Top events of Jule 2019

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

1. Transneft approves compensations to companies for contaminated crude, Rosneft-Transneft conflict progresses

   The incident that took place in April continues to be the breaking news in the Russian oil and gas sector, and proposals of Transneft on the size and conditions of compensations do not put an end to this conflict. The Druzhba case has gradually turned into the war of two state companies: Transneft and Rosneft. Transneft’s proposal is its opinion on how the conflict should be settled, but Rosneft does not agree to it. Rosneft keeps accusing Transneft of the incident and of impeding transmission of Rosneft oil because the pipeline system is full of contaminated crude. According to Rosneft, it has caused decline in output at some of its large projects. Transneft argues that it is Rosneft that creates problems and points to incidents caused by the oil producer in the Khanty-Mansi Autonomous Area. Thus, the two companies have been exchanging punches over the past few months, but the President has been silent. Therefore it is too early to close this case, and it is very interesting what will have happened by the end of 2019.

2. Moratorium on new tax incentives for oil companies, Priobskoye is an exception

   This decision is typically Russian – to impose a moratorium and immediately introduce an exception. Thus, the total ban is followed by an exception for one project. It means the idea of the Ministry of Finance to stop giving preferences is not supported yet. Preferences are a typically Russian story. It is always like that in Russia: there are common rules and exceptions from them, and there are always those who want to get these exceptions. This struggle for exceptions and for a possibility to grant such exceptions having corresponding administrative capacities is probably one of the cornerstones of the Russian political and economic system. This is why preferences will not disappear. The idea of the Ministry of Finance to ban preferences seems understandable. Yet, the ministry does not want to think how a normal and effective tax system should look like. The system of the excess profit tax introduced at the beginning of this year looks rather like a pittance that does not work and will not work.

3. OPEC+ deal extended until April 2020

   It took some time to make this decision; it was passed only in July beyond the first half of the year. Russia was contemplating for a long time which strategy to follow. On one side, the country wants to produce more crude, but, on the other side, risks seem to be quite serious. Production decline in Venezuela and Iran did not help remove excessive oil quantities from the world market preventing Russia from substituting these countries. As a result a cautious and conservative decision was made. Yet, the market situation in August demonstrates that the deal may have to be transformed on tougher conditions, because prices keep going down.

4. The situation around the Strait of Hormuz sharpens

   It seemed the war was about to begin in the Strait. However, neither the USA nor Iran went too far; oil prices even began retreating in August. The opportunity to charge the “war premium” was avoided.

5. Ministry of Finance decides to correct the dampener, adds kerosene

   Oil companies managed to add kerosene to the list of compensations. The state budget will have to offset growth in kerosene prices. The cancelation of the moratorium on growth in fuel prices actually led to a typical situation for the Ministry of Finance: on one side, the ministry lifts the moratorium, adjusts the dampening mechanism and raises payments to oil companies; on the other side, the ministry increases the minerals production tax by the same amount. What happened was that the money was put into one pocket of oil producers but the same amount was taken out of another pocket. On the positive side for oil companies is that the situation involving kerosene was settled not at their expense. Though, the Ministry of Finance will attempt to compensate it somehow.

6. Dmitry Mazurov arrested under Antipinsky Refinery case

   This story demonstrates that independent refineries are in the most problem zone in Russia. The arrest of Mazurov and the Antipinsky Refinery case are a litmus test that shows that if a refinery does not have crude production assets and is not part of a large oil producer, the balance sheet of this refinery will have huge problems. Antipinsky Refinery had enormous losses. Sberbank tries to show that the problem is about Mazurov and the management. However, there are actually many questions to the tax system. It is surprising that the Ministry of Finance, where seemingly liberal people are employed who stand for the free market economy, in reality stands for state regulation of prices of petroleum products and does its best to kill competition in this segment. It feels like we are moving towards introduction of state petrol prices, making refining an oligopolistic activity and ruining all independent refineries.

7. Gazprom sells 2.93% block of shares

   This case is interesting. Shares were sold to one buyer at a discounted price. It is evident that, despite speculations about nationalization and construction of the state capitalism, in reality state assets are actively sold. Just a reminder for those who have forgotten – a large block of shares in Rosneft was sold not long ago; this time it is Gazprom’s turn. Though, there is no reason to doubt that the buyer is “a right one”. No wonder for obvious reasons the name has not been revealed.

8. Russia suggests prolonging current gas contract with Ukraine by one year

   It is understandable that the closer the autumn and winter are, the more attention will be paid to the Ukraine case. There is no clarity in it. Elections to Ukraine’s Supreme Rada were held on July 21, and we are expecting appointment of a new PM and, possibly, a new head of Naftogaz. It is obvious that Russia’s suggestion is addressed largely to the Europeans to reduce their concerns. However, Kiev does not need it, because Russia will progress significantly next year in construction of alternative gas transit capacities and, being in a position of strength, will be able to fully dictate conditions to Ukraine. This is why it is absolutely evident that Ukraine will reject Russia’s proposal making this autumn a vibrant one.

9. Dmitry Medvedev allocates resources to build Utrenny terminal in the Ob Bay

   It means NOVATEK still very successfully lobbies allocation of state resources on its project. This decision, however, creates a conflict, because the Ministry of Finance suggests taking the money from other transportation projects, e.g. from Russian Railways. In other words, the Arctic is an interesting story – the amount of the money allocated is huge, but it is not enough for everybody, which leads to conflicts.

10. Meeting of the government commission for the Arctic

    At the meeting its chairperson Yury Trutnev seriously criticized Rosatom. This criticism confirms that the struggle for the Arctic is the struggle for administrative powers and the money. Why does Trutnev criticize Rosatom? – Because he wants to show that he is the chief in the Arctic, he must be taken into consideration, and monetary flows should go through him. Thus, not only the climate is severe in the Arctic, it is also the place of tough political ambitions and financial battles.