Top events of 2012

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

1. Formation of new bodies to manage oil and gas industry

   After the presidential elections in Russia there was large-scale reshuffle in the system of managing the sector: ex-deputy PM Igor Sechin became the head of Rosneft, while the government official responsible for FES is now Arkady Dvorkovich, who earlier said that diversification of the economy and reducing the role of the minerals sector was an important task; former deputy finance minister Alexander Novak was appointed energy minister. The new supervisors of the sector tried to add certain dynamic: laws on preferences were actively debated and passed, a new concept of the shelf policy was under development. But on the whole, the new supervisors of the sector did not venture to make strategic decisions – they did not dare to carry out the fiscal revolution and liberalization of access to the shelf. There were, indeed, many decisions on preferences, but these preferences are not a new philosophy of taxation. So, the sector is still facing strategic problems. It is a pity that confrontation of two commissions began in May – Dvorkovich’s commission and the presidential commission linked to Sechin. This will definitely be the tug of war, and the apple of discord is not strategic tasks of the sector but conjuncture interests of this or that administrative clan – interests of the sector in general are often left behind interests of competing clans.

2. Rosneft decides to take over TNK-BP

   The intrigue was developing throughout the whole year, and the final decision was somewhat unexpected: Rosneft is to buy not 50% but 100%. Certainly many observers immediately started speculations about continuation of the state capitalism policy, about the state building up its muscles in the oil and gas sector. In reality this question was answered by Vladimir Putin in his state of the nation address on December 12, when he said that state capitalism was not our course and that our course was privatization. It is unlikely that the president was insincere. Actually privatization is indeed Putin’s strategic task, and reinforcing state companies is a move towards their further privatization. It is better to sell large assets. And Rosneft will be sold anyway. The fact that it is now buying TNK-BP is just the strategy of stuffing it with assets. This strategy will soon be replaced by privatization of assets. This has both political and economic meanings. Thus, state capitalism is just a scary story; in reality we will soon face the big Putin privatization that will affect the oil and gas sector too.

3. 20 year record of oil production

   In 2012 Russia’s oil production had been record high over the past twenty years of Russia’s existence as independent state. This figure is certainly pleasant, but it raises very serious questions about our ability to continue setting records. Considering the first issue in our rating, there should be systemic solutions that would alter investment policies in the sector, because potential of the old resources base is being depleted. New breakthrough is necessary, which requires huge investments, special conditions for new deposits and projects. This is why it is very important for the state to revise its policies in the sector.

4. Launch of Bovanenkovo

   This has been another big success over the past 20 years – this time it comes from the gas sector. The deposit will ensure peak production of some 115bn to 120bn cu m. This is a fantastic breakthrough that has been paid little attention to. Actually, it is very strange that the sector is often scolded, but when such big success happens it goes practically unnoticed.

5. Conflicts between two commissions for FES, struggle for integration of state grid assets

   This again concerns the top point of our rating. We indeed have spent quite a time observing the duel between the government and presidential commissions. The grid story is very indicative in this regard. The concept was changing almost every week – either FGC acquires IDGC Holding or no one acquires anyone. This means that the current situation in the sector does not provide for making long-term decisions. The main question is what clan manages to outbalance others on a particular day and convince the president of correctness of this or that choice. This definitely results not only in vagueness regarding the further strategic course, but also leads to complete disorientation of investors. And the key thing is that all decisions turn out to be temporary.

6. First welding of South Stream pipes

   Although no ecological permit has been given and not all licensing procedures have been implemented, it is clear that South Stream will be built. The size of this project still can be revised, but on the whole it is obvious that in 2012 we finally acknowledged that we cannot agree with Ukraine. In several years Ukraine will cease to be a transit state.

7. Second line of Nord Stream

   Two lines of Nord Stream have been laid, which means some 55bn cu m of gas can be delivered directly to the EU. The project that several years ago looked absolutely impossible has been implemented. There are even speculations about a possibility of laying new lines to Britain. However, these questions should be thoroughly examined taking into account the situation on the European market.

8. ESPO-2

   Two large infrastructure projects – Nord Stream and ESPO-2 – were completed. The importance of ESPO-2 is understandable: it will provide for increase in exports to Asian markets. The main problem, certainly, is that exports to Asian markets can be implemented by partially reducing exports to Europe. But this depends on our production. If there are no activities on expanding domestic production, the rise in deliveries in one direction will apparently reduce supplies in the other direction.

9. European Union decides to file suit accusing Gazprom of discriminating policies towards European buyers

   This is the height of worsening of our gas relations. The Europeans are obsessed about the idea of gas surplus on their market. The idea is rather questionable and short-sighted, but being blinded by it they may resort to tough measures. We can also retaliate firmly. Actually Gazprom has already announced that construction of a gas pipeline from Yakutia to Vladivostok would be accelerated. In addition to ESPO-2 Russia is beginning to lay a gas pipeline to Asia. This means that facing unfriendly policies of the European Union both in the oil and gas sectors we have to make alternative moves. However, their economic expediency may not be always understandable.

10. Attack by forecasters

    In 2012 there was a series of forecasts supposing that Russia would have no place on the world energy map, while untraditional hydrocarbons that are mainly produced in the USA, will rule. The International Energy Agency was especially active in this regard. At first, it issued a report with a new version of the natural gas golden era, then it was a document about Iraqi oil and then about shale oil in the United States. The general idea is that Russia’s role will be inevitably decreasing. We believe these are attempts of self-realizable forecast, i.e. attempts to convince Russia that it is pointless to invest in new projects: “Hey, guys. You have lost the battle for world energy resources. Relax. No Arctic shelf is needed; no investments in projects in Eastern Siberia are required”. Such decisions as refusal to make the final investment decision on Shtokman in 2012 are disappointing. These forecasts obviously have many things dragged in. For instance, it is impossible to raise US gas exports and simultaneously maintain extremely low gas prices on the US market. Without extremely low prices in America, the whole strategy of bringing back industrial manufacturing capacities to the USA will fail. So, it is evident that the US government is not interested in expansion of exports, but these considerations are not taken into account in the reports. The logic of reports is clear: authors of these forecasts do not intend to foresee the future. They have a different task; they use their forecasts to influence current decisions. Russia should respond to such forecasts by intensifying its investment activities. But instead, we respond by panic, paralysis and rejection of new projects.