Top events of June 2012

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

1. Creation of Presidential Commission for FES Development and Environmental Security

   Creation of the system of managing the oil and gas industry continues. This process was not limited to formation of the new Cabinet. Currently it is vivid that there are two parallel systems of managing the fuel and energy sector – one is in the government, the other is outside. The latter is also an official institution; the president has an aide who supervises activities of the new commission. This is not duplication as the mass media suggested. This is conscious creation of staff competition between different clans. Vladimir Putin consciously does this; it is one of his managerial methods. The question is whether we are capable of generating strategic solutions under such schemes and competition? Won’t the oil and gas sector remain unattended in this case?

2. Privatization disputes continue

   The next six years of Vladimir Putin’s term in office is the time for privatization of state property. It is wrong to think that some elites stand for privatization and some stand against. In reality everybody is for privatization, the question is about the period and, certainly, beneficiaries. This is a key issue. Disputes were going on throughout the whole June, although there are just several assets that cause most heated discussions – first of all, this is obviously Rosneft. An important moment is whether to privatize the company before 2016 or later. Privatization schemes and beneficiaries will be certainly different in these two variants.

3. Cabinet meeting on oil and gas sector taxation

   This is one of the examples of how solutions of fundamental issues get protracted. In spring before formation of the new government final decisions on FES taxation seemed to have been passed. According to them, the additional profit tax was not necessary, while the gas production tax on Gazprom and other gas producers was to equate in 2015. These decisions are clearly questionable. However, when new people came to the government they suggested going back to the taxation issue. On one side, it is good that we come back to this topic, because the suggested changes were not ideal as they further dig a hole under the Russian oil and gas sector. But on the other side, this system is absolutely arbitrary. As a result, it is not clear whether the additional profit tax will be introduced or not. On one side, it is good that the Cabinet is flexible. On the other side, we understand that taxation is the issue that should be fixed for some serious period of time to facilitate inflow of investments in the sector. Unfortunately, Russia has nothing to boast about in this sphere.

4. Reshuffle in energy ministry

   Changes occur not only on the level of ministers but also below. Many officials close to Igor Sechin are leaving the ministry. But this is not a sign of weakening of the former deputy PM. This is rather evidence of redistribution of resources. Besides, Rosneft still has a representative in the energy ministry.

5. Annual shareholders’ meetings at Gazprom, Rosneft

   June is a traditional month for meetings of shareholders and, naturally, such meetings at major companies attract special attention. There was no breaking news, but it is interesting that Gazprom retained its head, while Rosneft obtained a new one. However, in reality the latter has been supervising the company over the past years. Gazprom and Rosneft need to solve a number of complicated problems – for Gazprom it is the problem of taxes and domestic gas prices, for Rosneft it is privatization.

6. Vladimir Putin visits Chinas

   China is a difficult issue. On one side everybody understands that the main demand for energy sources is shifting to the Asian region. China is a powerful absorber of energy sources from all over the world. But on the other side, the PRC is a very tough negotiator that is capable of insisting on prices it wants, that dictates its conditions and foists off its credits that need to be paid off reducing the price of energy sources delivered to China. This is why the fact that Russia has not signed a gas agreement with China is rather a positive sign, because the main principle in relations with the PRC is prudence.

7. Dmitry Medvedev visits Ukraine, Russian-Ukrainian talks continue

   Unfortunately, no breakthrough was observed in this sphere: neither contract was sealed, nor decision on Ukraine’s GTS was made. After completing the UEFA Euro 2012 Kiev is going to focus on the upcoming election campaign. During the elections fundamental decisions are unlikely to be made. With new parliament it will be harder to ratify decisions; besides, construction of two lines of South Stream will start soon. So, we are losing possibilities to agree with Ukraine, as the window of opportunities is getting more and more tightly closed every day.

8. World Gas Conference in Kuala Lumpur

   A powerful voice of the customer is often head in the expert circles and the press, and this voice is dominating. We often see events on the world gas market through the eyes of buyers. The most prominent global expert bodies are represented by customers, e.g. the International Energy Agency. The World Gas Conference is interesting from the point of view of the seller. The question is when the voices of the customer and the seller will ring together at serious forums?

9. Shtokman prospects discussed

   A preliminary agreement between shareholders of the Shtokman project expired on June 1. Everybody expected signing of a new model but this did not happen. It means there are indeed difficulties between shareholders. There are many rumors, e.g. Shell might replace Total. There are large expectations on this project. Russia cannot simply send this project into archive – this would bring real shame on the country. A positive thing is that there are those willing to join the project. However, Shell’s participation may lead to serious technical revision of the existing model. No wonder there are speculations that LNG production may be organized within the project instead of pipeline construction.

10. EU ratifies its embargo on Iranian oil supplies as of July 1

    The decision does not seem to be scary for the buyer; moreover, the market received premium on war expectations. However, today there is no war but tomorrow it will happen. The Persian Gulf region is an extremely unstable area currently that may burst into flames in several places simultaneously: there are preparations for war in Syria, Iran may follow this course later, which means Saudi Arabia will be set on fire and a conflict in the Strait of Ormuz will ignite. People who reject such forecasts calling them alarmism have the right to express their own opinion. However, one should understand that such embargos only complicate the situation in this region further. If the region explodes, it will be very difficult to replace oil produced and imported from this area. There are indeed variants of such replacement, mainly by Saudi Arabian oil. But if the Strait of Ormuz is blocked, problems will immediately surface. It is possible that this keg of gunpowder will not detonate until the US presidential elections are over, but this does not mean that it will never go off.