Top events of 2015

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

1. Oil prices

   The main question obviously was oil prices. We were discussing them throughout the year. Oil prices were very volatile: they rose sharply at the beginning of the year and then started retreating dropping below $40 at the end of the year. It certainly raises questions about how long the period of low oil prices will last and whether they drop to some $10 to $15 as some Western experts forecast. It should be noted that almost all analysts rushed to monitor market factors, e.g. levels of supply and demand. But in reality one should understand that the influence of the financial factor is very significant – the volume of money on the market of oil futures and the dollar exchange rate in particular. In this regard, a decision of the Federal Reserve System to raise the key rate at the end of the year resulted in the US dollar strengthening – American companies simply began investing the money in the dollar expecting its value to increase. In this situation one cannot expect oil futures to rise. Thus, oil prices started easing back. However, at the moment oil prices are below production costs of shale oil in the USA. It means that by keeping low oil prices the United States is punishing Russia and its own shale oil producers but helping China. In this regard, oil prices may stay low only if the US government discreetly provides financial support to domestic shale oil producers. Otherwise miracles do not work. If the United States is doing that, the question is how long it is ready to play this game. Another question is what about China benefiting in this situation? In the end, it is China, not Russia, that is the main problem of the USA.

2. The story of Stream pipelines

   The year 2015 began with the Turkish Stream project. In spring 2015 the project began stumbling, and in summer the Nord Stream-2 project was put forward. It means that two lines of Turkish Stream moved to the north; the idea is to connect the key market of Italy through Germany. Actually this idea was given the go-ahead. However, there are other two lines of Turkish Stream: Turkey requires one of them and the other one is to cater for Bulgaria, Greece and other Balkan countries. This question is still open, because Nord Stream-2 does not release these states from their dependence on the Ukrainian transit. Actually the key question is how to get rid of the transit via Ukraine? The European Union, especially several EU states, throughout 2015 we trying to prove that Ukraine should not be deprived of transit; yet, no reasonable argument was provided. But they certainly do not want to assume responsibility. We remember how it was in January 2009 when during a crisis in Russia-Ukraine relations the EU pretended it was not its problem, that natural gas should be delivered to the European border and how it would happen was not their concern. This is why this issue will be intriguing in 2016. There is a solution of major part of the problem – gas supplies to the south of Europe. However, there will be long battles with the European Commission regarding the fate of such projects as OPAL-2, because it is necessary to deliver natural gas from Greifswald in Germany to Baumgarten in Austria. How it is going to happen is a long story. As far as supplies to the Balkans are concerned, we believe that the so-called South Stream Light project could be implemented – it is an abridged variant of South Stream (we are getting back from Turkish Stream to South Stream). It means the pipeline may reach Bulgaria from where a connecting pipeline should be laid to Turkey and Greece, while building the infrastructure in the European Union is no longer needed. May gas distribution be the problem of European companies. Moreover, there will be not much to distribute.

3. Taxes

   The fuel and energy sector was fighting against the finance ministry all the year round and the result was negative. And the problem is not even about the finance ministry having managed to secure preservation of export duties on the same level, although they were supposed to decrease. In 2016 the duty is to be fixed at 60% amid advance in the minerals production tax. There is a much worse outcome. The finance ministry in fact torpedoed plans of gradual transfer of the sector to taxation of profits, not revenues. This decision is postponed; the finance ministry refused to carry out any experiment and won another year at least. Thus, the main loss of the sector is not those 300bn rubles in additional taxes it will have to pay, but the delay of solving this strategic question.

4. Ukraine

   There were many events related to this country: from suspension of supplies to Donbass in spring to agreeing another winter package. Anyway we are entering the year 2016 with some uncertainty, because Ukraine proudly declared it would cope without Russian gas this winter. However, since the weather forecast for the beginning of 2016 is very unfavorable, Ukraine will probably have to resume imports of Russian gas. Moreover, reverse gas supplies are more expensive, and in winter there may be no sufficient volume of reverse gas. Thus, Ukraine will draw our attention again. A positive factor is that Ukraine managed to reduce natural gas consumption. There was a wonderful report by PM Yatsenyuk who declared that Ukraine had made a huge progress by cutting natural gas consumption by 25% allegedly due to the policy of energy efficiency. However, in reality it happened due to the destruction of the real sector of the economy. Nevertheless, if Ukraine’s economy had been in the state it was before the Maidan, the issue of supplies would have been more serious. However, at the moment Ukraine’s policy reminds the saying “zero inflation is only in the graveyard”. Well, zero consumption is actually also there.

5. Middle East stories

   The issue of ISIL, Iran sanctions and the situation in this region in general is quite a large set of questions. The region reminds a snaky knot; it is very unstable and may deteriorate at any time. The current situation is so complicated that the region is steadily sliding towards a serious war. It may bring oil prices to the previous level. What we can observe now is that Turkey wants to dominate this region and, first of all, to control Kurdistan. Saudi Arabia wants to dominate this region and it is ready to ally with Turkey. Iran wants to dominate this region but hates both Turkey and Saudi Arabia and supports Assad’s regime. Hezbollah supports Iran. Russia supports the current Syrian authorities. Some Kurds are trying to agree with Turkey, others are thinking of creating an independent state. Iraqi state authorities are unhappy with the Turkish armed forces being in Iraq. There is war in Yemen between state authorities and Houthi rebels. To put it briefly, the situation is very tense. Removal of sanction from Iran only fueled the flame. It did not lead to the lessening of tensions but increased ambitions of Iran. We surely will see the latter as a confrontational player.

6. Discussion of domestic gas market reforms

   At a meeting of the Russian presidential commission for FES held in October Vladimir Putin declared we were not ready yet to launch serious reforms in the gas sector. The question that adherents of reforms cannot answer is very simple: “why do you want to do that?” Before launching reforms it is necessary to explain their objectives. The idea of reforms currently looks as if their adherents believe that they are just necessary. “We will liberalize Russian gas exports,” they say. But why will we liberalize them? It turns out that the movement, not objective, is what matters. But it is a very strange logic for such an important question.

7. Offshore deposits and production

   Although oil prices have dropped below $40, some companies have not calmed down. Rosneft still claims we need Arctic deposits. But why do we need the Arctic if such oil prices have made production at the Prirazlomnaya platform not very profitable? There is no answer to this question yet. It is possible that the year 2015 was the year when Russian Arctic projects were buried. There is nothing dramatic and catastrophic about it. Projects will be revived in 10 to 15 years when oil prices restore. In the meantime we have a possibility to ensure a necessary level of production by engaging tight reserves in Western Siberia.

8. Nonresidents

   In 2015 activities of nonresidents in the sector froze waiting for what would happen later. Unfortunately, sanctions were not lifted, and many Western companies were implementing their projects rather slowly. ConocoPhillips sold its assets, ExxonMobil withdrew from Russian projects and Total reduced its share in the Kharyaga project at the expense of Zarubezhneft. In other words, there were no large and breakthrough deals with Western companies. On the other side, the presence of Chinese and Indian companies is expanding, although many observers believe it is happening not very quickly. Yet, Western companies possess the money, technologies and marketing strategies. This is why it will be sad if this pause in relations gets protracted.

9. Russian companies abroad

   It has become clear that many large companies, due to their ambitions, made very risky decisions. It became especially evident in Venezuela when Maduro lost the parliamentary elections at the end of the year, which may lead to the change in the political regime. In this case our investments will be serious endangered. Our investments in Iraq seem to be more economically expedient but political risks in this region have risen quite seriously. Actually our oil companies should focus on the domestic upstream segment and domestic upstream projects. However, changes in the tax regime are obviously required to make such projects more attractive. We need to carefully refuse politically risky investments or, to put it more correctly, politically motivated investments, like Venezuela, because they create only problem for us.

10. Import substitution, tight reserves

    The situation regarding import substitution, just like the situation around tight reserves, is complicated. We were speaking about innovation platforms and about Bazhenov formations all year round. We have not seen innovation platforms yet. Domestic services companies are in a difficult situation; substitution of foreign equipment is developing slowly; the state allocates very little money on these projects. The money usually is not given to the oil and gas sector. So far the window of opportunities is open for other sectors, not for the oil and gas machine-building sector. The problem is very acute. If the issue of offshore deposits has been closed and we need to produce tight reserves in Western Siberia, the key factor that we should bear in mind is availability of domestic technologies.