Top events of Jule 2018

The National Energy Security Fund introduces top-ten events in the oil and gas industry in Jule 2018 and is ready to comment on them in detail.

1. State Duma passes tax bills

   Main novelties concern acceleration of the tax maneuver and introduction of the excess profit tax (EPT). Given the overall confiscation effect from these bills, the fuel and energy sector will obviously suffer. The logic of authors of the bills is evident: implementation of Putin’s inauguration decree will require several trillion rubles in additional expenses. What is the source of the extra money? – First of all, it is our beloved oil and gas sector. The government does not have any other variant. The Cabinet immediately addressed oil and gas companies for additional resources. It was decided to speed up the tax maneuver. In the next two three-year budget periods, this measure should generate from 1 trillion to 1.5 trillion rubles in additional taxes on oil companies. The finance ministry does not deny it. The tax maneuver stipulates replacement of export duties with a higher minerals production tax. The EPT introduction looks like a concession to oil producers. The new taxation regime will provide for taxing profits, not revenues that are taxed at present. Oil producers are obviously more interested in the new tax, particularly if they have to produce hydrocarbons at brownfields and greenfields that require higher expenses. These extra expenses will be taken into account in the new tax. However, the scale of the EPT application is very modest. The finance ministry has cushioned the blow. Firstly, it is introduced as an experiment to last many years. Secondly, it covers a very limited number of projects. Thus, there will be no large-scale effect from this novelty. There have been many debates about support to the oil-processing segment, and about reverse excises. There are indeed some measures that should somehow offset certain peculiar features of this tax maneuver to the oil-refining sector. Yet, it is possible to admit that it is another package of confiscation bills. It looks justified for the public that thinks that rich oil producers should pay for the new social policy of the state. The real question is what will happen to the production sector in ten years. There are also others questions. The finance ministry however is interested only in potential revenues of the state and taxes paid by companies, but it is absolutely not interested in what will happen to the sector.

2. Rosneft files lawsuit against Sakhalin-1 participants

   It was in the July breaking news. Rosneft filed a suit against itself, as a Sakhalin-1 participant, and against several foreign companies engaged in the project, including project operator Exxon. Russia’s attitude towards foreigners has always been very gentle – there have been very few such scandals. Rosneft probably decided to follow the pattern of the state that addresses oil and gas companies when there is no money in the state coffers. Rosneft opted to ‘seek assistance’ from its neighbors – the company wants them to pay. The situation is flavored by the fact that Rosneft usually attacks Russian owners and Russian companies. This time however it launched an offensive on Exxon, as well as Japanese and Indian companies participating in Sakhalin-1. Exxon has left all projects in Russia, except Sakhalin-1, since anti-Russia sanctions were introduced, and relations with Exxon have been rather complicated since then. Thus, it is a good time to attack Sakhalin-1. The question is likely to be about the money, not property – the situation is unlikely to follow Sakhalin-2 footprints, although many observers have referred to that case. Yet, it was different – Gazprom joined Sakhalin-2 and paid to its participants. The gas giant paid the full price of the project when oil prices were on their peak, which enabled Sakhalin-2 shareholders to earn quite well. In the Sakhalin-1 case, nobody wants to pay that much. Therefore, if Sakhalin-1 assets are estimated at prices lower than market prices, Rosneft may encounter serious problems. The reason is India’s state company ONGC that takes part in the Sakhalin-1 project. Rosneft is developing large projects in India, and it has some assets in this country. If Rosneft treats the Indians badly in Russia, they may create similar problems to Rosneft in India, where the Russian company has a major refinery. This factor is likely to be taken into account.

3. Donald Trump meets with Jean-Claude Juncker

   Following their meeting, it was said that Europe would buy more LNG from the USA. The European Commission president declared they had agreed that the US president would restore the previous situation with duties on commodities, primarily steel and aluminum, while Europe would buy more liquefied natural gas produced in the USA. It all looks like crowd pleasing. Juncker needed to show his electorate that he had found a way to harness Trump and solve the problem of trade war between the USA and Europe. Trump demonstrated his voters that he had played tough with Europe that would buy American LNG, and that no compromise on duties had been reached. The latter is absolute truth. Nobody has lifted steel and aluminum duties imposed by Trump. There is actually no restoration of previous positions. Trump just promised not to introduce new duties, that’s it. In this regard, Europe is in big trouble. However, the important thing for us is that Juncker’s statement was also absolutely demagogical and declarative, and it cannot be put into practice. Although Trump visited Italy afterwards, where even some concrete figures regarding construction of new LNG terminals were voiced, it is necessary to discuss the price conjuncture, and analyze LNG shipments from the USA. According to the latter information, American LNG practically does not reach countries that buy piped gas from Russia. Europe’s leading importers of liquefied natural gas from the USA are Spain and Portugal that do not get Russian piped gas because of the distance and logistical peculiarities. The main figure however is that approximately two thirds of existing LNG receiving capacities in Europe are idling. Moreover, in the first six months of 2018 their load dropped significantly. Building new capacities while existing facilities are idling would be too silly. If the European Union decides to do that anyway, it will mean that politics prevails over economy in the energy sector. It is however hardly a threat to Russia. It is possible to build new terminals, but it is a big problem to make consumers buy a more expensive gas. For instance, the terminal in Klaipeda is feverishly looking for buyers to sell its LNG to. Nobody wants to purchase the fuel at high prices.

4. Yamal LNG’s tanker arrives in China

   This event became a big festive occasion. It was the first arrival of Yamal LNG’s tanker in China without icebreaker assistance on its way. All experts claim there will be significant growth in gas consumption in China; the Chinese market is actually quite significant. However, there are questions about Yamal LNG – the project was initially aimed at Asia. It was Putin who insisted on avoiding competition between LNG produced in Yamal and Russian piped gas exports. Yamal LNG was launched last year, but the first tanker came to China only half a year later. Indeed no assistance was required from icebreakers, but the voyage took place in July; the question is how such deliveries will be made in winter.

5. New sharpening of Gazprom-Naftogaz relations, Kiev-Moscow-Brussels talks

   It was a kind of adjustment of fire. Obviously no agreement could be reached at the first meeting. Naftogaz continues attacking Gazprom by putting forward new and more insane claims. How else could one describe the demand to calculate devaluation of a pipeline and add it to 2018-2019 tariffs? They say $11bn is allegedly the residual value of gas pipelines in Ukraine, and Gazprom must, for some reason, compensate it in the 2018-2019 tariffs, as if the Russian company has ever promised to transit natural gas through Ukraine forever and ensure operation of this system. There are many questions regarding this situation, and the next winter is likely to be quite vibrant, because it is the last full winter under the current contract that expires on 1 January 2020. Since Europe, as we can notice, absolutely does not want to press Russia demanding preservation of gas transit through Ukraine by all means (besides, many stakeholders support the Nord Stream 2 project), Kiev certainly is tempted to employ clearly provocative actions and to create crises to garner attention. It is particularly possible if construction of the Nord Stream 2 begins this autumn despite all problems.

6. Saudi Arabia suspends oil exports in Red Sea

   So far it looks like demonstration of problems in this region to the world community. And these problems are rather serious, because it is not only about the Bab-el-Mandeb in the context of Yemen, but also about the Strait of Hormuz and Iran. The latter has already hinted that it will have to block the Strait if the USA imposes sanctions. The region has again become an arena of serious geopolitical battles. Actually it has never stopped to be the battleground. This situation obviously affects oil prices. We can ironically think of our American colleagues who in 2014 and 2015 proudly stated that oil prices had got rid of a geopolitical component. So, it is back. And there could be no other way. The role of the Middle East is significant, and neither North America nor any other region can replace the Middle East as a key producer of oil. Since the region preserves its key role, all geopolitical difficulties here have to be taken into account. Thus, geopolitics is maintaining oil prices so far, while advance in oil production within the OPEC+ framework has not affected them negatively yet.

7. Kirill Molodtsov resigns as deputy energy minister, appointed aide to presidential administration head

   Pavel Sorokin is finally responsible for the oil and gas sector in the energy ministry, while Kirill Molodtsov is now responsible for the presidential commission for the fuel and energy sector and environmental security. The commission has not held meetings over the past three years. The next meeting is scheduled for the end of this August. Molodtsov has been preparing quite actively for this meeting. So, it will be interesting to see how well this commission will manage to be part of the seriously amended format of state administration of the oil and gas sector. There is a new deputy PM responsible for FES, there is restart of activities of the commission, and there have been large changes in the energy ministry this year – these are all components of a large process.

8. Gazprom promises to begin Kharasaveyskoye field development in 2019

   It is interesting news reflecting HR changes in the government. The natural resources ministry has seen the arrival of officials who are linked to NOVATEK. It means unavoidable sharpening of struggle for fields in the Yamal and Gydan peninsulas that are significant for gas production development. NOVATEK has long been eyeing Kharasaveyskoye. The company’s logic is as follows: if Gazprom does not need it, give this asset to us. Gazprom realizes that the new leadership of the natural resources ministry will soon launch an offensive. Therefore, the gas giant is trying to act proactively. Its recent move means: “we need this field badly; we have approved a program, and we will start developing it in 2019”.

9. Gazprom ready to sue FAS over gas transportation tariffs

   Russia’s Federal Antimonopoly Service refused to increase gas transmission prices by 3% to 4%, but increased domestic wholesale gas prices by 3% to 4%. Gazprom is indignant about the decision. The company believes it is clearly discrediting; therefore, this time it intends to take a tough stance. However, it is just part of the struggle for the domestic gas market, and it will evidently continue. The position of independent gas producers is also known: gas transmission tariffs should be reduced, not enlarged. They also claim that tariff formation is nontransparent. So, we will witness many interesting cases in this sphere.

10. LUKOIL decides on quasi treasury shares

    It has been decided that managers of the company will buy out quasi treasury shares. It means there will be no block of quasi treasury shares on the market. It is an important factor for LUKOIL and market participants, following a series of plainly sponsored reports claiming that LUKOIL was allegedly planning to sell this block of shares to the Americans. In Russia such reports are akin to delation; they have to be carefully dealt with. LUKOIL is building defense showing there is no intention to sell this stake to nonresidents. The company has good prospects of repulsing possible attacks. LUKOIL is unlikely to be the next victim of Rosneft’s aggressive expansion contrary to expectations of many experts.