. Power certainty

   Vladimir Putin will run for president, Dmitry Medvedev will become prime minister. This is the most important event for the oil and gas sector. We all realize that Vladimir Putin is a key element in managing Russia’s oil and gas sector, which means a lot depends on the configuration of power. Putin was expected to return to the president’s office; he will try to reduce risks of collapse of the system he has created. But there are many intrigues around the question who will supervise the oil and gas sector in the government? Will the government return to the model of Putin’s first two terms when the sector was controlled by the president’s executive office? What will be the role of companies? Thus, the industry has some unanswered questions, and we will be watching serious administrative battles until the presidential inauguration in May 2012.

2. Viktor Yanukovich visits Moscow, no progress in gas talks

   Many observers perceived a visit by the Ukrainian president almost like the end of the gas soup opera, but in reality nothing happened. Prime minister Nikolay Azarov has made very benevolent statements; minister Yury Boiko flies to Gazprom’s office in Moscow as if he works there. But the problem has not been solved: the price is the same, the pricing formula is unchanged, the owner of the pipeline is the same – i.e. not a single key issue has been settled. Meanwhile, on October 11 the court is to rule in the Yulia Timoshenko case. If she is found guilty, it means that theoretically on October 12 the contract on gas transit will cease to exist.

3. Searches at European companies related to Gazprom

   The scale of this operation was unexpected. The Europeans followed the Russian way – when they speak about awful Russia, they recollect searches and seizure of documents at offices of companies. But we have to admit that in Europe it was done in a more civilized manner. Several hundred officials are engaged in the operation, but their arguments sound rather amusing: this was allegedly a reaction to Lithuania’s letter. But to examine a situation in Lithuania it is not necessary to seize documents in Vienna and Berlin. Thus, absolutely obviously it was a demonstrative action that shows that the European Union, unfortunately, still views Russia as threat, not as partner. European functionaries cannot get rid of the image of a bear sitting on the pipeline in their heads.

4. Turkey decides not to prolong contract on Russian gas supplies

   After Turkey refused to prolong the 1986 contract on gas deliveries many observers rushed to conclude that Ankara had easily made this decision because the supply of gas exceeds its demand. In 2010 Turkey bought 18bn cu m of Russian gas instead of the contracted 24bn cu m. Thus, given this situation, Turkey could well terminate that contract. Besides, it does not need gas from new sources. Pursuing its policy of diversifying gas supplies Ankara has accumulated quite a large amount of resources and now the supply exceeds the domestic demand by 30% from the point of view of available variants of gas deliveries. But many observers think it will be like that in all European countries where everybody will have a possibility to take gas from wherever they want. However, Turkey has an advantage over the EU in this aspect: Russian natural gas is directly pumped to Turkey via Blue Stream, it can buy Iranian gas that Europe cannot purchase over political motives, and there is Azerbaijan in the vicinity. This is why the Turkish model is not applicable for the EU. Turkey is a very serious headache and the main problem for the South Stream implementation. The Europeans are wrong thinking Turkey will be their partner. It is absolutely clear that Turkey will demand serious political concessions from Europe in exchange for the Southern Corridor project realization.

5. New partnership accord on South Stream signed

   Three European countries are involved in Nord Stream; now there are also three European countries engaged in South Stream. This is not just a Russian-Italian endeavor but a really Russian-European project. Yet, it has some questions; every participant pursued its own interests when it joined the project. There are problems related to Turkey; the EU does not want to provide the pipeline with the status of exception from the Third Package. This is why the signing of this accord does not obviously mean that the project will be surely carried out.

6. Launch of Sakhalin-Khabarovsk-Vladivostok pipeline

   The pipeline is built. Now the question is what to do with it? There is no market to sell gas either in Sakhalin, or Vladivostok or Khabarovsk. There is an idea to construct an LNG plant near Vladivostok. This certainly will be a serious novelty, because the distance from Sakhalin deposits to the plant will actually exceed 2,000km. Nobody in the world has ever laid such a long pipeline to erect an LNG facility at the end. We will certainly boast this pipeline at the APEC summit in Vladivostok next year but the future of this pipeline is not evident. This project is likely to lead to other decisions such as accelerated construction of a pipeline from Yakutia, which may be implemented ahead of the launch of new gas deposits in Yakutia. The final decision on the Chiginskoe gas field in that region scheduled by investors for Q2 2011 has not been made yet.

7. Amendments to 2011 Gazprom budget

   The budget sharply increased as a result of higher expenses on pipeline projects such as the Sakhalin-Khabarovsk-Vladivostok, Nord Stream and Gryazovets-Vyborg pipelines. All these projects required a lot of funds, which led to budget amendments. Gazprom’s task is shift priority from pipelines to production projects, as more and more ambitious tasks are set. For instance, PM Vladimir Putin mentioned about gas output of 1 trillion cu m by 2030. But to produce this amount it is necessary to invest in deposits, not in laying more and more pipelines.

8. Extraordinary meeting of Rosneft shareholders, president retains post

   The dismissal did not take place and there is nothing special about it. However, the fact of rumors about his dismissal shows there is a serious conflict in the elites; there is struggle for who will control the fuel and energy sector, which in fact means who will head state companies. The intrigue will obviously continue. Eduard Khudainatov will retain his post at least until spring 2012. After that the conflict will go on. We will monitor further developments.

9. Gazprom Export head Alexander Medvedev says price parameters on gas contract with China agreed

   This was clearly a reaction to the searches in Europe: “If you treat us in this way, we will go to China”. We hope that pragmatic thinking will prevail and we will not hurry to sign this contract. We are currently tempted to scare Europe by signing a gas contract like it was with the oil accord that was signed and less than a year later we were ready to appeal to court against the Chinese, because they interpreted contract provisions in their own way. We should not cede pricing issues to China. By the way, president Medvedev specified that everything was agreed except the basic price. The Ukrainian case shows that the basic gas price is actually the main problem in our relations. Thus, the Chinese contract is not fully agreed yet.

10. TNK-BP board decides not to appoint Maxim Barsky director

    This decision is interesting from the point of view of TNK-BP prospects. Relations between shareholders are still very bad; minority shareholders have not withdrawn their suits yet, and it is clear that there is a group of shareholders behind them. In this regard, Barsky just became a hostage of the situation; each side suspects him of being an agent of the other side and certainly does not trust him. Now it turns out TNK-BP has no director and we think Mr. Barsky will leave the company next year as he does not want to work in such a suspended state. Russian and British shareholders look at each other as enemies; yet, the company always voices some fantastic plans on investments, development of Eastern Siberia and a gas cluster. Some serious changes should certainly happen; the sides were on the brink of divorce several years ago but miraculously managed to keep the family; but this family will not survive a second conflict.