Top events of February 2014

The National Energy Security Fund introduces top-ten events in the oil and gas industry in February 2014 and is ready to comment on them in detail.

1. Ukraine in Russia-Europe relations

   The revolution in Ukraine is not only the main intrigue of February and, probably, March but even of the next few years. The main question is certainly Russia-Europe relations. The crisis is so deep that it questions the whole Russia-Europe partnership, including in the energy sector. Will we be able to retain the ties developed over the past several decades? Even during the cold war we did not suspend partnership with Europe and even developed it. Russia has been an alternative to the unreliable Arab world. We hope Europe will be clever enough and we will be wise enough not to return to the situation of the 1960s when Europe fully depended on Arab producers of energy sources.

2. Ukraine in Russia-Ukraine relations

   Besides the revolutionary situation and its consequences, there is the topic about the future of gas discounts and supplies. Political chaos in Ukraine naturally led to final destabilization of its economy. The latter has been unhealthy and now they risk killing it. In this situation Gazprom obviously is not going to sponsor the Ukrainian industry. Its position is understandable – the issue of the gas transportation system was not solved in time, and new authorities are not willing to pay debts. Thus, Gazprom offers a purely economic approach without any political background: pay for gas and you get gas. There will be no discount, because it was granted under conditions of fully paying off the debt, which Ukraine has failed. Moreover, it seems that by the end of Q1 Ukraine will generate $2bn in debts that it is not going to pay off. This is not a drama, because early spring has resulted in reduced consumption of natural gas in Ukraine. Actually this means there will be no deep crisis until the autumn. However, if the situation does not improve, if there is no responsible government in Ukraine, we will have serious problems, inter alia with gas transit, in autumn.

3. Debating access of independent gas producers to infrastructure

   This topic was discussed in different variants; different schemes were suggested, including provision of independent producers with access to the pipeline proportionally to their production. Yet, all these schemes are rather disputable. Independent gas producers are not financially responsible for development of the Russian system of gas supplies, construction of new gas pipelines and gas supplies to Russian regions located far away from Yamal. All these activities are absolutely unprofitable for Gazprom, because the most beneficial markets located close to Yamal are under control of independent producers. Gazprom has to service regions situated far from Yamal, while gas transportation is very expensive. And now independent producers are demanding their slice of the export pie that Gazprom uses to finance construction of pipelines. All these liberal slogans look nice on paper, but these are details that matter. So, such decisions are unlikely to be made quickly.

4. Rosneft suggests having additional issue of Transneft shares, wants some stake

   Actually this means that Rosneft would like to get control over a stake in Rosneft. Rosneft constantly demands liberalization of the gas market, but its policy on the oil market is absolutely opposite. There is certainly no logic in this policy. Rosneft just demonstrates that it can act as liberal in one case and as etatist in another case, depending on the situation. This position is certainly strange.

5. Debating permit for Gazprom to cut gas tariffs by 20%

   This decision stirred a storm of emotions of independent producers. The latter always claim it is necessary to reform the domestic market. And what is the purpose of reforms? – To reduce final prices for consumers. Gazprom asked for a permit to sell gas with a discount off tariffs set by the federal tariff service. However, independent producers immediately expressed their indignation at this move, which revealed their true plans. The main purpose of reforms for them is not reduction in prices but the opposite – their growth. The idea is very simple: let’s create free market and let the market define the price; but then, instead of monopoly, there will be oligopoly that will be increasing prices claiming they are free market prices. We saw this strategy on the electrical energy market, and we are well aware of the outcome.

6. Gazprombank to finance Gazprom’s Vladivostok and Baltic LNG projects

   Certain problems with attracting foreign investors made Gazprom look for financial resources in Russia. And this was a farsighted decision, because if Europe applies sanctions, first of all they will obviously affect financing of large projects in Russia. If it is possible to use domestic resources to finance projects, this opportunity should be used.

7. 2035 Energy Strategy officially presented

   On the whole, it seems that authors of the document decided to avoid battles with opponents and presented a profound consolidated forecast of the energy sector development until 2035. However, as far as measures are concerned, they preferred to shun these questions, especially those that provoke open irritation of representatives of the financial and macroeconomic bloc. Thus, the strategy has not become the sector’s operational plan, although it could have been. There is something to think about.

8. Neftisa, RussNeft rumored to merge and be sold to Glencore

   The question of property is a key one; Mikhail Gutseriyev seems to be thinking about protecting his property from aggressive predators like Rosneft. The Switzerland-based Glencore looks like a safe harbor.

9. Petrol prices rising

   The ruble is dropping, while petrol prices are going up. This situation triggers different debates about possible consequences. It is clear that oil companies want to offset their losses amid toughened taxation. The state is obviously not interested in panic on the domestic market; this is why, there is a question how the state will compensate possible problems with revenues to oil producers. Moreover, the tax burden keeps growing. So, there are very many questions, and this is why the federal antimonopoly service is so remarkably active in terms of new antimonopoly measures. We will be watching further developments.

10. Rosneft buys interest in Manas airport, to invest $1bn in other Kyrgyz airports

    To spend such funds on buying stakes in Kyrgyz airports is definitely a courageous move. Rosneft seems to have to take part in political projects. This is obviously politics, not investments in wonderful Kyrgyz airports, because the invested funds will never be repaid.