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Top events of August 2020

The National Energy Security Fund introduces top-ten events in the oil and gas industry in August 2020 and is ready to comment on them in detail.

  1. Belarus unrest following presidential election, prospects of energy relations with Russia

    Despite Aleksandr Lukashenko’s openly anti-Russia campaign before the election, current developments leave Moscow with no other choice but to support him, because alternative variants look even worse. There are fears of the “Orange Revolution” and other nightmares that haunt the Kremlin every time when such things happen in former Soviet republics. To assist Lukashenko means to take him out of the trap he has dragged himself into, including the financial trap. This is where the question of energy supplies arises, as it is naturally the sphere where Russia will have to assist. Lukashenko will probably ensure restructuring of over $300m in gas debts and is likely to get some preferential supplies of oil. Minsk does not have and will not have money to spare. Some expect this assistance to make the Belarusian economy more dependent on Russia. Moving oil transshipment out of Lithuanian ports is discussed. The problem is that Belarus sells major part of its oil products to Ukraine, and if these supplies are canceled, there will be no market for them. The second problem is that transshipment in Lithuania is economically, not politically, substantiated; therefore, if such transshipment operations move from there, it will be necessary to somehow compensate additional costs of transshipment through Ust-Luga. Thus, things are quite complicated. There was a feeling that we were trying to nail down Lukashenko by not giving him preferences, subsidies and setting high gas prices in 2020. However, suddenly everything changed instantly. Now Lukashenko has to be assisted; otherwise, the pro-West opposition may come to power, and Moscow will have to face all the consequences.

  2. Discussion of gas supply development in regions

    The topic was in the spotlight in August following a proposal of the United Russia party to finance gas supply development. Back in May, President Vladimir Putin made 11 instructions to speed up construction of gas supply capacities. Besides, Putin suggested considering variants of connecting households to gas supply networks for free. This immediately created a big political intrigue. The United Russia party found a political opportunity in gas supply. It is a possibility not only to hype on this topic, but also a possible variant to gain some control over Gazprom. It is no coincidence that this question was raised by Aleksey Kudrin at his meeting with the President; the Audit Chamber chief declared about a record low pace of gas supply infrastructure development. This topic will cost a lot to Gazprom. Nevertheless, on the other side, it is the topic that may protect the gas giant from restructuring, because no gas supply development will be possible if Gazprom is divided.

  3. Vladimir Putin receives Igor Sechin

    It was their third meeting in 2020. The Rosneft head attempts to demonstrate to the oil and gas community and political actors that he has restored Putin’s favor after the March oil price war that sent Russia’s Urals oil prices to critical lows and created a very serious budget and financial crisis. These days Sechin is very careful in his requests to the head of state, which is very untypical of Sechin, who in the past would demand exclusive conditions for his company. Though, the March failure makes itself felt – in his report to the President, Sechin focused on achievements of Rosneft that are, however, rather conditional. For instance, he brought a bottle of new oil, although several years before he had brought “new oil” in a different bottle and from a different field that has not been launched since then. Thus, the future of crude of the Vostok Oil project is a big question.

  4. Excess profit tax debate

    In a letter to Vladimir Putin, heads of oil companies requested the President to reject proposals of the Ministry of Finance to alter parameters of the excess profit tax. The ministry’s position is obviously incorrect, as the EPT was introduced to last for a long time, and it was said to be the tax regime that might replace the system of preferences. The Ministry of Finance agreed that it should be tested. However, a year later the ministry wants to revise its conditions and demands that oil companies allegedly should pay back some 213bn rubles not soundly elaborating on why they should do that. On one side, Putin is unlikely to go into details of calculations, and he does not have a trusted person who could independently review the opinion of the Ministry of Finance and the point of view of oil generals. On the other side, Putin is afraid of being left without financial reserves; therefore, it is possible that arguments of the Ministry of Finance may prevail this time.

  5. Dmitry Medvedev says it is necessary to develop internal and external response measures in case the EU introduces carbon border tax

    Brussels is planning to impose a tax on imported goods with high carbon footprints. This question is extremely important for Russia that exports hydrocarbons to the European Union. Possible losses are not clear at the moment, but their estimated scale is so significant that Medvedev has taken control over this question. Meanwhile, it was PM Dmitry Medvedev who approved the decision to sign the Paris Agreement even without its ratification by the Russian parliament. Back in 2015 it was clear that the question was not about climate values, but about the money.

  6. 2nd stage of OPEC+ deal begins on August 1

    This stage stipulates some growth in production against the May to July period. It is a serious moment. The question is not even about OPEC+ overestimating the market demand. Given that oil prices were fluctuating within $42 and $45 this August, there was no overestimation, and these levels were not at all bad, compared to this March. The question is how effectively Russia will manage to restore its output after massive suspension of wells.

  7. Gazprom posts H1 statements

    The results were disastrous against 2019 parameters. Actually, they were quite expected. Definitely, the year 2020 has been very sad for producers and exporters of hydrocarbons – natural gas prices plummeted as a result of the COVID-19 pandemic and many other factors, such as warm winter, LNG inflows on the market and expectations of a gas war with Ukraine – the latter did not happen but natural gas had been accumulated in underground gas storages. Gazprom recorded losses in Q1, but H1 results were better in general with some profits fixed. The main thing is that prices began climbing; at the end of H1 the average price of supplies reached $110. This is already some progress.

  8. Turkey announces discovery of a large gas field in the Black Sea

    This case proves that Gazprom is having uneasy time not only in the European Union but also in the Turkish market. There are many reasons to doubt this discovery. Nevertheless, the fact that Turkey is engaged in political geology proves that Gazprom is facing very difficult gas talks. Ankara insists on changing contract conditions to amend the pricing formula and reduce prices. Turkey argues that Gazprom should not charge take-or-pay penalties and wants this provision to be amended. Meanwhile, Gazprom has some formal arguments – this year among violators of the take-or-pay rule there are not only private firms that can escape paying penalties but also the state company Botas. This year the company will not meet its take-or-pay obligations, and corresponding fines may be quite significant. Moreover, Russia has some strong political arguments, given that Turkey has again fallen out with the EU. By the way, the latest dispute is caused by offshore geological prospecting – this time in the Mediterranean Sea next to Cyprus.

  9. Saudi Arabia reduces oil prices of September deliveries to some regions

    The question is about the Saudi behavior and whether it is possible to consider them as long-term partners. Their discounts are another hint at a possibility of a price war. The latest war was very unpleasant for us, and we had to agree to a new OPEC+ deal. The Saudis have some arguments, and they demonstrate them from time to time.

  10. Saudi Aramco freezes investments in $10bn refinery in Liaoning, China

    It is an interesting case showing competition not only on the crude oil market, but also on the market of petroleum products. The concept of decline in oil consumption implies that oil companies should pay more attention to the petrochemical sector, i.e. to invest in refining and value-added products. In this regard, Saudi Arabia considers the Chinese market as very promising. However, world oil prices observed these days have seriously changed the conjuncture. On the other side, this situation provides for looking at the Chinese market not only as a market for feedstock, e.g. crude oil and natural gas, but as a market that needs processing capacities that can be also used to make profits. We obviously have had some projects of participation in the Chinese petrochemical sector. However, China is a very complicated political partner – it is something for us to think about.

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Analytical series “The Fuel and Energy Complex of Russia”:

Druzhba Pipeline Accident: Key Implications
New OPEC+ Deal and Future of Oil Business in Russia
Gazprom on the background of external and internal challenges
Regulation of Oil and Gas Sector in 2019 and Prospects for 2020
Fiscal Policy on Oil and Gas Sector: Revised as Often as Wikipedia
The tax system in the oil and gas sector continues to undergo radical changes. The beginning of 2019 saw the introduction of a new tax regime: additional income tax. That experiment was supposed to start migration of the oil industry to an innovative principle of taxation: on profit, not revenue. It seemed that a new main road was found. In the same year, however, the Finance Ministry launched an overt offensive against AIT. The fear of loss of government revenue now is more powerful than the threat of causing oil production to collapse in the medium term because of a tax system that does not stimulate investment. The Finance Ministry would strongly prefer to speed up the tax manoeuvre completion that earns the state budget additional money. Oil and gas companies respond to this with individual lobbying, attempting to wangle special treatment for their projects.

All reports for: 2015 , 14 , 13 , 12 , 11 , 10 , 09 , 08 , 07

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