Top events of April 2014

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

1. Russian-Ukrainian energy relations

   Russia’s position is clear: it is categorically against allocating discounts to Ukraine’s current authorities. Actually why should Russia give discounts to the leadership that hates Russia? The suggested gas price is well substantiated – it is based on the contract signed on January 19, 2009. This is why Russia’s position is purely juridical. Kiev claims it will find a way to get rid of Russian gas; reverse supplies are much spoken about. But there are three main problems that are obvious. Firstly, even in case of reverse supplies this will be gas of Russian origin. You cannot get rid of Russian gas by buying Russian gas through other deals. Secondly, this gas is not for free. It may be $100 less expensive than April prices, but not free anyway. And the third problem is quantities of gas. Ukraine will not manage with the available volume of reverse supplies.

2. Exchange of gas letters between Putin and Barroso

   This is ping-pong – who will take responsibility, who will pay for Ukraine. Russia stresses this is not Russia’s problem; if Ukraine has chosen Europe, the European Union should be financially responsible for it. European Commission head Jose Manuel Barroso replies that this is Russia’s problem, because Russia has contracts on gas deliveries to the EU border, which means Ukraine is Russia’s headache. We witnessed such ping-pong in 2009 that ended very badly – supplies were suspended and Southeastern Europe was cut off. Actually we are following the same scenario. But that time the gas war was relatively unexpected; the sides had been hoping to agree until the last moment. Now this outcome is becoming expected making the situation look grievous.

3. US, EU sanctions against Russian companies

   There were many speculations on application of sanctions against energy companies, but in reality the sanctions imposed are quite careful. The situation around Igor Sechin is indicative: the Rosneft head is under sanctions, while the company is not. Thus, Mr. Sechin is not allowed to enter the USA, but the Americans can work with Rosneft quite well. So far the business is managing to pursue careful sanctions, but the political steamroller is on its way and it is difficult to stop it. Sanctions are very likely to appear high on our future ratings.

4. Polish PM Tusk suggests establishing common energy union in Europe

   This proposal is indicative. Unfortunately, Europe that always declares separation of business and politics follows an absolutely opposite course. Donald Tusk’s idea is striking, because its implementation suggests emergence of some uncertain body that would buy gas for the whole EU. But this is not the European Union or countries that buy gas. These are companies that buy gas. In this regard, Tusk’s proposal is destructive for the gas market. But the proposal found its response. In May this idea was repeated by European energy commissioner Guenther Oettinger, which is evidence that the Europeans are not following even the logic of capitalism.

5. Polemics around South Stream and agreement with Austria

   The European Commission keeps sabotaging this project pressing transit countries of South Stream. Bulgaria was rumored to have allegedly begun dismantling the pipeline. The rumors were refuted; moreover, this is not beneficial for Bulgaria, as the country is planning to earn on transit and have a guaranteed source of gas. But Ukraine is a powder keg that Bulgaria sits on being 100% dependent on gas transit through Ukraine. Gazprom is pretending that nothing is happening; it signs new contracts on supplies of pipes. Meanwhile, the South Stream route has been changed again: it will go to Austria’s Baumgarten. This is very bad news for Ukraine, because it creates possibilities to fully remove it from transit.

6. Russian delegation visits China

   The story about a contract on Russian gas exports to the PRC is coming to its end. The gas contract seems to be sealed finally during Vladimir Putin’s visit to China in May. This will be our response to Europe.

7. Agreeing reserves of Velikoe deposit in Astrakhan Region

   On one side, this is pleasant news. The deposit is record high for post-Soviet Russia. But there is a fly in the ointment. Such deposits are rarely discovered inter alia because of inattention to geological prospecting. It is not clear when we will begin production at this deposit, because such projects are difficult to implement with the current taxation system. Thus, this discovery is a projector that has again highlighted serious problems in the oil industry.

8. Sechin asks Medvedev to facilitate Rosneft obtaining access to Gazprom’s pipeline in Sakhalin

   This report is interesting, because Vladimir Putin personally commissioned Rosneft to provide its gas to line 3 of Sakhalin-2’s LNG plant, i.e. Putin instructed Sechin to give gas for liquefaction at the operating LNG plant in Korsakov. However, Sechin decided to ignore the president’s request and openly and demonstratively starting insisting on his idea that this gas should be used for Rosneft’s LNG plant and, besides, this gas should be delivered through Gazprom’s pipeline. The problem is that Rosneft does not have its own LNG facility, while there is a plant in Korsakov. The economic logic suggests that the scheme proposed by Shell and Gazprom is more expedient, but we will watch the developments.

9. Mitsui and Mitsubishi consortium withdraws from talks with NOVATEK on buying 10% minus 1 share in Yamal LNG

   This is evidence of sanctions. We always speak about Europe but the USA is toughly pressing Japan too. The latter has to take in into account. As a result, this leads to negative consequences for us.

10. Gazprom acknowledged as the world’s most profitable commercial public company in 2013

    Again Gazprom is showing very good economic parameters. The company is actively and aggressively criticized domestically, but it is the most profitable company in the world. And this profitability was ensured not by the domestic market where the position of independent producers is better, but by exports. It is happening on the background of constant statements by the Europeans that Gazprom will be soon strangled by them. But it turns out that everything is not that bad for Gazprom as some believe.