Top events of January 2019

The National Energy Security Fund introduces top-ten events in the oil and gas industry in January 2019 and is ready to comment on them in detail.

1. Political crisis in Venezuela, Washington imposes sanctions on PDVSA

   It certainly raises the question of Russian investments in Venezuela. PDVSA officially owes $2.3bn to Rosneft alone in advance payments and direct credits. Besides, we invested in the Venezuelan production sector, and these investments are obviously questioned too. If the regime in the country changes, it is possible that the money will not be fully paid back. Thus, Rosneft is a hostage of its risky policies. And in this particular case it was Rosneft that defined Russia’s foreign policy rather than followed it. On the other side, the crisis in Venezuela plays into Russia’s hand in terms of oil prices. Although the Venezuelan oil industry was decaying anyway with production having dropped from some 2.2-2.3m bbl/day to almost 1m bbl/day, it is possible to maintain oil production during the crisis anyway. If the USA manages to put its protégé in power in Venezuela, American investments and companies will evidently come back. This question, however, will not be solved in a month or even a year, given that Venezuelan oil is heavy, and it is quite hard to extract it. So far this case plays into our hands, except the money that our company Rosneft may bury in faraway Venezuela.

2. OPEC+ situation

   On one side, discussions on turning OPEC+ into a new structure have begun – Russia and Saudi Arabia are said to be permanent members in this new body. Thus, it is the process of moving from a deal to a full-fledged organization. On the other side, there is an evident crisis in Russia-Saudi Arabia relations. Riyadh accused Russia of not rushing to reduce oil production; Russia responded by citing difficult winter and weather conditions. Finally, on January 21, the Saudi Minister of Energy refused to attend the Economic Forum in Davos, and on January 22, the Russian Minister of Energy also decided not to go to Davos, although their negotiations had been planned to take place there. The OPEC+ deal is functioning so far; therefore, it is possible to expect that the desire to earn will prevail over political difficulties. Nevertheless, it should be repeated that Saudi Arabia suspects Russia of attempting to solve internal problems at Venezuela’s expense, and not cutting production too quickly. Saudi Arabia, by the way, reduced its output quite noticeably in January.

3. Ukraine-Russia-EU gas transit talks

   The negotiations expectedly got nowhere. The Russian delegation was led by Aleksey Miller, which seemed to make the talks more important. However, the Gazprom head came late practically to all meetings; as a result, they finished quite quickly. It is actually understandable that the sides were not inclined to agree on anything, as it was still a year before expiration of the transit contract. Ukraine is preparing for the presidential election, while we are waiting for completion of the Nord Stream 2 construction and the beginning of construction of the land section of the extended TurkStream. In the meantime, each side tries to find new arguments. The main question obviously is to understand who the next President of Ukraine will be. This question is not trivial; even if Poroshenko wins the elections, it is possible that there will be some changes at Naftogaz.

4. Vladimir Putin visits Serbia, negotiates with Serbian President Aleksandar Vucic

   The talks were marked by absolutely clear assurances that Serbia is ready to receive Russian gas pumped through the TurkStream, and it is waiting for completion of construction of the pipeline in Bulgaria, and it is ready to launch construction on its territory. In his turn, the Russian President promised to allocate $1.4bn. Serbia is not a member of the European Union, and Gazprom can invest in this project, as it does not contradict the Third Energy Package. The pipeline will run from Serbia to Hungary that is readying to receive natural gas too. Thus, things in the south of Europe are developing in a positive way for Gazprom so far.

5. The Arashukovs are arrested

   The father and son have been arrested. Although they face different charges, it is understandable that these cases are intertwined, and it is not a coincidence that they were arrested on the same day. Senator Arashukov (son) is accused of murders. Arashukov senior is an advisor of Mezhregiongaz head Kirill Seleznyov. In the past Arashukov headed subsidiaries of Mezhregiongaz in the North Caucasus and was a key figure in gas sales there. His arrest obviously gave rise to a lot of discussions and speculations about the original reason for this case. Is it linked to Gazprom or the North Caucasus? In the first case, it would mean the beginning of large-scale investigation of gas theft in Gazprom’s system. It is actually absolutely obvious that the North Caucasus is a special case. When they say that gas was stolen from Gazprom (Arashukov is accused of stealing 30bn rubles in natural gas, which is an absolutely huge amount; it means some 6.5 bcm was siphoned off), they argue that Gazprom does not monitor what is going on at its subsidiaries. However, Gazprom has long been trying to improve the situation: it replaced top managers of regional subsidiaries, e.g. in Dagestan. Nevertheless, nothing has helped. Moreover, new executives of new subsidiaries of Mezhregiongaz in Dagestan are charged too – it is either their fault or somebody else crossed them up. The arrested head of the local distribution company comes from Donetsk, and he is not linked to the North Caucasus; he was expected just to put things in order. Yet, this specific character of Dagestan has brought the company’s new head to the court. Therefore, the Arashukovs case is likely to be about the North Caucasus affairs; the toughening of methods of anti-corruption investigation evidently followed Vasilyev’s appointment to run Dagestan. The federal center does not have sufficient resources to finance the lack of restrictions in the North Caucasus and to forgive everything to local leaders. Screws are tightened on the North Caucasus, as the previous model of relations with the money and resources sent there is coming to an end. In reality, Gazprom’s power ends where the North Caucasus begins. Even appointments at Gazprom subsidiaries in the North Caucasus were out of Gazprom’s control until recently; everything going on there was the decision of the federal center that believed that such a model of relations was more optimal. However, the model is changing now. No wonder the Arashukov case has not affected Kirill Seleznyov, although there are many of those who are eager to leak discrediting materials about him.

6. Scandal over Chechnya gas debts

   This situation is absolutely opposite: the court has forgiven several billions of rubles in gas debts to Chechnya. Thus, it turns out that Dagestan is brought to order; illegal schemes of gas theft from Gazprom in huge quantities are eliminated, while this scheme is still valid in Chechnya. Moreover, the region’s debts are written off. It is clear that Kadyrov’s position is special, and Chechnya is allowed more things than other regions can afford. Yet, the question is: if the order in Dagestan is established somehow, will this experience be applied to other regions in the North Caucasus, in the sphere of supplies of resources in particular?

7. LNG terminal in Kaliningrad is launched

   On one side, it is now possible to provide the Kaliningrad Region with liquefied natural gas in case of some difficulties with supplies of natural gas through Lithuania. On the other side, this alternative is quite costly. It is interesting that we accused Lithuania of buying more expensive LNG from America instead of using Russian gas, but now we are applying the same approach, because we do not trust Lithuania. LNG supplies will be certainly quite expensive. The question is whether this regasification vessel will be a backup variant or it will be necessary to utilize it at some obligatory level to prevent it from idling? By the way, it is obviously a burden for Gazprom; though, as a state company, it has to do that, just like it has to pump gas to the North Caucasus. These are the examples of obligations the state company has to finance.

8. Sabetta meeting on state support to manufacturing of LNG equipment in Russia

   One cannot say that all decisions necessary for NOVATEK were approved at this meeting. Nevertheless, the government keeps clearly demonstrating its desire to provide financial support to import substitution in the LNG sphere. LNG is turning into a national project; no money and effort is spared on this process. It is a win-win situation for NOVATEK. It is not just import substitution that is important for the company. It is important not to pay for import substitution. If the state finances this policy, NOVATEK will be eager to make use of it. If the state does not finance import substitution, NOVATEK will buy everything abroad. The first contracts that NOVATEK has made on supplies of equipment have nothing to do with Russian manufacturers: contracts have been sealed with Nuovo Pignone, Saipem and Renaissance. These are foreign suppliers; almost one fourth of the necessary equipment has been already contracted, and there is no sign of any Russian producer so far.

9. Scandal around Rosgeo deputy head Ruslan Gorring

   After an outrageous video featuring him was leaked online, he was fired. This case, however, is not about the official, because the media attack was too powerful. This offensive was on Rosgeo, rather than Gorring. It is absolutely evident that this case is not about the intention to replace the Rosgeo deputy head. It is about the fate of Rosgeo. The company is obviously eyed by some major oil producer that has long being considering options of expanding its oil services and geological assets. This is the conclusion that comes to mind.

10. Another scandal with Belarus

    Aleksandr Lukashenko has ordered his government to explore the question of alternative oil supplies to the country. He even promised some possible union with the Baltic states that would supply cheap oil to Belarus to refine it at Belarusian refineries. The tax maneuver has accelerated in Russia this year causing evident problems to Belarus – Russian refineries will get compensations from the Russian state budget, while Belarusian refineries will lose the money. This is why Lukashenko is nervous, and despite several meetings held on the highest level in December, the question remains unsettled. This uncertainty led to another outburst of the Belarusian leader. It is clear that all these stories about substituting Russian oil with some “mysterious” Baltic oil and about some new arrangements profitable for Belarus are nonsense. Lukashenko many times intimidated Russia with either Iranian or Venezuelan oil, but no other oil reached Belarus – these stories are used to press Russia for new concessions.