Top events of November 2011

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

1. Gas accord between Russia and Belarus

   This document clearly outlines tactical advantages of Belarus and strategic benefits of Russia. The benefits of Belarus are obvious: the gas price in Q4 is $307, compared to $165 to be in Q1 2012. Thus, the price will almost halve making it possible for Belarus to accumulate some $2.5bn in profits next year. In fact, it means that Russian domestic gas prices are to be introduced in Belarus. This is fixed in the agreement: as of 2013 to 2014 the price will be linked to the Yamalo-Nenets Autonomous Area plus gas transit and storing costs, i.e. the way domestic gas prices are defined in Russia. This is what Minsk was dreaming about when it was negotiating 2012 gas prices. Besides, Alexander Lukashenko managed to cadge a credit to build a nuclear power plant. As far as Russia is concerned, it received 50% in Beltransgaz. How can we estimate the value of the asset that was paid $5.5bn for? The price is not bad given that Russia has ensured a relatively secure transit. Some 30bn cu m is pumped through the Belarusian corridor that consists of an old pipeline of Beltransgaz and the new Yamal-Europe gas pipeline. Now this is part of the Gazprom network, and the Russian giant is already trying to rename Beltransgaz into Gazpromtransgaz Belorussia. This may become a gate to buying up Belarusian enterprises. Some experts inquire “why we should start selling gas to Belarus at Russian domestic prices in 2013”, but we should not rule out a variant that already in 2013 to 2014 we will simply be delivering gas to Russian enterprises located in Belarus. Lukashenko is now pressed and active buying up of Belarusian assets may follow the Beltransgaz deal. Thus, this deal definitely is not about natural gas only. This is a relatively new way of Russia’s expansion through buying everything possible. The Ukrainian factor obviously played its role in this case, as it was necessary to show Kiev what happens to states that behave correctly: they get large discounts on gas supplies, while the handover of the pipeline system does not mean collapse of this country. However, it is clear that the Ukrainian case is going to be more complicated: firstly, the Ukrainian asset is larger; secondly, there is more politics involved unlike Belarus where there is only one decision-maker. In Ukraine there is opposition and decisions need to be approved by the parliament. The main thing is that Ukraine has created a myth that its pipeline system means its independence. Thus, this story will be more dramatic, but the Belarusian variant may work in this case anyway.

2. Official launch of Nord Stream first line

   The project that was so much spoken and speculated about is finally implemented. Poland used to brand it “a new Molotov-Ribbentrop gas pact” claiming that it should not be put into practice because of chemical weapons on the Baltic Sea bottom. Then we were assured that Sweden and other states would not agree to the project. But all ecological agreements were signed and the pipeline was launched, although some six to seven years ago it seemed absolutely unrealistic. Its importance is obvious: this is the first pipeline project directly linking Russia to European countries without transit states. Considering Poland’s behavior, there is a question what its position will be if Russia starts building a new pipeline through Belarus? It is very important that Nord Stream was implemented with European partners at every stage: German companies produce gas at the Yuzhno-Russkoe deposit, the pipeline is a joint project of Gazprom, two German companies, France’s GDF and Dutch firm Gasunie; finally there are two pipelines, OPAL and NEL, to deliver gas to consumers. The natural gas will be supplied to joint ventures, e.g. Wingas (a JV of Gazprom and BASF) will be selling it. So, it is important that there is cooperation along the whole chain from production to final consumers.

3. Gas Exporting Countries Forum

   If Europe intends to shift to the spot market and if it is confident that the future belongs to a short-term market, not long-term contracts, GECF will become a key mechanism. If Russia creates an alliance or a cartel with Qatar, Algeria and potentially with Iran, these countries may easily manipulate the market in the long-term perspective possessing major natural gas reserves. Thus, GECF could be a very clear response to attempts of the Europeans to establish spot trade. Europe has an illusion that the 2009-2010 situation will remain forever. In reality, this was a concurrence of exceptional circumstances and Qatar, by the way, leant a lesson from that, as this was Qatar that had made prices lower. Qatar had to sell gas at low prices but it did not like that situation; the country declared a moratorium on new projects until 2014. But the question is whether we will manage to agree with Qatar. This process is very complicated so far. The position of our state authorities is surprising. Although Qatar is obviously a key issue for us, neither Vladimir Putin nor Dmitry Medvedev, nor Gazprom CEO Alexey Miller attended the Forum; no significant talks were conducted. It was just a reminder that this Forum exists. Although this platform is very important for Russia, it is developing extremely slowly.

4. APEC forum, Medvedev says gas supplies to China may soon equal deliveries to Europe

   In this case Russia’s behavior is absolutely logical. If Europe tells us it does not need our natural gas, Russia responds by promising everything to the Chinese. It is very indicative that Russia is negotiating supplies through the Altai gas pipeline that is supposed to pump natural gas from deposits originally being a resource base for exports to Europe. Thus, we are going to sell gas that we have always been shipping to Europe. This alternative is not so economically beneficial, but the position of the Europeans claiming they do not need Russian gas is also not correct. So, aren’t we driving each other to a dead-end by blackmailing each other?

5. Turkmenistan, China sign new gas agreement

   Many observers believe this is Russia’s defeat as China has found alternative gas supplies. But in reality it is not true, because Turkmen gas is delivered to the west of China where there is no big demand. As far as China’s eastern provinces and eastern coast are concerned, the situation in the next 10 to 15 years will not be as bright as some analysts are trying to portray assuring us that China will fully satisfy its demand for natural gas in the medium-term perspective. This is not true. The Turkmen contract once again testifies to the lack of prospects of Russia’s strategy aimed at entering China’s western market – we should think about its eastern provinces. However, simultaneously Turkmen natural gas is moved away from the European market: the more gas is sold to China, the few chances there are for a trans-Caspian pipeline to be laid. And, by the way, no wonder that following the signing of this contract EU energy commissioner Oettinger was more amicable during his visit to Moscow compared to his statements made a month or two before when he position towards Russia was tough and his confidence in construction of a trans-Caspian gas pipeline was extremely high.

6. Debates around energy assets privatization, Igor Sechin says only those companies should be privatize whose value is not lower than their IPO value

   Contrary to general delusion, Russia’s current political regime is not opposed to privatization. The assumption that Vladimir Putin nationalizes everything is absolutely wrong. In reality we observe how the Putin elites are interested in privatization. The question is who will be the main beneficiary of this privatization. Some elites affiliated with Dmitry Medvedev certainly want to carry out this process while Medvedev is still a president. Others, on the contrary, are waiting for Vladimir Putin’s comeback as president thinking this will ensure more preferential privatization deals for them. This is why there will be many debates around privatization representing interests of certain administrative clans.

7. State Duma approves 60-66 taxation preferences for Tatneft and Bashneft

   When this taxation regime was introduced it was clear that practically all companies would benefit from it, except two firms – Bashneft and Tatneft. That was because of their production structure. But now they also enjoy the preferences, as Bashneft is a federal company belonging to very influential persons, e.g. Mr. Yevtushenkov and his Sistema, while Tatneft is a very important economic entity in Tatarstan that is one of the most populous regions in Russia, which is especially important during the election period. But we certainly understand that during the election period many promises have been made expanding the budget expenditure. The question is what will happen to the taxation regime? The task to find resources for investments seems to be in the process of implementation: introduction of the 60-66 regime will provide a break for companies. But what will happen to long-term policies? Is it a palliative decision that will be revised after the elections?

8. Natural resources ministry’s proposal on new taxation of offshore fields

   Everybody understands that the current taxation regime is murderous for new projects. How will you develop new offshore projects, especially in the Arctic, without taxation incentives? It means the situation should be altered. On the other side, who will contribute to the state budget? We all speak about the necessity of diversification and that our dependence on revenues from natural resources is terrible, but imagine you are refusing half of your income. How will you cope with this situation? The direct tallage on oil and gas companies accounts for 50% of the state budget revenues. It is not clear yet what the new Cabinet formed next May will be doing. From a strategic point of view it is apparent that oil and gas production on the shelf should be promoted. But on the other side, how to close the budget gaps? We believe this issue will be one of the main questions to define a new course of our leadership.

9. Conditions of selling Gazprom Mezhregiongaz Chelyabinsk to NOVATEK defined

   This once again testifies to active strengthening of NOVATEK’s positions on the domestic gas market. It is expanding onto the Perm and Chelyabinsk regions, and it turns out that the gas market liberalization is in full swing, Gazprom’s share is decreasing. We certainly understand that NOVATEK is not a usual company as it is managed by loyal people. Nevertheless, gradual changes on the domestic gas market are taking place. We think this is not the last acquisition by NOVATEK.

10. Poland’s PGNiK appeals to arbitration court

    PGNiK brought a suit demanding reduction in the Russian gas prices. Meanwhile, the company has no alternative sources of gas supplies. Although the company says it will soon build a terminal for Qatari LNG supplies, there is no precise date. According to Polish plans, the year 2020 is a deadline for having some progress on shale gas development. As far as LNG is concerned, this is 2014 at best. But they are filing a suit now, not in 2014. So, it turns out that Poland realizes that all these projects can be postponed or will not be launched at all. The issue involving Qatar is also very serious, because the demand for Qatari gas is rising very quickly in the world. In China the price of Qatari LNG is in fact twice as high as in Europe. Certainly it is a more beneficial destination for Qatar to sell its gas. Besides, the demand for LNG will be growing in Japan. Will Qatari gas be ever shipped to this terminal in Swinoustje? The topic of LNG and shale gas should be promoted more actively now, because this issue will be forgotten if problems start. This is why Poland confidently goes to court hoping that this psychological attack will produce some serious effects, Gazprom will be frightened and PGNiK will get more advantageous conditions. PGNiK indeed has started reducing consumption of Gazprom gas buying it from other companies. But this is Russian natural gas coming from Russia anyway. Although another pricing formula is used, the natural gas it buys is from Russia, which is a very significant moment.