Top events of October 2012

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

1. Rosneft promulgates procedure of TNK-BP acquisition

   This topic was keeping us in suspense for the whole month. Conditions of acquiring TNK-BP are defined. Certainly there will be a range of details, nuances and some more precise parameters of this deal. Rosneft has won. For Igor Sechin this is obviously a significant decision, because if this deal had been ruined, his image of “energy tsar” would have been somewhat undermined. On the other side, this can hardly be called defeat for the AAR consortium. The price of the company is high enough; it is not ruled out that part of the deal will be closed by shares like in the BP case. But the most interesting developments are just starting, because acquisition of TNK-BP is part of the Rosneft privatization strategy. At first assets are gathered in the company but this is done only to sell them later.

2. Launch of Bovanenkovo deposit

   This event passed quite modestly, although its importance is great: we launched the largest gas deposit in the post-Soviet history. Its peak production is expected to be 115bn cu m. This is a huge success. The matter is not just in the fact that this is the largest deposit in terms of production over the past 20 years. Finally, Gazprom entered a new oil and gas province in the Yamal Peninsula. Besides, Bovanenkovo-Ukhta, a technically complicated gas pipeline over the Baidaratsky bay, was built. Thus, we had three large events. This is really important, because competition on the world gas market is growing currently, and it is possible to respond to the challenges we are facing only by speeding up the launch of new production projects. There is room for our gas on the market.

3. Final investment decision made on Chayanda

   Inspired by its success in Yamal Gazprom is trying to develop it in the East. However, activities in this direction are limited to memorandums and investment decisions – there is a very long way to first gas. We have already received gas at Bovanenkovo, but at Chayanda there are many questions left. Yet, Gazprom demonstrates its determination to develop the Eastern Program and implement the Asian direction of exports. Chayanda is a comprehensive oil and gas deposit; it has combination gas, but transportation infrastructure is not ready – pipeline construction will begin only next year. There are many questions, but, at least, we see how words transform into deeds. We hope that success with Bovanenkovo will be repeated in Yakutia.

4. Struggle around offshore projects

   In October this kind of fight sharpened. There are two positions: state companies claiming “nobody except us”, and private companies saying “let us in and we will bring money”. LUKOIL made quite a noticeable move having proposed to invest $2.7bn if it is allowed to operate on the shelf. So, the intrigue continues. At the same time, on one side, the government does not like state companies very much. On the other side, state companies are not really fond of the government. So far, state companies are winning, because they write letters to President Vladimir Putin, and he is on their side. Yet, the final decision has not been made.

5. Government discusses measures on softening fiscal regime for gas industry

   On one side, it is good that the government thinks about changing the taxation regime in the oil and gas sector. But on the other side, these changes are within the same philosophy, i.e. the government does not want to alter the principle of taxation by replacing revenue taxes with taxes on profits. It is clear this would pose serious risks to the budget, but we actually have to get used to the fact that production will be getting more and more expensive. In this regard, the oil and gas sector will not be able to generate the same volume of revenues for the budget. The sector will require huge funds. Oil and gas revenues will soon start shrinking, and then we will see whether we will live better without this money. The government has to understand that the current taxation system has achieved its objectives, and it is time to think how to encourage production in new provinces. The current taxation system, certainly, does not fit this target.

6. Igor Sechin meets with Gennady Timchenko

   The public reconciliation of the two old antagonists does not look quite real so far. There is a feeling that our president is very much afraid that conflicts in his circle will become constant and systemic, so he makes main players reconcile publicly. But all these handshakes do not solve problems of the conflict completely. Moreover, the sides are turning to the problem of property distribution, but this question is never solved peacefully.

7. Second line of Nord Stream launched

   Gazprom did not conceal the fact that the launch of the second line was dedicated to Vladimir Putin’s anniversary – Alexey Miller directly pointed to that. The project is implemented, and its success even turned some heads, as it was declared about the third and the fourth lines, although it is no secret that Nord Stream is not fully loaded currently. Laying the pipeline is half of the work. It is necessary to agree with European regulators, to get the status of exception from the third energy package. All these export gas pipelines have very many nuances. And on one side we constantly scare Europe with redirection of our exports to Asia, but on the other side, we are building new pipelines to Europe, which, definitely, somewhat smoothes over our threats to turn towards Asian consumers.

8. Uncertainty grows in Russian-Ukrainian gas relations

   Construction of a sea section of South Stream begins in December. The success of Nord Stream shows that South Stream is a not a myth, not some fantasy, but quite a feasible project. The other thing is that the South Stream project is also negotiated with certain difficulties with the European Commission, but this project can be implemented anyway. The question is how Ukraine will react to this. It is understandable that its attitude will be negative but how much negative and what steps it will make. Viktor Yanukovich has already compiled necessary evidence to terminate contracts with Russia, and this can be done at any moment. In reality, there is no reduction in gas purchases from Russia this year compared to last year. There is just some statistical craft that Ukraine is very good at. But what will happen when Ukraine understands that South Stream is the question of the near future? Ukraine is still perceived as gunpowder keg on the way of our gas to the European Union.

9. Deal of Rosneft and Inter RAO on gas supplies

   Rosneft taking away a major client of NOVATEK was the real breaking news in late October. This is a very interesting phenomenon, because previously independent gas producers had taken slices of Gazprom’s market, and now they start biting each other. This is a new page in development of our gas business. But in reality it can be well apprehended, because, contrary to the wide-spread opinion, there are limits of growth of independent gas producers. They like very much to sell gas to regions in the vicinity of their production facilities but are not eager to sell the fuel to regions situated faraway from their deposits. The reason is gas transportation costs. Thus, whatever they could do in regions profitable for them they have already done and have moved Gazprom aside. But to expand further is difficult and they start fighting each other. This is an intriguing process, especially considering the political weight of Gazprom and NOVATEK. And, by the way, the fact that after a meeting of Igor Sechin and Gennady Timchenko Rosneft took away NOVATEK’s major buyer once again demonstrates that all public hugs and kisses do not mean much in the Russian reality..

10. Investment decision on Yamal LNG postponed

    Many observers perceive Shtokman problems as advantages for Yamal LNG. In reality the latter project is very complicated too. Total does not want to leave Shtokman, this is why it follows an old practice of putting eggs into different baskets: it has not withdrawn from Shtokman and has acquired a stake in Yamal LNG. Even if Total is asked which of these projects will be launched first, the company would not know. Both projects are very expensive and long-term; the situation may change many times. But, undoubtedly, this unofficial competition of the two projects – one is promoted by Gazprom and the other by NOVATEK – exists, and it is one of the intrigues in the sphere of LNG production development in Russia.