Top events of March 2013

The National Energy Security Fund introduces top-ten events in the oil and gas industry in March 2013 and is ready to comment on them in detail.

1. Energy results of Chinese leader Xi Jiping ’s visit to Russia

   It was the most significant event of the month. Although no agreement was signed, the change in the energy vector is becoming more and more apparent. China’s traditional friends also had a say: Rosneft declared about a possibility of increasing the amount of crude supplies to 31m tons and set a strategic target of 50m tons. Gazprom also seriously changed its tactics. Instead of the unpromising Altai project the more reasonable Power of Siberia pipeline was suggested. The drift towards the East seems to become the reality. Certainly, the question is about economic and political consequences of this step, but in this regard we have to argue that this is largely the European Union that forces Russia look at China. Aggressive policies of the Europeans obviously play into the hands of the pro-China forces in the Russian Federation.

2. Hugo Chavez dies, prospects of Russian projects in Venezuela

   This was another significant event that questioned our energy strategy abroad. Having large oil reserves we are feverishly trying to enter expensive, complicated and risky projects around the world attributing this to growth in our geopolitical importance. In reality investments are leaving Russia, taxes are paid to budgets of other states, while we are nurturing competitors on the world market. The question is even not about the winner of the Venezuelan elections and whether Russian contracts will remain. The question is whether it was necessary to enter expensive and complicated projects in Venezuela, where we had to pay over $2bn for the right to produce oil.

3. Banking crisis in Cyprus, its energy aspects

   The banking crisis in Cyprus stirred a serious panic in Russia, including among state authorities. We heard quite many unexpected admissions, especially by the PM. The main thing is that Dmitry Medvedev noted that many state companies keep money in Cyprus. However, the banking crisis did not impede the deal of Rosneft and TNK-BP, and Gazprom refused to confirm that it had deposits at Cyprian banks. It is clear that Russian companies have some money in Cyprus. But instead of reproving them and asking them if they had learnt the lesson, our authorities are energetically supporting claims of Russian companies. This raises a lot of questions about the anti-offshore policy. But as far as the energy sector is concerned, it is interesting that Cyprus immediately began offering offshore projects to us. These projects are rather questionable. Just like in the Venezuelan case there was temptation to buy something just in case it would work in the future. But Russian leaders seemed to be so indignant at Europe even not having consulted Russia that all plans of saving Cyprus were perceived rather negatively. Besides, the idea of selling new offshore licenses to foreigners caused real hysterics in Turkey that is our quite an important partner. So, we had to reject these energy projects. And this is not the worst decision, because again we think too much about going abroad while projects in the Russian Federation are delayed.

4. Rosneft completes takeover of TNK-BP

   The deal was announced long ago and finally it has been closed. Rosneft will have to prove why this deal was necessary. It is no secret that the company had to pay a significant margin (over $15bn) on the market price, while the synergy effect that Igor Sechin likes so much to refer to, according to his estimations, is only $10bn plus debts and debt servicing. There are many questions left. It is interesting what will happen to this company. Igor Sechin promised to agree to the firm’s privatization when it reaches a certain level of capitalization. Now the big question is how fast Rosneft’s value will be growing? To be precise, what will be the policy of Rosneft’s top management on growth in its value parameters? When will it be possible to sell a controlling stake in Rosneft to private investors?

5. Struggle for offshore licenses between state companies intensifies

   The war between Rosneft and Gazprom continues; they have a lot of disputes around gas exports and the domestic market. Disagreements concerning offshore licenses are another battlefield. Rosneft claims part of Gazprom licenses. Earlier Gazprom and Rosneft stood together against private companies, but now they are quarrelling. Actually we realize very well that relations between Rosneft and Gazprom have always been quite complicated, and this alliance was temporary and it inevitably broke up. But this quarrel did not reinforce positions of private firms. Gazprom and Rosneft will be fighting for licenses as long as the government and the president are thinking about depriving them of the shelf deposit monopoly.

6. Sharp rise in spot gas prices

   Frosts and the snow made the situation on the European spot market very difficult: prices jumped sharply. This reminds us of a simple truth: the spot market is not a market of cheap gas. This is an unpredictable and highly volatile market. Prices may be super-high and super-low. It is important to know that they depend on the weather, the demand, political factors, etc. And it turns out, unexpectedly for many Europeans, that spot market prices can be even higher than prices of Russian gas under long-term contracts with Gazprom.

7. Viktor Yanukovich visits Moscow

   The visit was fruitless; the question is why the Ukrainian leader flew to Moscow. No new proposal was made; Russia’s position has been known for a long time. Ukraine can easily get practically a $200 discount off the gas price. Instead, it is still looking for some strange solutions, one being sillier than another with the main objective to show that it can cope without Russian gas. In reality, it is absolutely impossible. If this rhetoric dominates, it is unclear why the Ukrainian president should visit Moscow, if he is not ready for compromises. In March Ukraine’s economic parameters deteriorated; the situation is aggravating. The government is anxiously looking for the money; e.g. in May alcohol and tobacco excises will be raised. Clumsiness of Ukrainian authorities may cost ordinary Ukrainians, because the country has no other sources of increasing budget revenues. However, instead of taking a simple solution, they are looking for some complicated schemes with even larger expenses. This will end rather sadly.

8. FAS tells Gazprom to buy pipes directly from manufacturers

   It turns out that the Federal Antimonopoly Service raises claims against Gazprom, although everybody understands very well that pipes are bought through the company controlled by the Rotenberg brothers. There is a feeling that FAS is pretending to be naive not realizing what is going on in reality. The firm the Rotenberg brothers have a controlling stake in came not by chance to this business. However, FAS believes that it is politically dangerous to pronounce this family name here.

9. Negotiations on crude supplies to Belarusian refineries

   The decision is temporary. We agreed to demands of the Belarusian side on oil purchases, but this solution will be valid for several months only. There is no strategic decision, which means the question is suspended. This is an old story: Belarus takes Russian oil, refines it and sells oil products to Europe as solvents not paying duties to the Russian budget. It is silly to put up with this state of things. Actually this is the reason for the conflict. We will not fix the situation, until we acquire control over Belarusian refineries.

10. Debates around lifting export monopoly continue

    The energy ministry declared about a possibility of lifting Gazprom’s export monopoly. There is an opinion that it is possible to abolish the monopoly on gas supplies to Asia. Another opinion is that it is possible to allow supplies to European countries where Gazprom does not sell gas to. But as far as Asia is concerned, Yamal LNG gas is unlikely to be delivered to Asia – all project estimations and finances are based on supplies to the European market where NOVATEK is trying to enter. The project of building an LNG plant by Rosneft may be linked to Sakhalin-1 gas that can be sold with preservation of the export monopoly. Sakhalin-1 actually is not subject to the law on gas exports. As far as possible supplies to France and Spain are concerned, NOVATEK already has this opportunity. Yamal LNG has a unique business contract with Gazprom Export that enables the private company to export gas without removing the export monopoly. In March NOVATEK in fact acknowledged that it was actively negotiating gas sales to foreign companies, although previously it had argued it had no talks and Gazprom had been doing nothing and impeding everything. But it turned out that Gazprom was not hindering anything, and negotiations were conducted. In reality the problem is not in the export monopoly but in the fact that projects of independent producers lag behind their schedules. If prices of their gas are comfortable, it will be certainly sold abroad, and there will be no real necessity to amend the law.