Top events of September 2014

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

1. Sistema head Yevtushenkov under house arrest

   This is the Bashneft case, not just a local case around property. It is clear why other players are interested in this company. They need to close gaps in their oil production and processing balances. But when they take away property from quite a loyal systemic businessman by using rough methods of the wild 1990s employing state authorities on the background of anti-Russian sanctions imposed by the West, elites start questioning such developments. Such cases are obviously followed by speculations about some split in elites. To avoid the split one should not organize redistribution of assets in such a difficult period.

2. Decline in world oil prices

   This is the most popular topic in Russia. Our budget depends too much on oil prices that are decreasing now. There is a version that the USA has decided to punish us in such a way. Actually this argument is understandable as the price weapon used to be employed against the Soviet Union. However, this game is very dangerous for the USA too, because, if oil prices drop too sharply, American shale projects will be suspended. This would be a huge gift to China. Besides, the USA may indeed break up with Saudi Arabia whose budget will not sustain oil prices below $80. It is a big mistake to think that Saudi Arabia is a country where black caviar is eaten spoonful and there are no social problems. It has a significant number of problems in the economy, and the situation in general is not that simple.

3. Russia-EU-Ukraine gas triangle

   A compromise seemed to have been found but Ukraine managed to spoil it. It was suggested that Europe should pay off Ukraine’s gas debt demanded by Russia. This debt is for Q1 supplies and a part of Q2 deliveries. Russia was ready to pump 5bn cu m of natural gas and provide another 5bn cu m as option. However, Ukraine declared that it had been misunderstood and it was not going to pay off debts. There is money to pay but Kiev will not give it to Moscow. This is obviously a remarkable story. Ukraine seems to be consciously willing to be sacrificed. However, some European countries will have to suffer, e.g. Bulgaria and Balkan countries. It is amazing how ready solutions were terminated. It seems we will witness dramatic developments – suspension of gas transit, unfortunately, is quite a possible variant.

4. New Western sanctions against Russia

   The September sanctions were the most bitter for Russia, as they were imposed after an armistice agreement had been reached in Ukraine. Now it is clear that the story is going to be very long. The USA dragged Europe into this war. And, unfortunately, Europe did not act independently while whining, crying and explicating its stance.

5. Western companies withdrawing from projects in Russia

   The sanctions indeed influenced business, although business seemed not to leave Russia. There are no incomes and prospects where they used to be. Exxon almost completely left Russia; Total terminated its Bazhenov deposit project with LUKOIL and Shell closed its project. The image of a country with mineral nationalism was purposefully created for Russia but it has turned out that in reality the country is trying to preserve Western businesses. But the latter, unfortunately, are too fragile and susceptive to political pressure. And this is the USA not Russia that applies political pressure. It is very clumsy but effective as we may observe.

6. Pobeda deposit discovered in Kara Sea, the future of Arctic projects

   It seems the announcement about the Pobeda (Victory) deposit discovery was made to provide Exxon with arguments for Washington in favor of staying in Russia. However, this did not help. Washington made a firm decision. And this “Victory” turned out to be hollow, because prospects of Artic projects are suspended; Rosneft will not manage this project alone. Even the money it requested from the National Prosperity Fund will not be sufficient. This is why Arctic projects may be delayed for decades. And there is nothing bad about it.

7. Russian companies queuing for NPF money

   Rosneft asked for 1.5 trillion rubles while NOVATEK requested 100bn rubles. This is quite a cynical story. Rosneft always positions itself as major taxpayer in the country and simultaneously it requests large resources. There will be no money left very soon if it goes like that. The saddest thing is that the criterion of allocating assistance is the political and administrative weight of an applicant. Initially Rosneft did not even explain what it needed the money for.

8. Rosneft sells stake in Vankor project to China

   This is certainly an unprecedented case, because Russia is offering a stake in a ready project with stable production and ready infrastructure and capital expenses incurred. This is a fantastic gift that means that our turn towards China is a forced but very serious one.

9. Russia-Belarus dispute around tax maneuver

   Belarus found that increase in the oil production tax and decrease in oil export duties would make oil more expensive for Belarus. Minsk may lose as much as $1.5bn. For us this is the question of our friends: we tickle their ears while they use every opportunity to take money from our pocket. Since we are having problems with friends now, such fake friends increase prices of their services. We are likely to expect uneasy talks with Belarus.

10. Deal with Iran

    The Russian energy minister visited Tehran and the question of negotiations with Iran is on the agenda again. But it is obvious that Iran is our strategic opponent that is trying to occupy our place on the European gas market. So, it is not clear why we should take oil of our competitor and sell it. Moreover, they say we are going to supply some commodities to Iran, but nobody has produced a clear list of such commodities yet.