Top events of December 2011

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

1. Russian-Ukrainian top level negotiations

   Their result can be assessed pessimistically because no contract was signed. Yet, in reality we know there will be no gas war, since the current contract is valid until 2019. The main thing is that last December Viktor Yanukovich made an important statement saying they are ready to sell the gas transportation system. Thus, the Ukrainian president is removing the problem, the myth that assures the Ukrainian population that Ukraine’s independence depends on its gas transportation system. Yanukovich is now trying to explain that the GTS and Ukraine are not synonymous notions. The Belarusian example is indicative in this case: Minsk ceded the pipeline to Russia, but Belarus has not disappeared as country.

2. Gazprom CEO says South Stream project may be revised in case of positive deals with Ukraine

   This is an example of the wits triumph. We have always stressed that South Stream is an expensive project. Yet, we need it, if we fail to agree with Ukraine. Otherwise we have no other variant as we cannot depend on Ukraine. The year 2009 cost us a lot – the matter was not only about the money but about deterioration of our relations with the European Union. We cannot afford repetition of that case and we cannot allow Ukraine to blackmail us. However, if we agree with Kiev, South Stream should be definitely revised – we do not need a four line project of 63bn cu m capacity. This was the first time Alexey Miller acknowledged that.

3. Kolskaya oil rig sinks

   This tragedy shows that disorder often reigns in Russia when it concerns complicated technological processes. It also demonstrates that Russia can hardly be called a great shelf power. In this regard, we are not fully in line with the world trend of growing offshore production of hydrocarbons. If we really want to produce hydrocarbons in the Arctic and the Far Eastern shelf, we need to change our approaches completely. We should not just write some concepts simply stating that we have this or that amount of resources and we can produce this or that volume of oil. We have to deal with it comprehensively. We should evaluate the situation with our HR, technological and financial potential. It is high time to pay necessary attention to planning in the oil and gas sector.

4. Vladimir Putin publicly accuses energy firms of corruption, calls for fighting offshore companies

   There is a dual feeling: on one side, everybody is aware of appalling corruption in the energy network sector, of how budget costs are overstated, the flourishing practice of kickbacks, and transfer of money to offshore firms by affiliated companies. So, there is definitely a reason for indignation. But why pretending this was never known before? It is very strange that Putin suddenly opened his eyes and saw corruption. This is why we can make a conclusion that this campaign is aimed not only at fighting corruption but also at redistributing management in the sector just on the eve of possible privatization of the network business. Thus, this is not just an element of struggle against corruption, but also an element of redistribution of administrative control in the industry.

5. Conditions of Rosneft-PDVSA deal on Carabobo oil field posted

   Russian companies have to pay huge money just for the right to produce oil in other countries, though in Russia they do not have to do this. In this regard, their amazing desire to look for some difficult projects raises many doubts – the production costs at Venezuela’s Carabobo well are estimated at $25 to $30, which is many times higher than production costs of Rosneft in Western Siberia.

6. Bulgaria refuses to take part in Burgas-Alexandropoulos project

   On one side, this was expected. But on the other side, this decision shows that Bulgaria is a rather unreliable partner and that we are in a very difficult situation having relied on Sophia. The Burgas-Alexandropoulos project was aimed at bypassing Turkey as a transit state. Today we have just one project left, Samsun-Ceyhan, but the problem is that it runs in Turkey making it impossible to avoid transit through this country.

7. New oil pricing formula agreed with Belarus

   A breakthrough in the oil question followed the signing of a gas contract. We managed to find a compromise – Russia made a concession. It is likely to be similar to the Beltransgaz case – we exchange price for property. The question of privatization of two Belarusian refineries is likely to emerge in 2012.

8. OPEC decides to raise quotas

   OPEC is trying to somehow influence prices but the main circumstance will be the situation around political risks in this region, not moves by OPEC. If war between Iran and Saudi Arabia starts (it is possible as Saudi Arabia has even declared its intention to create a nuclear bomb to defend against Iran), prices will clearly skyrocket. If there is no war but a recession from the demand, another scenario is possible. This is why, nobody knows how much oil will cost in 2012; prices are forecasted to be from $50 to $250 to accommodate anybody’s taste.

9. Gazprom Export to have deputy general director for EC

   This simply shows that Russia has finally recognized Brussels as party to negotiate with. This move is unlikely to fully change the essence of our dialogue, but it is quite interesting as a symbolic measure.

10. Energy ministry refuses 3rd phase of Sakhalin-2 LNG plant

    The decision is ambiguous. On one side, we understand that the Sakhalin-Vladivostok gas pipeline needs to be filled. On the other side, constructing a third phase of the Sakhalin-2 LNG facility would be more economically expedient.