Top events of 2013

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

1. Rosneft-TNK-BP deal closed, acquisition of Itera, targeting minor oil and gas producers

   Rosneft is definitely the aggressor of the year; it was active in the M&A sphere and steadily generated rumors about its new plans. In particular, prospects of creation of the “oil ministry”, i.e. a single oil company, were debated in the country throughout the whole year. Prospects of acquisition of Tatneft and Bashneft were discussed. All these developments were stirring the market; this is why Rosneft was one of the main trend setters in 2013. However, there is a feeling that the Russian oil sector is unlikely to pursue the idea of creating one giant, because, on the whole, this does not correspond to interests of Russian elites concerned about control over assets. Surely, there will be privatization. And to carry out privatization painlessly it is not necessary to form a single monster. It is rather doubtful that the sector will return to the late 1980s with a single company.

2. Intrigue around SeverEnergia

   This story has been developing over the past several months. Rosneft bought Enel’s stake in SeverEnergia, but it turned out it did not meet the interests of NOVATEK and Gazprom Neft. NOVATEK managed to ensure that Rosneft leaves the project in exchange for a stake in Sibneftegaz. And this showed the limits of expansion of Igor Sechin – it is very difficult to struggle against such people as Gennady Timchenko. Such people in Putin’s circle are an additional guarantee against Rosneft turning into a monster.

3. Liberalization of rules of LNG exportsIgor Sechin suggests establishing international gas exchange

   The new law came into force on December 1. It was long awaited; its discussion lasted for the whole year. There was much fuss, but the rules of the game did not changed significantly. Those two non-Gazprom projects – Yamal LNG and Rosneft’s LNG plant in Sakhalin – could be implemented without amendments to the law and the new law on gas exports. However, the new law forms one of the main intrigues of 2014 – discussion of prospects of liberalization of piped gas exports. President Vladimir Putin and corresponding deputy PM Arkady Dvorkovich show that this issue is not open, but Rosneft and NOVATEK will obviously try to open it, although Gazprom’s position looks quite strong so far.

4. New accord on oil exports to China signed

   This was also an absolute hit of the season. It became evident that extensive growth of supplies to China is one of the priorities of Rosneft. And this put Transneft into a difficult situation. Now Transneft has to acknowledge the thing that became obvious long ago – development of exports to the PRC is impossible without taking away a substantial volume of oil supplies from the European direction. Shortage of the resource base in the East is a serious problem, because expansion of oil supplies to China raises the question of efficiency of this policy for the state budget. It is indicative that Rosneft was arguing with Transneft throughout the whole 2013; although a decision to expand supplies and a pipeline to Mohe in China was made, the conflict remains. And this is not just about relations between the companies but also about the state strategy.

5. Bill on replacing export duties with accelerated growth in minerals production tax passed, easing taxation rules for offshore deposits and hard-to-recover oil

   The policy seems to be contradictory: on one side, the state liberalizes production offshore and of hard-to-recover oil, but on the other side, the tax burden on the current projects is increased. However, there are no contradictions here: now the state is collecting the money giving the carrot to oil producers in the form of a possibility for them to gain in the future. There is no offshore oil, while hard-to-recover oil production is just beginning. This is why the policy is simple. “Pay more for the already operating projects and in exchange you will get preferences for future deposits. Perhaps you will manage to use them”. Such policy may obviously lead to a catastrophe.

6. Tariffs of natural monopolies frozen for 2014, limited indexation in 2015-2016

   This was an important decision. It is no secret that Gazprom is a major investor in our economy. Having an investment program of over one trillion rubles the concern is naturally the main locomotive of economic growth that buys pipes and other produce. The state in fact deprives Gazprom of a possibility to be an active investor. And it is understandable that the policy of checks and restrictions will not give a full effect. This situation raises the question whether the state has a new model of economic growth if it reduces possibilities of implementing the old model? It is doubtful. In this regard president Putin’s criticism of the Cabinet means that in 2014 we may face negative economic growth because of unreasonable tariff decisions. Correspondingly this will threaten the government.

7. Ukrainian saga, practical implementation of South Stream in Europe begins

   We were watching the Ukrainian soap opera for the whole year. The result of the year is contradictory. On one side, everyone seems to be sick of Ukraine. It is hard to cancel decisions on South Stream, because construction of a Serbian section has begun. On the other side, the December accords leave some room for maneuvers. If some agreement on the Ukrainian gas transportation system is reached, parameters of South Stream can be revised. In any case the year 2014 is probably the most significant for relations with Ukraine when it should become clear if we are with Ukraine or without; and if we are with Ukraine, how far this will go.

8. Production success in 2013: launch of Kirinskoe gas condensate deposit, Trebs and Titov deposits

   There was indeed some success, although we understand the scale is limited. Kirinskoe’s capacity is 4bn to 5bn at peak production and Bovanenkovskoe launched in 2012 will produce 120bn. So, there is success; this is a positive sign. Yet, it is local, and we again come back to the issue of tax incentives, which is the most important question.

9. Talks on Russian gas exports to China

   Last year’s results in this sphere are very contradictory. On one side, Gazprom did not sign an agreement. On the other side, NOVATEK sold a stake in Yamal LNG to CNPC and, in fact, agreed conditions of liquefied natural gas supplies to China. And these conditions are very beneficial. Having sealed this agreement with NOVATEK the Chinese showed that in reality they had serious problems with getting a required volume of gas, and they are ready to pay a very good price for the fuel. In this regard, the fact that Gazprom is trying to hold back may play into its hands.

10. Greenpeace vs Prirazlomnaya, launch of production there, adoption of Arctic strategy

    The logic is simple: the more frequent such actions are, the more irritated Vladimir Putin gets and the greater his desire to deal with the Arctic becomes. Putin is getting convinced that many sides are interested in the Arctic region and it needs to be protected. This resulted in a decision to deploy a military base in the Novosibirsk islands and reinforce militarization of the Arctic – these decisions were made in December. Besides, Prirazlomnaya began production. We will see how this project will be developing: it indeed has some environmental risks, but anyway, a positive thing is that Gazprom Neft demonstrated that development of production projects continues, despite actions of flamboyant environmentalists.