Top events of September 2015

The National Energy Security Fund introduces top-ten events in the oil and gas industry in September 2015 and is ready to comment on them in detail.

1. Russia begins air strikes in Syria

   It has direct influence on the oil and gas sector. The Middle East region is stirred. It is not yet clear how it will affect world oil prices, but there will be obviously some impact. There is a possibility that the military operation will spread onto Iraq; Russia, Iran and Syria may form a coalition with rather unclear consequences. A conflict between Iran and Saudi Arabia may intensify with Russia’s involvement. Thus, Russia has launched an exciting mechanism with obscure outcomes. However, it will obviously affect the market of hydrocarbons and will be drawing our attention next month. Besides, the success of our negotiations with the West and, correspondingly, prospects of sanctions that influence the oil and gas sector depend on the success of the operation in Syria.

2. Minerals production tax debate

   Disputes around the new tax regime in the sector and collection of the so-called “devaluation” revenues continued in September. Different mechanisms to solve this issue were suggested. Finally it was decided that instead of 600bn rubles initially requested by the finance ministry the sector would pay, according to various estimations, from 230bn to 300bn rubles. Thus, the finance ministry succeeded in its traditional policy of requesting twice as much as it could really get. Actually the outcomes for the sector could be rather unpleasant – investments are being taking away in the form of devaluation revenues, which creates premises for decline in production next year. The finance ministry seems not to be willing to take these circumstances into account. It is much more important for the ministry to close next year’s budget than to think about prospects of the sector in the next decade. Besides, many representatives of the macroeconomic bloc believe that the oil industry has no prospects in the future great Russia. This is why they treat the sector as a milk cow that must provide both milk and beef simultaneously.

3. Shareholder agreement on New European Pipeline AG signed

   This company will own and build the third and forth lines of the Nord Stream-2 gas pipeline. Thus, the project is becoming absolutely real. Preparation of contracts on pipe purchases is beginning. The project is very important as it shows that, despite a serious conflict with the European Union, Russia still has partners in Europe who understand better than Brussels that there is no energy security in Europe without Russia. Our partners are large European states, Germany in particular (the latter is actually the destination of the two new lines), and large energy companies that have become Gazprom partners – BASF, Eon, Shell, Engie and OMV. These are five major European energy companies that realize very well what energy business is and that see things in a more realistic way.

4. Gazprom, Wintershall complete asset swap

   The deal seemed to be postponed or even canceled over political reasons. Nevertheless, Russia has reliable partners in Europe; they understand that Russia possesses serious energy reserves; they can cooperate with Russia and make money here. Wintershall is to produce gas in Russia. The project is very complicated – Achimov formations of the Urengoy deposit. It shows that there is advancement even on the background of sanctions, which leaves hope for further progress.

5. Gazprom tests selling gas to Europe at auction

   The results are quite optimistic. Although Gazprom did not sell the whole suggested volume of gas, there were some applications. It means Gazprom demonstrates certain flexibility. The Europeans were criticizing the Russian company for a long time for its unwillingness to use spot and exchange trade mechanisms instead of long-term contracts. Finally Gazprom is learning how to do that trying to develop its trading platform in Saint Petersburg. It is clear that the gas giant is bearing in mind the third and fourth lines of Nord Stream. This is why the idea promoted by Brussels can become beneficial to Gazprom.

6. Rosneft, ONGC seal contract on selling 15% in Vankorneft

   Russia keeps turning towards Asia. Europe continues to be stubborn; this is why the stake was made on closer cooperation with Indian and Chinese partners. Serious deals are being made despite a wide-spread skepticism about reliability of such partners. Vankorneft is actually a very good asset. This deposit has reached its designed production; the project was launched long ago and all the required investments were made. The Indian company is expected to pay off the investments. This deal is a kind of invitation to broader cooperation under projects in Russia. However, this move was made by the Indians, although the Chinese were initially expected. The Vankor oil will be exported to China, not India. Yet, we believe the Indian company has not only investment objectives to achieve. It is important for India to secure supplies of energy sources. It means Indian companies will join other projects. It is a beneficial deal to India, as it is aimed at investments in greenfields. It is also important for Russia, as India is a very capacious market. While Saudi Arabia is trying to push us on the European market, we are pressing them on the Asian market.

7. China’s Sinopec buys almost 10% in SIBUR

   China is also investing in large projects. We can also mention that China bought a slightly over 9% block of shares in Yamal LNG, which testifies to gradual acceleration of Chinese investors.

8. Russia, Ukraine agree discount on Q4 2015 gas supplies

   All conditions of gas deliveries to Ukraine until the end of the year were defined. The price is very comfortable at $227 per 1,000 cu m. Although Kiev was disputing it, Europe made Ukraine agree to this price. Europe even provided Kiev with the money but the latter, however, did not rush to transfer it to Moscow; it did not begin buying natural gas in September. Yet, there is a sound scheme at least. So, now Ukraine has to find funds to buy the required volume of natural gas from Russia. However, it seems that Kiev will try to make Europe responsible for the financial matter. Yet, there are reasons to believe there will be no crisis this winter.

9. Rosneft wins suit against Sakhalin Energy

   On September 9 the federal arbitration court of the Far Eastern Federal District ruled to provide Rosneft with access to free capacity of the trans-Sakhalin gas pipeline. This gas pipeline is connected to Russia’s only operating LNG plant. Many observers rushed to declare it was a significant victory of Rosneft. Yet, the situation is not that simple. According to the court decision, Rosneft may get access to free capacity of 2.2bn cu m of natural gas per year. However, the company planned to build an LNG plant of 5m ton capacity, which requires about 6bn cu m of natural gas. Thus, it is unclear what to do with this court victory. Besides, Rosneft’s enthusiasm about building its own LNG plant in Sakhalin is fading. Igor Sechin even mentioned a possibility of selling free quantities of Sakhalin-1 natural gas to Gazprom at netback prices. Such a compromise could be the most optimal variant. The capacity of the operating LNG plant can be expanded; Gazprom will produce and sell LNG jointly with its partners, while Rosneft will sell natural gas to them at prices more advantageous than domestic prices; the new pricing formula could be linked to export prices.

10. Energy ministry posts 2035 Energy Strategy draft

    This was another edition of the strategy that did not remove many methodological problems. If this document remains a kind of outlook for possible developments in the sector until 2035 and a kind of forecast that translates current tendencies into the future, it will not alter the situation. The Energy Strategy should become a roadmap and an action plan, not just a description of the possible future. The latter is usually provided by energy companies, while the energy ministry should write a plan of actions of the state in this sphere. This document is about practical policies rather than science, but this is what is available so far.