Top events of 2011

NESF presents the most important 2011 trends

1. Fukushima catastrophe

   Whatever apologists of the nuclear energy say, this event has definitely changed the energy history. It is absolutely obvious that a decision to shutdown nuclear power plants in Germany and Japan, giving up nuclear projects in Italy, Belgium and other states will seriously alter the modern energy sector. It means that natural gas is becoming the 21st century fuel, as new opportunities are rising for it. Japan and Germany will become very serious locomotives of the new growth in the demand for natural gas. Skepticism about the nuclear energy will strengthen. However, the nuclear energy sector will recover, but it faces several difficult years ahead. The attitude towards nuclear projects will be changing; this is why, nobody writes off the nuclear energy sector. However, the industry suffered a serious blow, and it will take time for it to recover.

2. Arab Spring

   The unrest in the Arab world was initially perceived by western experts as another round of the history development, i.e. countries were refusing different dictatorships in favor of democracy. But at the end of the year it became clear that military regimes were replaced by radical Islamists. This means the choice was not made in favor of the liberal western way. Since Saudi Arabia, Algeria, Egypt, Yemen and Bahrain are very important from the point of view of the energy sector development, political risks in producing and transit states are increasing, e.g. it is enough to mention the Suez Canal in Egypt. Thus, the Arab Spring makes us think that the idea of diversifying supplies to Europe and denying Russia is very doubtful, because Libya, Egypt and Middle East states are not reliable suppliers. At least, they are not more reliable than Russia. Certainly, there were serious important events in Russia but, at least, anti-West forces that are ready to implement anti-West political projects are unlikely to come to power in Russia. Even political instability in Russia is absolutely incomparable to political instability in Egypt, unless the situation in Russia develops in line with the chaos scenario of the 1990s. But we hope Russia may avoid such a catastrophic scenario. At least, there are chances for that. Meanwhile, the Islamic world is diving, judging by what is going on in Egypt.

3. Exxon Mobil-Rosneft deal on joint exploration of Russia’s Black Sea offshore hydrocarbons, Total gets stake in Yamal LNG

   Nonresidents are interested in the promising Russian oil and gas sector. Political risks in Africa, the Middle East and Latin America push western companies to Russia. The year 2010 was very unproductive for Russia in this regard, but the year 2011 was quite successful in general – several large deals were made and some more are being prepared.

4. Energy dialogue with China

   In 2011 we realized what a contradictory partner China is. On one side, this market is very attractive. On the other side, China is a very hard and even dangerous negotiator. This is testified to by our dispute about oil prices – the PRC made proposals that looked absolutely strange from the point of view of understanding the nature of pricing. Our gas talks are also not easy. Although gas negotiations did not lead to signing a contract on the Altai gas pipeline, it does not mean that Russia has lost. This was the victory of common sense, because the Altai gas pipeline is a doubtful transportation decision for Russian gas supplies to the PRC. Firstly, the gas pipeline is expected to be filled with natural gas produced at the deposits that have long been the resource base of our exports to Europe. Thus, it means we will have to take away natural gas from the European market. Secondly, the Altai pipeline leads to the west of China where it is not actually required, contrary to China’s eastern coast. So, projects of supplies to China are interesting, but we have to be extremely careful and we have to offer more adequate projects from the point of view of logistics and consumption.

5. Discussion of Russia-Europe energy dialogue prospects

   The year 2011 was tough. Unfortunately, the trust that was lost mainly in January 2009 after the gas war with Ukraine was not fully restored. The EU aggressively promotes its third energy package, criticizes Russia as supplier and speculates about diversification. But the situation objectively changed to our advantage amid expectations of growth in the demand for natural gas in the near future, the Arab Spring and the Eurozone budget crises that reduces investments in alternative energy. These circumstances may improve our position in our dialogue with the Europeans. We hope that Russian authorities will be wise enough to improve the situation concerning, at least, our gas relations with Europe as there is every premise for this.

6. Launch of Nord Stream

   The much debated and severely criticized project has proved its validity. By the way, many experts who claimed the project was impossible, are now in a difficult situation trying to forget about their failed forecasts. Nord Stream is very important, as it proves a possibility of cooperation with Europe from production to transportation and marketing. Besides, this is our first project of direct supplies to Europe bypassing transit states.

7. Negotiations with transit states

   This is another traditional story. The results of talks were different. A contract with Belarus was finally made. There can be much debate around the price as the concession looks indeed quite substantial. But on the other side, Gazprom now fully controls transit through Belarus. As far as Ukraine is concerned, despite the lack of significant progress, there was an important psychological breakthrough at the end of the year. Viktor Yanukovich actually acknowledged that Ukraine may transfer part of its gas transportation system to Russia. This is very important given that previously Ukraine considered its GTS as national heritage that must not be shared with anyone on principle. Now Ukraine is changing its attitude towards this problem.

8. 60-66-90 taxation system, new taxation in gas sector

   On one side, the new taxation system cuts the oil export duties, which is profitable for oil producers. On the other side, we cannot say that oil companies received a comfortable taxation regime. As far as gas producers are concerned, for instance Gazprom’s tax burden is to rise by over $10bn in 2012. There have always been talks about the hydrocarbons curse and the oil and gas needle our country is on. But they have not noticed this oil and gas needle became rusty. Today it needs renovation. But how it will be done if the budget and elections require more and more money? Modernization is planned to the carried out at the cost of the oil and gas sector. But the latter is not as strong as a bull. Unproductive use of money collected from the oil and gas sector resulted in the situation when oil and gas producers also need money. Yet, the state has to take it away from them. This means the situation around taxes remains very difficult.

9. Fuel crisis on the domestic market

   This story started last spring and was developing throughout the whole year. However, the situation is rather simple. If we cannot increase oil production but want to supply oil to the Chinese market, we have to realize that amid limited production and desire to raise exports we have to take away part of oil from the domestic market. Meanwhile, the domestic demand for petrol traditionally rises by 3% to 4% annually, which is quite substantial. So, in this situation one should not be surprised at constantly growing prices. Besides, to meet the state budget objectives, it is necessary to raise excises. The year 2012 is unlikely to bring some relief to those travelling by car or by plane (aviation kerosene prices also jumped last year).

10. Privatization of energy assets

    There were debates about procedures of privatization, whether growth in prices of securities should be expected, whether it is a budget or a social measure. However, in 2011 the thesis NESF has long been pointing to was finally voiced – this is an illusion to think that the current political system is aimed at nationalizing energy assets. On the contrary, state authorities are targeting privatization. And this is not some chaotic privatization, but well planned and precise. Yet, the thesis was voiced publicly and privatization will undoubtedly become one of the main trends in the next one or two years.

11. Development of foreign projects of Russian oil companies

    In 2011 we understood that the state would consciously assist, promote and even encourage Russian oil companies to invest abroad. The number of foreign projects is expanding. On one side, we should be glad that Russian companies are turning into global majors. On the other side, we have to realize that this money is taken away from the Russian oil and gas sector and invested in foreign projects. Obviously this money will not bring as much return as in Russia, because this issue involves investments, taxes and new jobs. This is why, the tendency of copying the western development strategy is very questionable and ambiguous.