Top events of August 2012

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

1. Gazprom says it suspends Shtokman project implementation

   The duration of the shareholders’ agreement under phase 1 of the project has finished, and no investment decision has been made. Currently Gazprom is thinking how to revive this project. It is surprising that Russian state authorities are silent, although the case is not so trivial. This project is not as stupid as some mass media sources try to portray it. Shtokman gas will be in high demand especially at the beginning of the next decade. We simply consider an inertial scenario, while the gas market is very changeable – nobody knows what will be there on the European gas market in 10 years.

2. New price hike in domestic fuel prices

   Predictions made relatively long ago regarding growth in retail prices are coming true. The conjuncture of world oil prices is playing into the hands of oil producers. Now the fact of swift rise in oil prices on world markets can be well used to substantiate growth in oil product prices on the domestic market. Given that no structural changes or reforms on the fuel market have occurred over the past few months, the problem of a new jump in prices will have to be solved and regulated in the manual made. But will oil producers listen to PM Dmitry Medvedev, if the situation goes out of control and an extraordinary government meeting is called to counter crisis developments on the domestic market of oil products?

3. Problems with appointing Igor Sechin chairperson of Rosneftegaz board of directors amid upcoming privatization of energy assets

   On August 14 the business mass media disseminated information about appointment of Rosneft president Igor Sechin chairperson of the board of directors of Rosneftegaz. A bit later it was reported about preemptive activities of Arkady Dvorkovich, a deputy PM responsible for FES: in August he sent a letter to president Vladimir Putin, in which he criticized the scheme of establishing a large energy company on the basis of Rosneftegaz suggested by Igor Sechin. This again confirms our thesis about confrontation of the two power blocs for the sphere of influence on FES and for instruments of managing it. Moreover, we observe polarization of interests, and any slightest reason is used by the opposing parties to start a conflict. This is a sad tendency for the industry. Vladimir Putin, acting as arbiter, so far has not reacted to Dvorkovich’s letter regarding the scheme of privatizing energy assets. Every day it will be getting harder and harder for him to make decisions, as they cannot be compromising satisfying all sides.

4. NOVATEK signs long-term contracts on gas supplies to E.on Russia and Fortum

   Gazprom feels pressure from NOVATEK more and more clearly. The independent gas producer not only caused changes in the state doctrine towards Gazprom (which is the reason for the failure of Shtokman development plans) – but it also started active expansion on the domestic market pressing the state monopolist. Without political approval by Vladimir Putin such large-scale agreements of NOVATEK with the energy companies would be unlikely. Both E.on Russia and Fortum are subsidiaries of western energy holdings. It is obvious that with the state course aimed at supporting NOVATEK we may expect the company on the foreign market in the near future.

5. Gazprom Neft fails to find profitable hydrocarbons deposit after drilling exploration well on Cuban shelf in Gulf of Mexico

   This is an example of obsession of Russian companies with projects abroad. Previously we mentioned about downstream projects, i.e. processing and marketing, but over the past few years companies have been mad about production projects in the upstream segment. But having sufficient domestic reserves it is a rather strange idea to roam the world looking for deposits. Moreover, major part of projects has come up with zilch. When we invest in friendly Venezuela we simply pay billions of dollars for access, but this raises questions. This money could be definitely invested in Russian projects.

6. LUKOIL buys back 30% in Naryanmarneftegaz from ConocoPhillips

   Such reports are certainly not very pleasant, because presence of nonresidents on the Russian market is very important; without them we are unlikely to solve tasks we face in the production sector. In this regard, ConocoPhillips was indeed purposefully withdrawing from the assets, as it also sold quite a big stake in LUKOIL some time ago. However, the company declares it is not leaving Russia. The period from 2008 to 2009 was very negative from the point of view of relations with nonresidents, but currently the situation is changing and more and more projects are emerging. This means Russia has competitive advantages. Comparing investment opportunities in other states, Russia would be more interesting in this regard than Venezuela, Nigeria, Mozambique and other ‘remarkable’ states.

7. Viktor Yanukovich visits Moscow

   Unfortunately development of relations with Ukraine still reminds a hundred episode soap opera, and it is still unclear whether we will see its happy-end. Viktor Yanukovich’s visit also did not yield any result. Moreover, it seems that it is getting even more and more difficult to agree. Personal relations between Vladimir Putin and Viktor Yanukovich are very bad, and this is becoming more evident. In this regard, replacement of president Yushchenko with president Yanukovich does not make any difference. Ukraine’s position is still diehard. Russia is also stubborn: we will build South Stream, and as soon as this process starts in December it will be necessary to forecast not how we could have agreed but how Ukraine will act having realized that just seven to eight years are left for it to be a transit state. Ukraine’s line of behavior may become very unpleasant, as it will have nothing to lose.

8. Gazprom delegation visits Bulgaria

   The South Stream project is definitely not a dummy. One can argue whether it is necessary or not necessary, but it is clear that we are promoting it and it seems we will not give up this project. Although there are very many political problems, but they can be solved even in such an incredibly difficult case as Bulgaria. It is no secret that Bulgaria has received discounts. Turkey also received gas discounts before that. But as we see, with the competent management actually any problem can be settled. The other thing is that we have many problems with the EU concerning South Stream: the EU does not provide South Stream with the third energy package exception status, which suspends the whole project. There is no competent management of our relations with the EU, and this creates such a number of problems.

9. Russian oil firms fail to modernize refineries on time

   The problem of quality of the domestic oil processing is becoming more and more acute. On August 27 the Federal Anti-Monopoly Service (FAS) declared it did not see any reason for prolonging the use of the Euro-2 fuel, which oil producers had requested. However, several days later it was reported that functionaries decided to meet requests of owners of oil and gas processing facilities and agreed to correct the period of modernization of enterprises. The government is likely to grant deferment to the players at fault, as the planned toughening of rules is fraught with emergence of a fuel deficit on the domestic market that is fluctuating feverishly – prices at filling stations may rise by 14% by the end of the year, compared to 2011. Along with indulgences it would be logical for the state to impose penalties on oil producers for delays and poor investing in processing amid the favorable conjuncture of world prices of energy sources.

10. First reactor of Iran’s Bushehr NPP reaches 100% designed capacity

    This topic is interesting not only because it brings back the problem of Iran and its nuclear program. It is indicative from the point of view that speculations about the common global energy market are rather arguable. The world is developing in different directions: Europe is reducing gas consumption, while in America it is sharply increasing. The same situation is with nuclear energy: somewhere in the world, e.g. Japan, Germany, there is an anti-nuclear campaign, while in other countries the interest in atomic energy is rising. There is no universal solution of energy problems in the world; there is no global energy strategy and no global energy market. This should be taken into account in forecasts.