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Top events of Jule 2021

The National Energy Security Fund introduces top-ten events in the oil and gas industry in Jule 2021 and is ready to comment on them in detail.

  1. Nord Stream 2 almost completed

    Both lines of the gas pipeline are ready by 99%. However, it only marks the beginning of the second part of the NS2 saga with the story developing around conditions of using NS2 capacities. Washington that has practically acknowledged the fact of the project’s completion claims that it will make Europeans regulate application of the NS2, and its filling will depend on the volume of gas transit via Ukraine. In July, the sides indicated their positions. The USA and Germany signed a declaration on Ukraine gas transit and the Nord Stream 2 indicating the US desire to ensure extension of the current transit contract for another ten years after it expires in 2024. And it seems that prolongation of its current conditions – 40 bcm of annual gas transit via Ukraine – is also anticipated. Russia obviously does not need such quantities. Moscow has said it is ready to retain gas transit via Ukraine if its conditions are commercially attractive and, most importantly, if there is guaranteed growth in demand for Russian gas. The latter is undoubtedly more difficult to guarantee amid Europe’s struggle against long-term contracts and its focus on diversification of gas imports. Therefore, we are going to have rather difficult talks. There is still some time left. On one side, the contract expires in 2024. On the other side, the pipeline is laid, and it is now necessary to define conditions of its application.

  2. EU’s top court rejects Germany’s appeal on OPAL

    It is no coincidence that the ruling came in July, because the OPAL case is a precedent, to some extent, that can be applied to the Nord Stream 2. The matter is that the Nord Stream 2 falls under regulation by the Third Energy Package. Europe purposefully expanded its law to cover offshore pipelines. The owner of a pipeline has the right to fill 50% of the pipeline’s throughput capacity. However, there are opportunities to expand this share. One of the options is gas auctions. Some time ago the Court of Justice of the European Union allowed OPAL owners (in fact, Gazprom) to buy 30% of the pipeline’s capacity through open season procedures in addition to 50% Gazprom is entitled to. However, Poland certainly protested, the court supported Warsaw and reinstated the 50% limit at OPAL. There was an attempt to appeal against this ruling, but the court rejected the appeal, although gas actions fully correspond to the European law. However, it is necessary to look at things objectively. Probably, when it is time to decide on the NS2 capacity utilization, the old Latin saying “Let justice be done though the world perish” will not work. Unfortunately, the OPAL case proves that the European Union politicizes its law. It is the precedent that sets the sides for uneasy negotiations on the Nord Stream 2.

  3. OPEC+ ministerial meeting

    The meeting resulted in quite serious changes in production quotas. The decision was indeed great. Russia’s expectations had been much more modest, compared to the resolution to increase output by 400,000 bbl/day every month. It means Russia will reach the output level recorded before the deal already next May. To be precise, Russia can reach it if its quota is expanded to the April 2019 level. And the quota may get enlarged further. Certainly, there are many disputes around it. Some think that the decision is not that serious, and the growing market will digest it. Others believe that the COVID-19 factor is still dominating, and the decision to raise output is indeed serious. Yet, why do we think that the deal will remain intact until the end of 2022? The deal is formally extended until the end of 2022, and its conditions seems to have been defined. However, this year has demonstrated that conditions can be regularly revised. We are pretty much confident that the deal will not stay the same until the end of 2022, and it will be corrected depending on the conjuncture that will be also changing.

  4. EU introduces bills designed to execute the green policy

    Russia is certainly interested in the Carbon Border Adjustment Mechanism that should regulate taxes to be paid by Russian exporters. The first impression is that everything is not that bad – unpleasant changes could have been much more extensive, and they could have been put into practice much quicker. Only as of 2026, the EU will start charging taxes; in the meantime, it will attend only to the so-called Scope 1 (direct carbon emissions under control of a producer), while indirect greenhouse gas emissions from electricity purchased and used by a producer, and emissions from all other sources that the producer does not own or control (Scope 2 and Scope 3 respectively) will not be covered. Nevertheless, this arrangement will be quickly altered. Europeans have demonstrated that they can creatively interpret their law to meet their personal interests. Thus, the case is not as simple as it seems to be. When Europeans observe some resistance of counteragents, they make traps – they first apply intimidation, then ease conditions and then again tighten the screws. We believe this case will follow the same scenario. At the same time, adherents of immediate introduction of carbon payments have become noticeably more active in Russia, and it is another remarkable topic.

  5. Deputy Minister of Finance Aleksey Sazanov comments on carbon topic

    Mr Sazanov has said there is no necessity for introduction of the carbon tax in Russia. It is an indicative position. On one side, such activists as Chubais and Edelgeriyev are actively promoting introduction of carbon payments, although the law passed recently stipulates only introduction of a system recording emissions, not charging carbon taxes. Sazanov’s statement is positive for the oil and gas sector. It is kindly implied that oil, gas and other producers should not worry, because the government is not going to introduce carbon taxes in Russia. However, this position is not fully sincere, as it is not what it looks like. Simultaneously, Aleksey Sazanov promises that there will be no easing of the tax regime for oil producers in the near future. At least, as long as oil producers are bound by the OPEC+ deal, taxation will not be relaxed. By the way, this position is also applied to the tax on viscous and highly viscous oil, although President Vladimir Putin supported its easing. Nevertheless, the Ministry of Finance argues that oil producers should not expect it to happen. However, on a more positive note, the ministry declares that it will not support the carbon tax. By the way, the latter is an additional tax! Meanwhile, the tax burden on the oil industry is already very significant. What the Ministry of Finance really implies is "there is nothing to worry about. However, if you keep demonstrating your discontent, we may join the camp of Chubais and support the carbon tax introduction”. And this will finish everything off. If we want to finish off the sector that ensures a third of total revenues of the consolidated budget, it is probably the right path to follow.

  6. Anatoly Yanovsky leaves Ministry of Energy

    Actually, there was a chain of moves in the HR sphere. Yanovsky not only retired as a deputy minister but also replaced Kirill Molodtsov, who had been an aide to Anton Vaino, head of the Presidential Executive Office, and had supervised the work of the presidential commission for the fuel and energy sector. Yanovsky supervised the coal industry for 20 years during many ministers. It is the first replacement of the government supervisor of the coal sector during Vladimir Putin's era. It means only one thing: there is struggle for control over this sector. We will continue to monitor who will be the next coal supervisor. As a rule, when such HR decisions are prepared, a successor is immediately named – one person leaves, and another takes his post. In this case there is no successor; at the end of July this post was marked as vacant on the website of the Ministry of Energy.

  7. Wholesale petrol prices climb to 60,000 rubles per ton

    There have been speculations about banning petrol exports. The Ministry of Finance claims this ban will not affect the state budget. It is understandable that this topic should be controlled on the eve of the upcoming election. Voters are nervous, and they should be signaled that everything is all right. However, the most remarkable thing is that retail prices are holding steady. It seems there is some informal compromise: the government allows vertically integrated oil companies to raise wholesale fuel prices and collect the money from independent filling stations that buy the fuel on the wholesale market and correspondingly have to reduce their profit margin. Independents claim that they are about to collapse. Though, they have been saying that over the past five years, and they have not collapsed yet. It means they also have some potential to expand revenues or profits. It is not difficult to imagine what instruments they can employ to raise profits. The simplest way, of course, is to reduce the quality of petrol to save costs. We do not rule out that the situation on the fuel market is already developing in this way. It is absolutely evident that the government will not allow increase in petrol prices before the September 19 election. We will watch what instruments will be employed in the near future, and whether Soviet-type methods of regulation, like banning exports, will be introduced.

  8. Gas prices surpass $500 per 1,000 cu m in Europe

    There were high gas prices throughout July. It is an important factor that demonstrates operation of the free market. Europeans always claimed that the spot market pricing is very important and attractive for clients. And here it is. Competition is a very simple thing. At the beginning of the year gas prices jumped in Asia luring LNG suppliers. Therefore, LNG imports in Europe fell significantly in H1 2021. It is the reason for high prices coupled with hot summer. This is how the free market works. It is the invisible hand that can take the money out of anybody’s pocket.

  9. Government commission for hydrogen established

    On one side, it reflects the general hype about the new energy that hydrogen is part of. There are many actors willing to obtain state subsidies for hydrogen, as the government is ready to support this sphere. On the other side, relevant questions are not trivial. As far as the Green Deal is concerned, it is necessary to point out that Europe has already made tough promises about the new fuel and intends to refuse hydrocarbons. Obviously, many targets are aspirational, and many are not attainable. However, the general idea is that it is necessary to convert transport to hydrogen. So, what can Russia offer? The main question is that the new commission should immediately start negotiating with Europe, because, for instance, Europe refuses to recognize blue hydrogen. It is totally incomprehensible from the point of view of fighting climate change. Blue hydrogen is produced from methane with simultaneous capturing and burying of greenhouse gases. Its carbon footprint is not worse than that of green hydrogen. Nevertheless, Europe categorically refuses to accept it. By the way, it is interesting that the government commission has even a Deputy Minister of Foreign Affairs, although, to be honest, the Ministry of Foreign Affairs has never produced any great results at energy talks.

  10. Ministry of Industry and Trade drafts plans to localize production of LNG equipment

    It is another typical case – the government actively subsidizes LNG production and devises substantiations to do so. The initial claim was that the LNG is the future of the world gas market, and, therefore, we should produce it, and the state should facilitate this process, because it is probably not very profitable at the start. Then a new idea was put forward: let’s organize manufacturing of domestic equipment for the LNG industry and promote import substitution. There will be the same story regarding hydrogen. There will be actors willing to utilize state subsidies and claiming that it will facilitate industrial growth. Of course, it would be better to apply more commercial approaches to the energy sector instead of relying on Keynesian and political methods.


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

State regulation of the oil and gas sector in 2023, 2024 outlook
Gazprom in the period of expulsion from the European market. Possible evolution of the Russian gas market amid impediments to exports
New Logistics of Russian Oil Business
Russia’s New Energy Strategy: on Paper and in Fact
Outlook for Russian LNG Industry

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

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