Top events of March 2016

The National Energy Security Fund introduces top-ten events in the oil and gas industry in March 2016 and is ready to comment on them in detail.

1. Oil prices growing amid expectations from Doha meeting outcomes

   Petroleum producers identified the venue and date of their next meeting – Qatar, April 17. As a result oil prices started going up and then retreated slightly. However, it is important that a psychological threshold was moved from $30 to $40 per bbl, meaning that in February oil prices were around $30, while at present they are fluctuating around $40, which is an absolutely different reality. It confirms our thesis that oil prices are defined by speculative operations rather than by demand and supply factors. Speculators’ reaction to developments is very hard to predict. The upcoming meeting in Doha also raises a lot of questions: the format of participants, documents to be signed, Iran’s participation, whether the oil output will be frozen on the 11 January 2016 level or whether some reduction is possible? There are many questions, but the main thing, like in a Hollywood movie, is to present information in the right way. If they manage to deliver the news in the right way and the market reacts in the same manner as it reacted even to rumors about this meeting, then it will be possible to add some more dollars to the oil price. This is what is needed now; it is necessary to move oil prices some $5 to $10 upwards, and the situation will become much calmer.

2. US President prolongs anti-Russian sanctions by another year

   This decision concerns directly the fuel and energy sector, because these are largely FES companies and representatives that are under sanctions; there should be no illusions regarding this matter. Speculations about Russia-West relations having reached its bottom, John Kerry’s visit being conciliatory and the West having appreciated the removal of Russian forces from Syria are illusions. The pressure will obviously continue; the West has not accomplished its objectives regarding Russia. This is why we should be ready for continuation of technological and investment sanctions. In the next few years it will be the reality that we, unfortunately, will have to operate in. However, it’s been two years since sanctions were imposed.

3. Development of Russia-India cooperation

   Russia’s turn towards Asia is a natural response to Western sanctions. Although many in the West believe it is bluffing, we can see it is a reality. Deals with India are important in this regard. We all think of China that is currently the major consumer of Russian oil, but India also has a deficit of oil and natural gas. Thus, it is a promising market for us, and it is quite logical that Indian companies are ready to invest in the Russian upstream segment. These deals will generate several billion dollars for Rosneft in 2016, which obviously is a serious assistance to the company.

4. Privatization debate

   Speculations about privatization schemes continued throughout the whole month. All major players in Russia are interested in this issue. However, the question is about the way privatization will be carried out. There are different variants. The first option can be conditionally referred to as Baikal Finance Group, i.e. an asset is quietly transferred to a previously unknown company. However, in the current situation it may spark a scandal, which state authorities are unlikely to be ready for. The second variant stipulates a real competitive struggle, which is also fraught with risks – the system may collapse. This variant can be conditionally called Svyazinvest. So, there is a variant of giving an asset to someone unknown and a variant of public war for assets. So far state authorities cannot figure out which option to choose. Other questions, e.g. what, when and in what form to sell, are not settled either.

5. War of messages, struggle for the future of natural gas exports

   We were discussing letters of NOVATEK and Rosneft throughout March. The companies believe they want one simple thing: Gazprom buys natural gas from Rosneft and NOVATEK, pumps it through the state border, gives it back to Rosneft and NOVATEK and they independently sell it there. In reality it is about ruining Gazprom’s export monopoly. The monopolist answered back having written a letter with arguments against the proposed plan. Vladimir Putin seems to have supported Gazprom’s position. Rosneft and NOVATEK are trying to convince the president that such a scheme will enable them to increase sales of Russian natural gas abroad. However, it is a very questionable supposition, because Brussels has been critical about Russian natural gas in general, not Gazprom’s gas in particular. In the current political conjuncture it is the struggle against Russian gas, not Gazprom. Thus, Rosneft and NOVATEK will not manage to deceive Brussels. Putin realizes it very well. So far he believes that destroying Gazprom’s export monopoly will be a gift to our consumers and foes in Europe.

6. Another anti-Nord Stream-2 letter

   There is nothing surprising in this letter, as it fully corresponds to the existing political conjuncture. Any project aimed at developing supplies of Russian natural gas to Europe is perceived very negatively, as they are believed to be the Kremlin’s gas weapon. Although there has been a noticeable rise in natural gas exports to Europe in 2016, the political background remains very negative just like the attitude towards Russian projects.

7. Winter package deal with Ukraine expires

   Russia-Ukraine gas relations lost their foundation on April 1. Well, we have a contract signed in 2009, but Kiev does not implement it. It is clear that spring and summer are relatively calm in this regard, as Ukraine does not need Russian gas to satisfy domestic consumption in this period. However, after the winter season Ukrainian underground gas storages are empty, and they will have to be filled some time later. This is why we believe Ukraine will have to negotiate imports of Russian gas, although it declares that refusing Russian gas is the most significant political achievement. Yet, the Ukrainian energy minister carefully admitted that Kiev was ready to buy Russian gas at $160 per 1,000 cu m. So, at least there is some reference point. Bargaining is better than political demagogy.

8. Putin meets with Sechin

   The Rosneft head promised a trillion rubles in investments. Previously only Gazprom could afford such an amount of investments. But where is Rosneft going to take such resources? It is clear that there are advance payments by Chinese companies, the money from Indian partners and sold assets, but Rosneft’s debt anyway is quite large. There is a desire to show himself at a meeting with the president, but the question is whether the company can afford such expenses amid low oil prices, high taxes and a large credit burden.

9. Tax policy meeting at energy ministry with companies

   The taxation issue is still one of the most important for the sector. At the meeting the energy ministry tried to restore the question of a new taxation system on the agenda – replacing the tax on revenues with the tax on profits. However, the sector is suffering defeats. The finance ministry regularly introduces new discriminative initiatives that expand the tax burden. In this situation the finance ministry is likely to win, and the issue of transfer to the new tax instrument will be played down. The sector should be readying for growth in the tax burden, not for a new philosophy of taxation. Unfortunately, this variant is quite feasible.

10. Natural resources minister says oil reserves to be depleted in Russia in 28 years

    This statement stirred wild emotions and debates. However, the minister did not say anything sensational. It is clear there will be oil in Russia in 28 years, because over the past few years the volume of oil reserves put on balance has exceeded oil output. This situation we observed in 2015 too. However, the minister correctly focused on the significance of this question. A high tax burden makes companies save resources, and they will save largely on their future. They have to maintain current expenses somehow, but it is possible to save on future operations. In this regard, expenses on geological prospecting are the first to be reduced. Exploratory drilling in 2015 fell by 20%. It is the result of taxation experiments or, to be more precise, the absence of such experiments in the sector. Thus, there is obviously such a problem. We definitely have oil, but the issue of exploring oil reserves, putting them on balance and then producing them will be getting more and more significant.