Top events of April 2012

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

1. Struggle for executive power layout

   In April different elite groups were elbowing one another struggling for a place in the sun. The month was marked by a great number of intrigues, rumors and discrediting reports. The key intrigue concerns the energy sector: who will supervise the sector in the government, who will head a profile ministry and who will be in charge of the natural resources ministry? There are rumors about many other positions but the energy sector is the most questionable. It is still unclear what Igor Sechin’s next post will be. It is uncertain who will replace him. Energy minister Sergey Shmatko and natural resources minister Yury Trutnev are named among probable candidates to leave the Cabinet. But who will replace them? Everything is shrouded in mystery so far. This intrigue will be resolved in May, and our May rating will be definitely full of reports regarding state authorities.

2. Rosneft-Exxon Mobil, Rosneft-Eni deals signed

   On one side, the accord with Exxon is not the breaking news, because this is, in fact, the second stage of the agreement initially signed back in August 2011. But the deal with Eni is a more unexpected event. In its deal with Exxon Mobil the Russian oil producer tested the technology, and the deal with Eni, in fact, copies the pattern of cooperation with Exxon: e.g. Eni’s stake in the project and Rosneft’s engagement in foreign endeavors. On the whole, we see that the Arctic shelf is becoming open for foreign firms, which is fundamentally important. Now it will be more difficult for the West to portray Russia as the resource nationalism stronghold. So, we welcome such developments. Nonresidents will bring money, technologies and marketing strategies. They will not hinder us in such complicated projects as the Arctic.

3. Defining new taxation regime for Arctic projects

   At a meeting on April 12 some fundamental decisions on altering the taxation regime were made. They are already fixed in a corresponding bill that will be passed soon. These decisions are absolutely logical from the philosophical point of view, as they concern transfer of the taxation burden from the phase of deposit development to the active production phase. There is no other way to develop these projects. We would like these fundamental changes in the rules of the shelf game to finally lead to serious reforms in taxation regimes of other projects, because the oil and gas industry needs serious taxation changes.

4. Active debates on gas production tax

   We witness that the state has different attitudes towards taxation regimes in the oil and gas industries. There is understanding that if taxes are raised in the oil industry it may lead to collapse of production and finally to a financial catastrophe. However, developments in the gas industry are different: there is some wild passion for increase in taxes. By the way, we remember that Vladimir Putin in his articles mentioned that we need a taxation maneuver and that the potential of growth in the tax burden on the minerals production sector had been depleted. So, in which case the government acts more sincerely – when it gives preferences to offshore projects or when it sharply raises the gas production tax? The gas production tax, in fact, will double on Gazprom by 2015 and will jump four-fold on independent producers. Corresponding decisions were prepared and adopted in early May. Slogans calling for taking away revenues of gas companies definitely dominate the agenda. In this regard, Anton Siluyanov directly follows Alexey Kudrin’s philosophy.

5. FAS forbids Gazprom to privatize state company transporting LNG in Russia

   The sale of SG Trans is one of the indicators of a major political and economic trend that was dominating April and will keep dominating beyond May. Struggle for privatization is the main trend of Vladimir Putin’s six year tenure. Fewer and fewer tasty morsels are left, and struggle for these assets will be very tough. Big players will certainly use their administrative resources. Removing Gazprom from this tender is a bright indicator. There will be struggle for every asset. But in May there will be another government, and the layout of forces lobbying interests of companies will be different. On the whole, there have been many intrigues around state property this spring, e.g. the Novorossiysk port whose 25% stake Rosneft tries to obtain raising concerns of Igor Shuvalov. There are a lot of intrigues of this kind, and the SG Trans case is like a symbol of the general trend of active fight for state assets.

6. Reduction in oil supplies to Czech Rep.

   This case looks insignificant, but in reality it is very important. This is not just about redirecting oil from the Druzhba oil pipeline to the BPS-2 that has been launched with difficulties. Unfortunately, this is not this kind of story. The is about an old problem that NESF has been raising for many years: if there is no general growth in oil output in the country and if we increase domestic consumption and expand our oil exports to Asia, it means oil is inevitably taken away from the European direction of exports. This is what happens in the Czech Republic case. And this is not the first story. We have nothing to fill in the Odessa-Brody oil pipeline; as a result, this pipeline is used to pump Azerbaijani oil in the opposite direction. Is it a wise strategy? This is a very big issue, and the Czech case is not the last one of this kind.

7. FAS upholds Rosneft’s request for 51% in Itera

   Competition in the gas industry is growing. Another potentially strong player is emerging. The necessity to reform Gazprom is much spoken about. But it is understandable that even existence of strong Gazprom does not impede emergence of new gas industry centers in Russia. The alliance of Rosneft and Itera is an example of this.

8. Another complication of Russian-Ukrainian gas relations

   All arguments are on the table and all benefits have been explained, but Ukraine still does not want to agree to our arguments. This looks like a dialogue of two people who do not understand each other quite well.

9. Hungary withdraws from Nabucco, South Stream positions strengthen

   It is clear that if Nabucco had been in a good state, Hungary would not have left it. Budapest’s current relations with Brussels are very complicated. The European Union currently portrays the country almost as dictatorship. The EU’s reaction to amendments in the Hungarian Constitution is very funny. In reality nothing dangerous happened there. The EU has armed against Budapest but the reason is banal as usual – it is about the money. Hungary introduced a new tax on banks; while all major banks in this country are French and German. As a result, the case of the new constitution emerged; they say it allegedly undermines the foundations of the European democracy. Hungary certainly bears a grudge against the EU. Then there was a plagiarism scandal around the Hungarian president. So, Budapest was looking for an occasion to bite Europe. Hungary’s statement reflects the general condition of its relations with Europe, and simultaneously it shows that the Nabucco project is half-dead. Azerbaijan (only its gas can be supplied to the Southern Corridor project) lobbies the TANAP project. The EU has been promoting Nabucco over the past 10 years. But if today you implement some obscure project like TANAP, you have to make huge efforts to explain that Nabucco and TANAP are similar. It will be hard for Brussels to dare to bury Nabucco, but Hungary can do this job.

10. Iran suspends oil supplies to some EU states

    The Iranian topic has calmed down a bit, but one should not forget that Q2 will begin soon meaning possible suspension of Iranian oil deliveries to Europe. The Iranian case has not been removed from the agenda; Iran is a bomb that may seriously undermine stability on the world oil market. Iran will soon be back in the breaking news reports and this comeback may be not positive, at least for European buyers.