Top events of October 2011

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

1. Vladimir Putin visits China

   Some observers rushed to assign some symbolic meaning to this visit – hardly had he announced his comeback to presidency, when he was set to visit China. They claimed it was not a mere coincidence – if Dmitry Medvedev has been, conditionally speaking, a pro-western politician, Vladimir Putin will allegedly be a pro-Chinese politician. But this is not true. Vladimir Putin has never been either a pro-western or pro-Chinese politician. The problem is that he cannot make his final choice. However, this is true for the whole country over the past centuries. No wonder, Putin’s visit to China led to nothing – there is no gas contract we are so much looking forward to. Yet, this is a positive sign. The variant of the contract offered currently is likely to create threats to Russia rather than open new opportunities. It is clear that Moscow is trying to blackmail Europe by the China topic, but the big question is how far Russia is ready to go in this game. This is why Putin’s visit is certainly symbolic, because the main foreign policy question of Putin’s third presidency will obviously be the geopolitical choice between Europe and China. This question is very closely connected to the energy issue: who will be a prospective buyer of Russian hydrocarbons? This question is fundamental. Vladimir Putin has no definite answer to this question yet. By the way, it is indicative that this topic was removed from the election campaign agenda.

2. Summa Group wins tender to build oil terminal in Rotterdam

   This case is quite indicative due to several reasons. Firstly, the group consists of well-known businessmen close to Vladimir Putin, such as Timchenko, Kovalchuk and Rotenberg, as well as other serious businessmen, e.g. Ziyavudin Magomedov, Summa’s main shareholder. These people have been long engaged in business. And this is one of Vladimir Putin’s main differences from Dmitry Medvedev: Putin’s HR reserve is large and it also incorporates people from old elites. For instance, Magomedov started working with Semyon Vainshtok and then easily migrated to Putin’s epoch and adjusted to it very carefully experiencing no problems. Since the project involves many businessmen, Putin can diversify risks not putting all assets in one basket. Some experts are mistaken saying that Mr. Timchenko is behind Mr. Magomedov. This is not correct – the picture of the world is much more complicated. It is clear that Putin is in the center, but around him there is a very complicated conglomerate of business interests. The second issue: Putin implements a very clear strategy of developing exports by sea. Pipelines running on the land through neighboring states, Ukraine and Belarus, will be drained – this is likely to affect both gas and oil pipes. Development of seaport infrastructure in the northwestern region is a sentence to the Druzhba pipeline. We are speculating a lot about gas exports, but the same will happen in the oil sector – development of Ust-Luga and the port of Primorsk will provide for cutting transit through Druzhba, especially given that the total amount of exports of oil and oil products is reducing. The last question: as far as the gas business is concerned, Europe is scared of any cases of Russian capital entering European assets, all such projects cause panic and hysterics, but there is no nervous reaction to the latest buy, i.e. the right to build an oil terminal is Rotterdam – business is business. The question is if the gas business differs radically from the oil one. If it concerns gas, they are looking for some political interest. If it concerns oil, this turns out to be just business.

3. Military operation in Libya over, Qaddafi dead

   It is a great illusion to think that the Arab spring will lead to establishment of pro-western democratic regimes in northern Africa and the Middle East. This illusion is already being shattered. We always warned that the Arab spring would be soon replaced by the Arab autumn. This is what is going on. Tunisia held elections in October; there will be attempts to portray the Islamists that won them as moderate. Egypt is the next to have elections. The Islamists are sure to win them. This is why there is no guarantee that some pro-western politician will win the vote in Libya and the country will turn into a pro-western state. Libya is a tribal state that used to be under control of hard dictator Muammar Qaddafi. There is no dictator and Libya will split into several artificial states ruled by tribes. There is no guarantee that Libya’s unity will be preserved. However, it is fashionable to consider this news as positive for Russia, because Libya is our natural competitor on the world oil map. On the other side, Russian companies always have some desire to get into production projects all over the world. For some reason it is believed to increase our status as global player. This is certainly nonsense. It is amazing that instead of leaving Libya our companies are again heading there proudly declaring that projects in Libya will continue.

4. Purpe-Samotlor oil pipeline launched

   Despite bravura around this event, we have to remember that the oil pipeline actually connects Asian markets with Western Siberian deposits. And again the same question pops up: what oil and gas we are going to sell to China? According to the current standing, we offer Western Siberian hydrocarbons to China, which is fundamentally wrong. Besides, development of oil exports to China is accompanied by serious mistakes; we should have developed Eastern Siberian fields to sell their oil to the PRC. Instead, we rushed to sign a contract and now we have to pump Western Siberian oil to China, which certainly reduces possibilities of exports of oil and oil products to Europe, which is a more profitable market than China.

5. Russian, Ukrainian presidents, PMs meet in Donetsk, St. Petersburg

   There are a lot of negotiations but no results. It reminds of a pause in a game between two grand masters. How long will this pause last? Ukraine cannot wait any longer. Gas prices advance every quarter and have surpassed the psychological benchmark of $400; next year the average price is likely to be as much as $450. The Ukrainian economy will not stand this. Nevertheless, the Ukrainian president is still not responding. The situation is deteriorating for Ukraine – Nord Stream was launched in November. It is very hard to tell now what it will result in. So far Ukraine cannot do anything but to blackmail Russia.

6. Turkey refuses to prolong old contract with Russia

   Ankara negotiated with Baku. But this does not mean that purchases of Russian gas will decline. The matter is that the total amount of contracts is 24bn cu m, but Turkey bought only 18bn cu m last year. Thus, Ankara may actually preserve the same volume of gas purchases having removed the 6bn cu m difference. There are other problems: this gas was pumped through Bulgaria to those districts that are main gas consumers in Turkey – first of all the Istanbul area. Now it will be necessary to take gas from Blue Stream and deliver it to Istanbul somehow. Ankara will also face a transportation problem, if it decides to switch to Iranian and Azerbaijani gas.

7. New bill on oil submitted to State Duma

   The saga about a new bill on oil may come to an end with the current State Duma and Cabinet. When the bill was worked out it was already clear that instead of the oil constitution we would have a document that mainly regulates the situation on the market of oil products and, possibly, the situation around oil transportation. So far, the most encompassing ideas, e.g. creating a system of oil control, remain unattended. By the way, there are doubts whether this needs to be done at all, given that Igor Sechin, the main lobbyist of this bill, is still a deputy PM but what his post will be after the presidential elections in spring 2012 is not clear. He will certainly remain an important player but it is a big question where he will work – in the government or the president’s executive office. This is why he probably should not expand powers of the Cabinet on the eve of its inevitable dismissal – next May we will have a new Cabinet.

8. 2012 gas production tax rate defined, proposal to cancel take-or-pay provision on domestic market

   The gas industry is also involved in covering pre-election expenses. Some interesting decisions were made, e.g. the minerals production tax rate for Gazprom and other companies is to be absolutely different. The gas industry has to undertake other obligations too. For instance, cancelling the take-or-pay provision is a present Vladimir Putin made to other sectors of the economy. Now they will not be bound by stiff obligations on taking gas and correspondingly will not have to pay penalties for not taking as much gas as contracted and will not have to pay higher prices for gas supplies above the contracted volume. This brings us back to an old dispute of what is better for the economy: expensive or cheap gas – both sides have their own arguments.

9. Debates on oil sector taxation continue

   In October the Russian finance ministry declared the tax on additional income would not be introduced. Expectations for the taxation regime liberalization are not coming true so far. This means deputy finance minister Sergey Shatalov as potential candidate for finance minister (he is expected to occupy this post after the spring 2012 presidential elections) realizes that currently Vladimir Putin demands tough measures from him. Such toughness is simply necessary. The elections cost too expensive, as the election campaign turns into distribution of money to everybody. There is certainly a dilemma in this issue: on one side, the oil sector will not be able even to maintain production at the previous level without taxation preferences, but, on the other side, there is no one to pay for the feast the election campaign promises to the Russians.

10. Management conflict in TNK-BP

    Shareholders are at war and they do not seem to be able to struggle out of it as easily as they did after the first crisis – there is too much of distrust and offence, memories of the BP-Rosneft deal are too fresh. This affected appointment of Maxim Barskikh as chief executive officer, because every side in conflict considers him to be an agent of opponents. They so much distrust each other that there is even no possibility to appoint an independent director. So, next year, in our opinion, there will be quite serious changes in the composition of shareholders; some mergers and acquisitions will be possible. TNK-BP is one of the candidates to be involved in these processes.