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Top events of March 2017
The National Energy Security Fund introduces top-ten events in the oil and gas industry in March 2017 and is ready to comment on them in detail.
Gazprom proposes EC to settle antimonopoly investigation
It is quite an important event in the context of relations between Gazprom and the European Union in general. It is no secret that there are many of those in Europe who perceive Gazprom as the Kremlin’s energy weapon, and they are confident that its share on the European market should be reduced. In reality, however, alternative suppliers cannot offer necessary quantities of natural gas at comfortable prices. Gazprom is actually ready to play in accordance with the European rules, and the proposals the gas giant made to Brussels testify to this. Gazprom is ready to make a compromise on many issues. The fact that the antimonopoly investigation may not end up in court means that Gazprom will not have to pay penalties on revenues. But the most important thing is that in this case the European Commission will admit that the antimonopoly investigation was launched without sufficient arguments. The European Commission has had many years to prepare; offices of Gazprom partners in Europe were searched. Thus, they could have found evidence, if there had been any. As a result, the position of the European Union looks contradictory enabling Gazprom to defend its commercial positions. The gas giant assures the EU that gas supplies to Europe are about doing business, not some political manipulation.
Gazprom buys out capacity to deliver gas from Germany to Eastern Europe
It concerns potential branches of the Nord Stream-2 pipeline in Europe. Few observers in Russia paid attention to this information, although it is extremely important. It means Gazprom keeps thinking of the Nord Stream-2 implementation, and begins practical realization of this endeavor. Main problems of the project will be certainly onshore. However, Gazprom shows that it can fit the European rules quite well. “Ok, you’ve got capacity auctions. We follow this procedure,” Gazprom seems to be saying. The gas giant has bought non-existent capacities; they have to be built yet. But these pipelines will be laid to correspond to the contracts made. Not Gazprom, but European companies will build them, which fully meets the Third Energy Package requirement on separation of gas producers from gas transmission. So, we have bought capacities – you build them, please. Let independent companies build them. Thus, Gazprom follows the European rules not intending to convince Europeans that these rules are incorrect. It used to do that; Gazprom contested the Third Energy Package claiming it was discriminative. Finally, the Russian gas producer has realized that fighting these rules is pointless. And it is the right position.
European Court of Justice says anti-Rosneft sanctions legitimate
On one side, it is not some revelation. Though, in the current political context, it shows that our relations with the West have deteriorated so much over the past three years that their quick improvement should not be expected. Well, we can see some political movement towards each other, but it is absolutely clear that we will not fix relations within three months after three years of breaking them. It is going to be a long way. We need to understand that sanctions will not be lifted quickly, and it is groundless to expect Trump to work wonders. We need to prepare for hard work on dismantling barricades. There has been at least some political move towards each other observed in 2017; it is already a positive factor.
Heating season over in Ukraine, gas no longer taken from UGS
The positive moment is that the heating season has ended. Ukraine did not have a serious crisis this season, and it is good. Many observers in Ukraine think that we wished collapse of the Ukrainian economy. That is not true. On the contrary, we were interested in Ukraine overcoming this heating season. If it had collapsed, Kiev would have siphoned off our gas, which would have led to another gas war with Europe. We obviously did not plan that. On the other side, Ukraine had pumped very small quantities of natural gas into underground storages by the beginning of the heating season, and warm weather in February to March played into the hands of Kiev. Ukraine stubbornly rejected to buy gas directly from Russia; instead, it was buying gas from Europe. Kiev could have filled its underground gas storages with much cheaper Russian fuel back in summer 2016. This superficial gas independence has cost additional money to Kiev.
Tax disputes, excess profit tax pilot projects
The finance and energy ministries have failed to agree on special tax regimes for deposits like Samotlor. There is this push-me-pull-you story again: one side, the finance ministry agrees to the EPT experiment, but on the other side, Rosneft does not care much about interests of the sector; it is concerned about its own interests and its own tax regime. Rosneft did not nominate any project to take part in the experiment. However, the company said that separate preferences must be provided to Samotlor. The finance ministry’s resistance on this question is understandable. There is only one thing about taxation where we support the finance ministry – there should be no preferences. There should be understandable tax procedures; it is not really normal when 40% of oil is produced under these or those preferences. However, the finance ministry cannot offer any sound tax regime; and it is a big drama. Even this experiment is not panacea, because it will last long and will apply only to several deposits; it is just an attempt to stretch the time. When the country’s largest oil producer says it does not need EPT at all, and it would rather get preferences for Samotlor, it becomes clear that the finance ministry tries to make use of this situation. The rival is too serious; therefore, neither side has secured the decision it needs.
Russian government declares new dividend policy
It is another financial dispute: the Russian government, the finance ministry in particular, believes that state companies should transfer 50% of their net profits in dividends to the state budget. The government thinks that since these are public companies, the state budget should get at least 50% of their net profits in dividends from the state block of shares. However, companies invest part of their profits, and the current threshold is 25%. As a result, serous battles began. Rosneft categorically declared it would allocate 35% of profits on dividends. The dispute has not been settled yet. It obviously concerns mainly Rosneft and Gazprom. Thus, it is another battlefield that we will keep watching.
The Arctic: Territory of Dialogue International Forum
The political component of this event obviously drew major interest: Vladimir Putin and Dmitry Medvedev visiting an ice cave, and talking about possible political future and the PM post. However, there was an energy component: a new surge in interest in the Arctic, a new ‘Arctic fever’: “New projects! New huge state investments!” Though, we think the Arctic should be carefully dealt with, because if we omit the economic component, the state will end up investing in projects that deserve little efforts of the state. Yamal LNG is a classical case; the project enjoys a fantastical tax regime; it acquired license blocks practically for free; the state has invested in its infrastructure (practically 2/3 of expenses are covered by the state) and the icebreaker fleet. They argue that the main advantage of the project is that it creates demand for Russian technologies. However, out of ten major suppliers to Yamal LNG only one is Russian. The ruble devaluation affected markedly the project’s economy; the money had to be taken from Russia’s National Prosperity Fund. Meanwhile, all 15 gas tankers for Yamal LNG are being built at South Korean shipyards; it is only plywood for them that is manufactured in Russia. The question whether we need the Arctic today, not in general but today, remains open; the Forum did not answer this question.
LUKOIL indicates readiness to sell filling stations in Russia
At first there were reports that LUKOIL wanted to sell some 30% of its filling stations; later they claimed LUKOIL would sell all of them. At the beginning of April Vagit Alekperov met with Vladimir Putin and assured the president that LUKOIL would not be selling filling stations so far. It might be an attempt to blackmail the government. Anyway, LUKOIL has raised the real problem. We are used to perceiving oil companies as fat cats. It does not matter how much the state taxes them – they have the money anyway. Yet, the profit margin of retail sales of petroleum products has become so tiny that there is no point in it. This problem includes the issue of excises, and new taxation of oil refining. By the way, LUKOIL also mentioned that it might sell a refinery in the Komi Republic, while Rosneft is considering a possibility of selling refineries in the Volga region – these are real cases. State authorities still perceive them as attempts to intimidate them. Well, you can address the president and request not to sell these assets, but it does mean that the problem is solved.
Gen. Feoktistov returns to civil service
This person is believed to have played a role in arrest of ex-minister Ulyukayev. It is interesting that he left FSB for Rosneft, but after Ulyukayev was arrested, he was sent back to the secret service. The arrest of the ex-minister seems to have caused a very nervous reaction in the government; it is possible that the president was not very happy about that situation either. It looks like they decided to move Feoktistov back to law enforcement authorities. Medvedev’s team seems to have begun complaining to Putin about Sechin’s aggressive policies, which led to such quick HR decisions.
ExxonMobil head Darren Woods visits Moscow, meets Putin
The meeting means that Russia is ready to maintain a dialogue with Western companies; Russia has not closed its door, and Russia does not play any resource nationalism game. Moreover, Russia and ExxonMobil are having a legal dispute in court over changes in the Sakhalin-1 tax regime. The company believes that changes in taxation of profits should have provided it with corresponding payments, and the company has increased the amount it demands. It is interesting that after the visit by Woods, Russia’s finance ministry declared about a possibility of a settlement agreement and payments to ExxonMobil. So, the company feels comfortable here. Rex Tillerson, ex-head of Exxon, was also a welcome guest in Moscow. Politics obviously influences these relations. Since we want to agree with Trump and Tillerson in a businesslike manner, it provides Exxon with a possibility to fix some issues.
Nord Stream 2 and Ukraine: Costs Should Decide
Shale Revolution: Myths and Realities
Liquefied Natural Gas Outlook: Expectations and Reality
Asia market: potential of Russian oil and gas exports to the East
State regulation of the oil and gas sector in 2016, prospects for 2017
Gazprom: Goliath is not going to surrender
The European gas market: the life in the epoch of the Third Energy Package
Main regulators of oil and gas battles
All reports for: 2015 , 14 , 13 , 12 , 11 , 10 , 09 , 08 , 07