Top events of May 2013

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

1. Tension around Cabinet growing

   The pressure on the government is rising accompanied by serious dismissals (e.g. Vladislav Surkov was fired). Arkady Dvorkovich, the direct supervisor of the fuel and energy sector, got into a very indicative for Russia story when he was not let into a presidential summer residence. And such things are quite significant in the Russian system of power; and it is important that this information was leaked into the mass media. Thus, we observe that the struggle of clans continues; many candidates to the post of PM were mentioned, including Kudrin and Sobyanin. However, this does not mean that Dmitry Medvedev’s Cabinet will resign and the supervisor of the FES will change. On the contrary, Medvedev’s weakness means that he can remain PM with Putin being president. Mikhail Fradkov and Viktor Zubkov were also administratively and politically weak when Putin kept them as heads of government.

2. Rosneft reinforced, Itera acquired

   Rosneft uses every chance to demonstrate muscles; the company has ambitious plans both in the oil and gas sectors. Certainly, the question is how realistic they are. By declaring such large-scale objectives Rosneft has to understand that it will have to correspond to such declarations. Moreover, it is not much time left before 2020. But the main thing is that the company is still planned to be privatized, and this is probably one of the main intrigues: what will happen to Rosneft that is being stuffed with assets. The idea is that the company should gradually become private.

3. Transfer of new offshore licenses to Rosneft and Gazprom

   On one side, we see that the monopoly of these companies is preserved, and attempts of private firms to get access to offshore deposits have failed. On the other side, Gazprom won the latest round. Although Rosneft received some licenses, main licenses were granted to Gazprom. And there is some logic in this, as major reserves located in the Arctic are gas reserves. And the idea was that Rosneft would get oil reserves, while Gazprom would receive gas deposits.

4. Debates on taxation policy continue, new formula of gas production tax

   In May the finance ministry declared about possible introduction of the excess profits tax in 2016. This is obviously a more progressive form, but these promises by the finance ministry seem to be just an attempt to win the time: “Yes, yes, yes, we will introduce it, but in 2016”. Meanwhile, many things will have happened and changed by 2016. It is absolutely possible that we will have a new PM, a new finance minister, a new deputy finance minister responsible for this direction. This is why it may happen so that in 2014 or 2015 new authorities will say “We have nothing to do with the promised excess profits tax”. Thus, the finance ministry is apparently trying to win the time and preserve the repressive tax policy, which is brightly demonstrated by the new formula of the gas production tax: it is completely confusing, very complicated and contradictory, and it does not facilitate improvement of the situation with investments a complicated region. What is the main task? – To make sure that companies invest in hard-to-recover reserves and complicated provinces and that the tax somehow depends on production costs, not prices on foreign markets. This is something we lack.

5. Struggle around export monopoly

   Attacks on the export monopoly continued throughout the whole May. They still say it will be lifted soon. Speculations about a final decision to be signed soon have been around since February, but Vladimir Putin has not made up his mind yet to cancel the export monopoly. He realizes that lifting the export monopoly will mean just one thing: our gas supplies will compete against each other largely on the European market, which is the closest and most comprehensible. It is not clear why would Putin need this. But it is clear why NOVATEK and Rosneft need this heating up corresponding debates.

6. Yamal LNG signs 1st contract on gas exports

   The event is very indicative, because early this year NOVATEK was arguing that it could not seal contracts because the export monopoly had not been abolished. It turned out that the export monopoly did not hinder signing of export contracts, and NOVATEK proved it in May. There is obviously some hidden reason for debates around the export monopoly.

7. Rosneft vs. Transneft

   The two state companies have locked horns. This testifies to general rise in turbulence in the political system. It is the first time the heads of state companies squabble so openly and publicly. The background is simple: Rosneft does not want to invest in construction of pipelines that would link its deposits to China. And Transneft does not have the money; it is trying to find such resources. Rosneft also would like to implement part of supplies through Kazakhstan, which raises a logical question by Transneft: “Why have we built the ESPO pipeline, if you refuse to fill it but want to use competing pipelines?” This is very indicative of Russia, where even state companies cannot agree with each other. There is a feeling that all the rules of etiquette are fully ignored.

8. LUKOIL claims oil exports to China

   This is also a very interesting moment that confirmed an old fact: if you want to raise oil deliveries to China, you have to cut crude exports to Europe. Transneft has always criticized us for this point of view, but it is absolutely justified and proved by the intention of LUKOIL. The latter does not have deposits in Eastern Siberia at all, and it is absolutely obvious that such contracts will be honored by supplies from Western Siberia that has always catered for Europe. LUKOIL is a private company; it will sell oil to wherever profitable. But the fact that the state encourages private companies to export to the East introducing advantageous tariffs is certainly a conscious choice. But it means that some part of crude will be taken away from the European direction.

9. Prospects of gas war against Kiev

   Kiev has sharply reduced the volume of Russian gas imports and keeps declaring about reverse supplies. The purchases decreased because Ukraine is not pumping natural gas into underground gas storages, not because it has found some alternative. Viktor Yanukovich came to Sochi to meet Putin and hinted at soon settlement of the question of the gas transmission system. There is no settlement so far. There is no clue when we will solve this problem. Thus, there is no progress here, which actually characterizes our bilateral relations.

10. Top managers leave Rosneft

    This is a very interesting feature related to the merger of Rosneft and TNK-BP. Many observers thought Rosneft will take not only deposits of TNK-BP but also best corporate practices, because the latter was valued high by investors. Mass resignations point to certain problems with the corporate culture at Rosneft. The collision of two cultures made former top managers of TNK-BP look for other jobs. So, we may suppose Rosneft has some specific management model. It is an interesting approach for the company to make the former head of the Federal Prison Service responsible for HR. However, judging by resignations of managers, not everybody finds it intriguing.