Top events of April 2019

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

1. Continuation of staff changes at Gazprom

   The company has been going through a process of tremendous staff changes over the past several months. Following the April reshuffle it is possible to draw some results and admit that, on one side, the scale of these changes testifies to serious attempts of Gazprom to get renewed and demonstrate its growing effectiveness to Vladimir Putin. It means that the Russian President could indeed raise some questions about Gazprom’s performance. On the other side, according to the character of changes, Aleksey Miller has preserved, in general, his positions at Gazprom and even reinforced them in certain aspects. The Gazprom head has indeed lost two very loyal top managers in this process – Kruglov moved to the seat of a Deputy Minister of Finance, while Seleznev left the post of a deputy CEO but stayed at Gazprom to be in charge of a new breakthrough project of the gas giant. Miller’s achievement is that it was reshuffle inside Gazprom, i.e. its top managers moved from one position to another, no outsiders came. It also means that having removed Medvedev and Golubev, Miller had to agree to the departure of the two loyal people from the management committee, but he secured promotion of other reliable people to top positions. There is only one serious ‘outsider’ in the top management of Gazprom – ex-deputy head of Gazprombank, Mr Sadygov. Yet, Gazprombank is quite close to Gazprom. It is also important that the segment of purchases and investments was seriously reformed in the reshuffle process. All these questions are now supervised by Aksyutin, meaning that the role of Gazprom’s chief financier will reduce – he will not be a strategist who, roughly speaking, supervises what to buy and what not to buy. This will be the post of a cashier managing the process of disbursement, i.e. allocating the money on those activities that the executive board finds the most important and optimal. Therefore, in general it is possible to say that this reorganization proves that Gazprom realizes the necessity of changes. On the other side, Putin has given some time to the company to demonstrate its effectiveness without undergoing radical structural changes or unbundling.

2. Russia-Belarus conflict over chloride contaminated oil

   It is indeed a dramatic scandal. On April 19, Belarus accused Russia of supplying chloride contaminated oil to a Belarusian refinery. This case has not been fully explained yet. Belarus took hold of this technical incident to stir up a high-profile conflict involving neighboring states. On the other side, Transneft admitted the fact of excessive chloride presence. It means problems indeed emerged on the Russian side. And here comes the most interesting part. It was suggested that since chloride may be used to increase oil recovery or in other technological processes related to oil production, it is possible to suppose that a small regional company could use chloride to improve its production performance and then just pumped it into the truck pipeline hoping that nobody would notice that. This version was suggested by Transneft that named a particular company based in Samara that, according to Transneft, was the perpetrator. However, nobody was held personally responsible. Moreover, this Samara company reported that it could not do that, because it did not control an oil acceptance terminal that it had sold long time before. Thus, since this company did not have free access to the main pipeline system, it physically could not do that. On April 30, President Vladimir Putin received Transneft head Nikolay Tokarev. The latter admitted technical problems that could emerge, inter alia, because of the absence of sufficient control over the level of chloride content in crude. At the same time, Tokarev kept insisting on the ‘regional’ version, although his ill-wishers are certainly keen to use this case against him. Belarus also employs this case to solve its foreign policy and geopolitical problems. This story will undoubtedly continue in May.

3. International Arctic Forum in St. Petersburg

   It was a large-scale event in April symbolizing that the Arctic had finally become one of the clear-cut economic priorities of Russia’s development. Basically, our economic policy is the policy of large industrial projects that the state is ready to finance. The message of the state is clear: “Folks, we do not believe in some small and medium-sized businesses, we do not believe in free energy of the masses. We believe only in large industrial projects of the Soviet scale”. And the natural question is: what are the expenses on these projects? Has anybody calculated them or not? So far we can see that the Arctic Forum was marked by gigantomania – more, more and more. Last December, there were hardly enough projects to ensure 50m tons of cargo flow along the Northern Sea Route by 2024. At present, there are over 90m tons, and ideas keep flowing.

4. New shareholders in Arctic LNG 2

   Chinese investors have followed Total that earlier entered the project, and it is quite logical. The Arctic LNG 2 project is expected to receive colossal preferences from the state, like it happened to Yamal LNG that also has Total and Chinese stakeholders. The state openly shows its readiness to finance the private company’s project, although NOVATEK sells stakes in the project to nonresidents, takes the money, pays attractive dividends, and nobody asks questions. It turns out that the private company sells stakes in its project, and foreigners buy these stakes because they realize that the state will provide this project with huge preferences. This is “our new industrial policy”, regardless of expenses and potential profits or, on the contrary, expenses of the state budget.

5. Presidential election in Ukraine, the future of Russia-Ukraine gas contract

   It is absolutely evident that the political factor will dominate. Zelensky as Ukraine’s head of state means the beginning of very serious political changes in this country. There will be a new PM, and, likely, a new head of Naftogaz. And this is already a ground for a dialogue between the Russian President and the new President of Ukraine, despite some tough moves that Russia made right after the Ukrainian vote (e.g. providing residents of the Donetsk and Lugansk Peoples’ Republic with Russian citizenship). Why are talks possible? – Because there is no personal dislike for President Zelensky. The main thing is that Poroshenko proposed a very clear-cut agenda to his country: the war and the faith. He focused on the conflict with Russia. Poroshenko’s main objective was to damage Russia. He suggested that the Ukrainian electorate should tighten their belts to achieve this goal. Ukrainian voters categorically do not want it, as they believe they have already paid too much. There is no war against Russia on Zelensky’s agenda. It is, by the way, very well shown in the now famous Servant of the People TV series. He puts forward the economic agenda; he intends to speak about the economy first of all. However, what kind of economy can one expect, if the key question of prices of energy sources is not solved? This is why Ukraine is interested in the dialogue with Russia. Though, there is another aspect, and it concerns huge efforts that Russia has already made to create alternative systems of delivery of energy sources to Europe – we obviously mean natural gas. If prolongation of the gas transit contract is on the agenda, it means we will have to preserve some considerable part of transit via Ukraine at the expense of alternative gas transmission systems that we are building. This is the main question, because at present Russia is not interested in prolonging the transit contract. Moreover, in April, Naftogaz voiced its understanding of the new transit agreement citing 60 bcm of gas transit per year. It is obviously an impossible figure that Russia will never agree to.

6. EU Council approves amendments to gas directive concerning offshore gas pipelines

   It is all about the pressure on the Nord Stream 2 and attempts to show Russia that the ongoing construction of gas pipelines bypassing Ukraine does not mean that a new transit contract with Ukraine does not have to be signed. Maros Sefcovic declared that the gas agreement should be necessarily prolonged. Sefcovic, however, has lost presidential elections in Slovakia and is likely to leave his post of the EC deputy head. Nevertheless, there are other people in Brussels who will be urging Russia to prolong the contract. What is the best way to achieve this? – To try to impede the Nord Stream 2. In this regard, efforts are not spared by the European bureaucracy and Denmark that in April proposed Gazprom to consider its third variant of the pipeline construction. Though, it is understandable that the project will be completed. The question is just about timeframes and how its progress will affect gas talks with Ukraine. There are very many questions about it. Nevertheless, construction of alternative gas pipelines continues.

7. Serbia foreign minister Dacic says construction of Serbia’s section of TurkStream begins

   Serbia has decided not to wait until Bulgaria completes construction of its part, although Sofia has already finished tender procedures, there is a winner, and construction activities can begin. So, the outlines of the TurkStream system are becoming clear. It concerns not only the sea section that has been already built but also its ground part that is laid quite quickly.

8. Moratorium on growth in petrol and diesel fuel prices extended

   The situation is rather complicated. Deputy PM Dmitry Kozak declared that the moratorium had been prolonged and companies had agreed to conditions of its extension. In reality, conditions of its prolongation are still unclear, because companies want to get some compensation. They expect it from the amended formula of the dampening component. If crude exports become significantly more attractive than processing of crude in Russia and sale of petroleum products on the domestic market, inter alia, over the price moratorium, companies would like to get some compensation for their voluntary consent to sell petroleum products on the domestic market at understated prices. However, it turns out that the dampening mechanism launched as compensation works in favor of the state budget, instead of companies, over some math formula features. This situation obviously does not satisfy oil companies, and their battles with the Ministry of Finance continue. The latter has a very remarkable position: “all right, we can change the dampening component formula, but will raise the minerals production tax”. Generally speaking, the ministry is ready to return the money, but first it wants to take the money from companies. Thus, although it is already the second quarter and the moratorium is in force, it is not fully clear how this whole system will work. Companies have made advances and decided not to sharpen the conflict, because otherwise the Ministry of Finance would obviously complain to Putin. Yet, the story is not over.

9. Gazprom restarts Baltic LNG project

   Gazprom has replaced Shell in this project with a company that is said to be affiliated with the Rotenberg brothers. With regard to the top position of this rating, it means Gazprom has to achieve success in those segments of the gas business that Vladimir Putin perceives as breakthrough – LNG and gas chemistry. No wonder the Baltic LNG project has been transformed into a gas chemistry cluster. Kirill Seleznev, who previously was responsible for the domestic gas market, has been moved to this project, and it is his chance to prove his effectiveness as manager. He was not removed from Gazprom’s system, but was given an opportunity for a kind of restart.

10. Yury Manevich appointed as Deputy Minister of Energy

    This person has a famous family name – his father was one of the Russian liberal economists, he was brutally killed in St. Petersburg in 1997. Yury Manevich has quite close ties with people who organized and conducted reforms at RAO UES of Russia. It is interesting that he has been appointed to supervise a key segment, because the state will soon start prolonging agreements on renewal of power generation capacities. The budget is almost 2 trillion rubles. No wonder deputy minister Kravchenko was removed, and Novak tried to make Teksler responsible for this sphere, but the latter was unexpectedly appointed to run the Chelyabinsk Region. And here comes the new deputy minister. It means there is serious re-division in the Russian power industry; there is a serious intrigue and the money involved.