Top events of January 2012

The National Energy Security Fund introduces top-ten events in the oil and gas industry in January 2012 and is ready to comment on them in detail.

1. Situation around Iran sharpens

   On one side, there is every chance to avoid a global war. The Europeans have variants of replacing Iran. The latter has opportunities to replace Europe with China. Barak Obama does not need war now, as it will, in fact, put an end to his hopes for reelection. But, in general, the situation is very complicated, and it is even strange that there has been no serious military conflict around Iran for so long. Well, wars usually do not start according to some schedule, but, nevertheless, this is a conflict that can blow up the whole world. Even a short-term blockade of the Strait of Hormuz will have awful consequences for the world market. Sharp rise in oil prices is not beneficial for Russia either, as this will trigger a more intensive search for alternative sources of energy. We may escape negative consequences but it is necessary to realize that in the modern world there are so many contradictions that sooner or later this keg of gunpowder may blow up.

2. Oil firms, energy ministry decide to freeze fuel prices until the end of February

   Unfortunately, this is another example of the government trying to solve problems in its traditional manual control mode, instead of resolving problems in a systemic way. During the election period there is indeed a task to show the electorate that prices will be held, because last year petrol prices surged by practically 20%, while the inflation was declared at slightly over 6%. But we understand that such moratoriums on price growth do not solve the problem systemically; they do not de-monopolize the market and do not reduce taxes. It is fine just as a pre-election measure. But this measure does not work to systemically cure the “monopoly on our market and irregular taxation”.

3. Ukrainian energy minister Yury Boiko visits Moscow, new round of talks between Gazprom and Ukraine

   Ukraine again hits our charts. The year began with Ukraine firing tough volleys – minister Boiko said Ukraine would buy 27bn cu m of natural gas; Gazprom responded it would speed up laying South Stream; Yury Boiko made a conciliatory visit to Moscow that did not result in an agreement on Ukraine’s GTS but enabled the minister to improve the situation caused by awkward and silly statements on reducing imports of Russian natural gas. He declared he was understood incorrectly, although it is common knowledge that the Ukrainian language is too similar to the Russian language to be understood incorrectly. The cold temperatures that Ukraine experienced at the end of the month finally buried the myth on decreasing imports of Russian gas in 2012. Due to the frosts, the gas consumption is record high as well as gas prices. In this regard, everybody understands that we have to agree on the GTS – both Ukraine and Russia will benefit. But, unfortunately, a political complex makes us going around. No decision on the GTS fate was made in January 2012.

4. Gazprom reduces prices for some European energy holdings

   This is a very important moment, because Gazprom is often described as a dinosaur unable to be flexible. The Europeans always rebuke the firm for not willing to cut prices urging to be flexible, to think strategically and to look forward, because contacts will have to be renewed some day and it is necessary to meet the expectations of buyers. Last year Gazprom already decreased prices for some companies. It again made concessions to its European partners having demonstrated some flexibility. There are three companies left that the Russian gas giant is heavily negotiating with: E.ON (Germany) – the problem concerns a possibility of establishing a JV with E.ON, Gazprom wants to set up this JV to produce electrical energy in Europe, while the Germans have no such desire; PGNiK (Poland) – a scandalous company that constantly threatens to go to the arbitration court. Gazprom seems to be trying to show it is steadfast and will not make any concession. With RWE Transgas (Czech Republic) Gazprom should have fewer problems.

5. Privatization debates

   The discussion continued throughout January. Two points of view were voiced. Igor Shuvalov, representing one camp, believes that privatization should be aimed at fixing the environment in Russia and it should be quick. Igor Sechin, representing another clan, thinks privatization should have a fiscal character and, first of all, it should solve the problem of collecting budget revenues and it should be slow. As a result, on January 30 Vedomosti published Vladimir Putin’s article, in which he also presented his view on privatization and, in fact, voiced his traditional compromise: privatization will indeed have an institutional character, i.e. its main task is to create a normal environment. On the other side, he stressed that only fools sell things cheap. So, the dispute on the future of the Russian privatization process will continue. There is only one obvious thing: assets in the fuel and energy sector will be sold and handed over to loyal private hands.

6. Discussion of possible reshuffle in boards of directors

   By February 1 state companies were to prepare lists of new members of their boards of directors that are to be voted at annual meetings of shareholders in summer. But the presidential administration is to provide its opinion already now. And it has turned out that the Cabinet and the presidential administration have different opinions on the composition of board of directors. A conflict between the president’s executive office and the government is an old story that was confirmed once again. Actually control over state companies is an important economic resource. We understand that on the eve of the elections the struggle for administrative and economic resources obviously intensifies. We should expect large HR and structural changes in state companies and the government. Preparation for them has already started. This is why Russian politics will be very interesting not only from the point of view of public events such as meetings, rallies and the March 4 elections, but also from the point of view of their administrative component.

7. Barak Obama delivers speech to Congress

   It would be nice for the Russian president to deliver a similar address. Barak Obama said the USA would produce oil and gas on the shelf and would accelerate production understanding that the catastrophe in the Gulf of Mexico created certain fears but, nevertheless, the US economy will not survive without oil and gas. Finally, Barak Obama stated it was necessary to disclose the chemicals used in hydraulic fracturing in shale gas production. This is also useful for us, because many experts in Russia are keen on shale gas claiming that since in America shale gas is so cheap the whole world will have a lot of cheap gas soon, which is not obvious. Debating shale gas prospects in the USA is one of the most fundamental topics for the gas market, but in reality the solution of this task is not as linear and unequivocal.

8. Discussion of Transneft development strategy until 2020

   Transneft claims it will focus on construction of pipelines for oil products instead of oil pipelines, which once again demonstrates the lack of a general picture of the fuel and energy sector development. It is a big delusion to think that Russia would expand exports of oil products. Neither Europe nor China needs Russian oil products. Our consumers are used to getting oil and refining it. But is it logical to transport oil products through pipelines, not by railway, creating additional infrastructure? Has everything been estimated properly? There are, indeed, some bottlenecks in the railroad network, but Russian Railways is also eager to make new investments. However, development strategies of Russian Railways and Transneft do not coincide; they are formed independently of each other, although they should be part of Russia’s general transportation development strategy. On the whole, the picture looks very sad.

9. Idea to merge Transneft and Zarubezhneft

   This is an absolutely senseless idea from the economic point of view, because Zarubezhneft mainly operates abroad and Transneft works in Russia. One company produces, the other ensures transportation. There will be no synergy effect from this merger. But in Russia there is practice to resort to structural changes in order to solve HR issues. This is why reshuffle in Transneft is quite possible. Thus, to settle some personnel questions it is necessary to launch some structural changes.

10. Debating introduction of unified methods of allocating preferential export duties

    The doings and sayings of the government often do not match. They say about unified methods, while in reality there has been no single taxation system in the country for a long time. There are many private taxation regimes instead of a universal one. The government keeps spending time on discussing unification of these systems.