Top events of June 2013

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

1. China becomes shareholder in Yamal LNG

   It took a long time for NOVATEK to find another partner in this project in addition to France’s Total. Many potential partners had refused, because the project is complicated. The question is not only about complexity of erecting an LNG plant in Yamal and about a shallow water port, but the main issue is how to ship gas from there. The Chinese will have to pay their share in the already incurred expenses, i.e. the cost of participation for them will be higher than for Total. Nevertheless, the Chinese have again demonstrated that, despite claims that China solved the question of gas supplies long ago, in reality this problem is still unsettled. China is looking for any possibility to ensure new gas imports, because it actually does not believe in sharp rise in its domestic gas production. China realizes that it does not have technological possibilities for such breakthrough. By the way, contracts with Australia are based on very high prices; they are approaching the most premium Japanese market. Thus, it gives good opportunities for NOVATEK’s competitor Gazprom to sign a contract on piped gas exports, because China obviously has some gaps in its gas balance.

2. Failed liberalization of gas exports

   Journalists rushed to declare the results of the St. Petersburg economic forum as breakthrough in the sphere of liberalization of gas exports. But President Vladimir Putin voiced a rather general opinion on that; and it depends on how to interpret it. Following the June results we can state that no decision on liberalizing gas exports has been made, although the results of the February meeting of the commission for the fuel and energy sector was interpreted by many observers as decision on liberalizing exports. Several months later the situation did not change. And it is clear why Putin hesitates: he is very much concerned about competition between Russian gas suppliers on the European market. A decision on liberalizing gas exports is likely to be made in every concrete case. But as far as the two really existing projects on LNG deliveries – Yamal LNG and Sakhalin-1 – are concerned, there is no necessity to amend the law. Yamal LNG has a unique contract with Gazprom Export that in fact stipulates the right of Yamal LNG shareholders to freely export gas and sign contracts. Sakhalin-1 has the right to export gas independently, which is fixed in the law. The project is implemented under a product sharing agreement and it is not covered by Gazprom’s monopoly. Other export projects are planned for the future, and they are rather obscure. As far as LNG exports of Rosneft’s Arctic projects are concerned, there has been no proper geological prospecting. So what LNG exports can we talk about today? The Pechora LNG project with deposits affected by a nuclear explosion is also doubtful. Thus, even if liberalization is fixed in the law, in reality it is unlikely to change the state of things much.

3. Gazprom refuses buying DEPA, fate of Greek gas assets

   This report was indicative. Everybody certainly expected Gazprom to get involved in the Greek case, because Russian companies buy everything possible. But finally we acted wisely, because there was no necessity to buy DEPA. The matter is that all gas transportation assets owned by DEPA will be transferred to DESFA that will have a new owner; and DEPA will actually be a holder of contracts with the lengthiest one expiring in five years. There is no point in spending money in this situation; moreover, conditions of the purchase were rather unbeneficial, and cunning Greek sellers were rubbing their hands being confident of Gazprom buying their company under any condition. The European Union again showed that it pursued double standards: this concerns DESFA, not DEPA, because it was bought by Azerbaijan’s SOCAR, which actually fully violates the third energy package rules. SOCAR is a gas producer. It has no right to act as owner of the gas transmission infrastructure. But since the EU needs Azeri gas very much, they simply turned a blind eye to that showing how ‘objective’ the EU energy policy is.

4. Annual shareholders meetings of energy majors

   There was no breaking news. The management of companies retained their positions. Some not very noticeable changes occurred in boards of directors, but in the context of the June intrigue, e.g. alleged dismissal of Russian Railways head Vladimir Yakunin, that was the news. First of all we were interested in the fate of Gazprom CEO Alexey Miller and Rosneft head Igor Sechin. Everything was smooth – the heads preserved their posts and acted very confidently. This was testified to by their work schedules in June – there was no panic and the always nervous period of annual meetings was very quiet for them.

5. Government drafting taxation benefits for hard-to-recover oil

   The issue of taxation procedures applicable to hard-to-recover oil should have been solved long ago. The question is how sincere the government is in its desire. Already in June it was noticeable that the one-step-forward-two-steps-back principle was ruling. For instance, taxation benefits are introduced and simultaneously it is declared that a system of separate accounting for oil deposits is necessary, and the volume of funds required for its introduction is comparable to the received benefits. Unfortunately, the finance ministry is guided by its unwillingness to reduce taxes. And even when it is persuaded to reduce taxes, the ministry thinks how to make it so that nothing is actually reduced. This was also visible in other taxation decisions, e.g. the gas production tax that has a very complicated new formula with an absolutely incomprehensible meaning. Other taxation decisions are also very contradictory being of no use for the sector so far. But, at least, the trend is indicative: they are ready to discuss this issue and even make some decisions – that’s something at least.

6. Gazprom blocks reverse gas supplies to Ukraine, results of new round of talks with Naftogaz

   Gazprom resorted to legal procedures. Indeed, if it concerns virtual reverse supplies, Gazprom in fact pays for the physical transit through Ukraine that did not happen, because this gas was consumed by Ukraine on the EU border. Alexey Miller’s position on this issue is very tough. He refused to provide an advanced payment to Ukraine, which may lead to another gas conflict with Ukraine – without the advance payment Naftogaz will not be able to buy the volume of gas necessary for its underground gas storages. As a result, the situation is critical. Naftogaz has very little time left to pump gas into underground storages before the winter season starts.

7. Transneft-Rosneft conflict escalates

   The battle of giants continues. It is interesting that Transneft has in fact confirmed conclusions that it has been criticizing the NESF for over the past years. Some experts close to Transneft even say that we are lobbyists of China’s interests. The conclusions were simple: while production is growing very slowly, expansion of oil exports to China means reduction in budget revenues, because oil production in the east lags behind the plan. As a result, oil flows have to be redirected from Western Siberia, which requires substantial financial resources. It is necessary to create new infrastructure and introduce preferential tariffs, otherwise it turns out that we consciously subsidize oil exports to China. And finally Transneft realizes this situation. Rosneft makes Transneft build the infrastructure to redirect oil from Western Siberia to the east. At the same time, it is absolutely unclear who should pay for this. The government suggested the plan, according to which the Cabinet is to be responsible for all expenses. This may satisfy Transneft, but from the point of view of Russia’s state interests, this scheme raises big questions. We certainly have a new sales market, which is great, but signing more and more contracts is doubtful. At the St. Petersburg economic forum Rosneft signed another accord with the PRC. According to Vladimir Putin, our exports may amount to 46m tons at their peak. This is a serious figure considering that the combined annual exports are about 260m tons. Moreover, production in Russia’s eastern regions has not reached a corresponding level, and it is unlikely to achieve it in the foreseeable future.

8. Prospects of national shelf development discussed

   Debates on whether private companies should be granted access to the shelf or not continued. On one side, the natural resources ministry has a quite liberal position towards private companies. On the other side, there is no liberalization. And this is the main problem: it seems there are liberalization supporters in the government but there is no corresponding decision. Instead, in June an early July distribution of offshore licenses to state companies continued.

9. 2nd summit of Gas Exporting Countries Forum held in Moscow

   Our interest in GECF emerges only during forums that are not held often. The problem is that member states do not control gas exports currently. The structure of world gas trade shows that they are losing control over export flows. Russia and Arab gas producers have absolutely different political values. OPEC was formed on the basis of a political alliance, i.e. the main thing was shared political values, not economic questions. There are no such values now; this is why when we speak about major owners of world gas reserves – Russia, Qatar and Iran – we have different situations. Qatar is an LNG exporter, Russia exports piped gas, while Iran is not an exporter at all. The problem remains.

10. Presidential elections in Iran

    Russia’s main problem on the world gas market is neither US shale gas nor Australian LNG, as many observers would think. The main problem is the future of Iran and Qatar’s investment decisions. This is a more sensitive topic in the strategic perspective. This is Iranian gas, not US liquefied natural gas, that poses threat to us. But it is not appropriate to talk about it in Russia. Liberalization of the Iranian regime is a very interesting question, because the ayatollah’s strategy is clear: to try to sell liberalization to the West. This move was obviously planned – to show a liberal president. Now a military operation against Iran cannot be launched. The question is whether the West will be satisfied with this? The US will not agree to a liberal puppet. And this is a big question whether changes in the Iranian political system can develop further being inspired from inside.