Top events of February 2012

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

1. Situation around Persian Gulf, Iranian issue

   This is obviously going to be one of the main news generators this year. The logic of developments shows there are arguments for war and against it. From the point of view of electoral perspectives Barak Obama is currently not interested in launching a military conflict, but Iran is clearly a strategic problem for the USA. For Russia this case is not as ambiguous as it may seem. Oil prices will definitely rise at the beginning, which is a positive moment. But growth in prices is acceptable up to a certain level. One should remember that if this advance is too intensive, oil will lose competition to other energy sources. It is good that Iran is not present on the world gas market. But what will happen if the ruling regime is replaced with pro-western authorities? Our competitors on the world gas market, e.g. Qatar and Saudi Arabia, are actively playing against Iran. So, there are very many questions around the Iranian problem, and the result of these developments is not clear for Russia.

2. New phase of gas standoff between Moscow and Kiev

   This topic remained important in February. The fact that at the beginning of the month Gazprom did not accuse Ukraine of siphoning off gas, gave us some hope for a way-out of this crisis. But it seems that Gazprom got tired of waiting for reasonable proposals on the gas transportation system from Kiev, and fired on Ukraine at the end of the month accusing it of theft. Yet, it produced the carrot in the form of a 10% gas price discount. Despite obvious advantages of a compromise on the gas transportation system for both sides, Ukraine continues to be obstinate. Instead of explaining to the public that Ukraine’s sovereignty cannot be built on the gas pipeline system, many Ukrainian politicians keep insisting on the opposite. It is, perhaps, possible to introduce a corresponding article in the Ukrainian Constitution saying that the Ukrainian GTS cannot be sold to anybody, because it is the guarantee of state independence. In this case we will drop all talks. They will become groundless as soon as the first pipeline of South Stream is laid in the Black Sea, which may happen already next winter.

3. Scandals around Russian gas supplies to the EU

   This case is very important for understanding the vector of the European gas market development. In 2009 to 2011 we were many times told that Russian gas was not in demand, that Europe built a competition system, that there was oversupply of gas on the market, that underground gas storages ensured increased gas supplies during peak consumption and that the spot market was operating, etc. But this model turned out to be unsuitable, and during peak consumption it was struggling to cope with the demand. When frosts came, the Europeans rushed to Russia demanding more gas. Meanwhile, Russia has long been proposing to discuss the future of long-term contracts, if European partners want to raise imports. Russia needs to understand what will happen to the demand. The second question, certainly, concerns Ukraine. The analysis of figures demonstrates that the assumption that Ukraine took more gas than the contract stipulated, is well substantiated. But the EU is not eager to solve this problem. Unfortunately, they prefer criticizing Russia.

4. Azerbaijan defines gas transit route to the EU

   Azerbaijan is at the height of its gas fame, and Baku looks very proud to choose a pipeline for its gas. However, the tender shows that the Azeri gas will not save the European Union; it will not ensure energy security of Europe, nothing to say about postponing for a year an investment decision on Shakh Deniz-2 that Azerbaijan had to make. One should not forget that initially this gas was planned for 2017 in the amount of just 18bn cu m. This volume will not be enough to save Europe. However, the idea of one pipeline was buried in February; the second pipeline, Nabucco, is being reduced just to remain in plans – already nobody is planning a 31bn cu m capacity. Thus, in February Nabucco became a dead project but to make its body look more or less live, there is some ritual dance around it. It is important to lay at least a small pipeline and call it Nabucco, to prove that the project has been implemented. Nevertheless, the Azeri gas story shows that there is no other gas available in the Caspian region, except in Azerbaijan, but its amount is not sufficient.

5. PGNiG files suit against Gazprom and Gazprom Export to Stockholm arbitration court, Eni gets new discount

   Gazprom that is always reproached for not being flexible, again made concessions. Many European companies received a second discount – Italy’s Eni is a bright example. Poland’s PGNiG could not secure a discount and went to the Stockholm arbitration court. In 2010 Gazprom and PGNiG had rather aggressive debates that led to revision of the contract – the volume of supplies was increased, while prices were reduced. Thus, it is not correct to state that Gazprom does not provide Poland with discounts. But the Polish side interprets everything very aggressively, compared to Italian and German firms that do not apply to arbitration courts and receive discounts. Poland, on the contrary, fires from all its weapons and remembers all problems in our relations, declares that it will not need Russian gas soon, because it will have shale gas, LNG from America and a terminal in Swinoustje. Poland consciously heats up the topic about it soon getting rid of problems with Russia. But then they come and ask for a discount. As far as the arbitration court is concerned, this system was designed by the Europeans. It indeed has provisions on changes in market conditions, but in reality PGNiG understands that the Stockholm arbitration court is not a guarantee of success for the Polish side.

6. Changes in lists of candidates to boards of state companies

   After the elections, the date of Vladimir Putin’s inauguration became clear and it became apparent that in mid May we will have a new government. It means March and April are the two months of fierce administrative struggle for posts in the structure of power and control over state property. The list of candidates to boards of directors of state companies testifies to tough battles. The general interpretation of changes is that there is an attack on positions of Igor Sechin. But if we study the list, we will see that Igor Sechin repulses the attack. March developments show that he actually controls the situation. In response to changes in the boards of directors Sechin went to Putin already after the elections to demonstrate the list of corrupted officials revealed as a result of auditing of state firms. Thus, Igor Sechin is not going to sit out, and we will witness interesting developments in the next few months – formation of a new Cabinet is going to be an extremely intriguing spectacle.

7. Rosneft, Itera plan gas partnership

   NESF said long ago that Itera has no future on the Russian gas market. Currently Itera is in fact a trading company. It has stakes in two large projects – Purgaz and Sibneftegaz (49% in each company); it receives its share of natural gas and sells it mainly in the Sverdlovsk Region. But the company has never had prospects of development. Today we are observing, in fact, acquisition of Itera assets by Rosneft. Itera is disappearing as independent company. However, there are many intrigues left in this case, because Rosneft will obtain stakes in projects managed, by Gazprom in Purgaz and by NOVATEK in Sibneftegaz. So, it will be interesting to watch how Rosneft will get on with its ‘sworn friends’.

8. Igor Sechin suggests Rosneft buying 25% in Novorossiysk port

   On one side, liberals in the government speculate about privatization of Rosneft; on the other side, Rosneft keeps expanding – an alliance with Itera, a proposal on the Novorossiysk seaport, a deal with Sintez Group on several Arctic projects closed in February. We see that the company is accumulating assets, but this does not mean it will not be privatized. This pie is becoming more and more nutritious, which means the struggle for it is definitely going to be ferocious.

9. Russia, China settle year long oil conflict

   The contract is indeed signed. On one side, it stipulates a discount. On the other side, deliveries to the Chinese border are more profitable for Rosneft compared to supplies to Primorsk. But this does not remove from the agenda the strategic question “how much China is profitable for us as consumer?” Was the policy of redirecting Western Siberian oil and gas to China justified? This is a very important question, especially in the context of talks with China. It is good that Gazprom does not make price concessions in gas negotiations. The principle of economic effectiveness of such supplies, compared to deliveries to Europe, should be strictly observed. If supplies to China generate less profit on deposits that can also cater to Europe, such supplies should not be arranged.

10. Discussion about Gazprom restructuring

    During the election campaign Vladimir Putin mentioned that Gazprom might operate in a new format in the future. This led to discussions about soon restructuring of the company. In reality this issue is not that clear. Vladimir Putin is likely to solve more important tasks first, as there are more real candidates for privatization. Nevertheless, one to two years after inauguration the issue of Gazprom’s future will be surely raised. This topic needs very a serious and weighted analysis; we have many sectors of economy that were thoughtlessly reformed, e.g. the electrical energy sector. If we follow a wrong path in the gas industry, we will face a catastrophe just like in the electrical energy sector. We hope for a more weighted and wiser approach.