Top events of September 2018

The National Energy Security Fund introduces top-ten events in the oil and gas industry in September 2018 and is ready to comment on them in detail.

1. Dmitry Medvedev chairs a meeting on oil industry development

   Participants of this meeting discussed taxation in the sector. Taxation actually has been the main topic since late summer. There are two approaches to this question that traditionally confront each other. The Ministry of Finance believes that the task the Russian President has set is to collect the money from all possible sources to implement his inauguration decree and to ensure a breakthrough. Where to get the money? – Obviously from oil companies. As a result, there is acceleration of the tax maneuver and the case of excises. On the other side, oil producers are trying to make it clear for the government that it should not address oil producers all the time when the money is needed, because sooner or later it will lead to major decrease in oil production. These questions were mentioned at the meeting presided over by Dmitry Medvedev. Both Aleksandr Novak and Dmitry Kozak spoke about a possibility of serious decline in oil production, in fact a 50% drop in a short period of time. Moreover, the sector needs to invest in more complicated projects with higher production costs. The sector is trying to be heard by the government. Oil producers have managed to secure the so-called dampening payments approved by the government head. We will see how the tax system will look in the end. Contrary to promises of the Ministry of Finance to not change tax conditions, according to plans for 2019, the situation is unlikely to remain stable, as it will be changing dynamically.

2. Situation on the world oil market, growth in oil prices

   The market’s reaction to November sanctions against Iran has been already included into oil prices. Such things happen quite often: an event has not taken place yet, but oil speculators have already reacted to it. Besides, we have to take into account the situation in Venezuela and Libya. Growth in production in North America and Brazil is not that strong to offset all those negative factors. However, the main factor that pushes prices upwards is Iran. Thus, when sanctions are declared, there will be a risk of the market becoming overheated. On one side, prices started rising earlier. On the other side, they were rising for several months before the expected event, which positively contributed to revenues of the Russian state budget.

3. Russia’s Minister of Energy, US Secretary of Energy negotiate

   In our opinion, this meeting was directly related to sanctions against Iran, although nobody admitted that. The main topic of current negotiations between the United States and Russia is Iran. Russia buys oil from Iran. It looks strange, but it is true. Iranian oil exports could be actually legalized through Russia, i.e. we could increase purchases of Iranian oil and sell it on world markets as if it is the Russian crude. The USA that has seriously taken on Iran obviously wants to prevent this possibility. Therefore, the USA is very much interested in Russia in this regard. The question is whether we are ready to undermine our Iranian partners? It is an open question. We will know the answer at the end of the year.

4. Nord Stream 2 pipes laid in Finnish waters

   By the way, this case is directly linked to the previous topic. Parameters of the Russia-USA deal are clearly outlined: we reduce purchases of Iranian oil, and the USA does not impose sanctions on the Nord Stream 2. Another similar and very important event in September was Donald Trump’s statement that Washington was not planning to impose restrictions on the Nord Stream 2 so far. He mentioned that in the presence of Polish President Andrzej Duda who was absolutely stunned by this statement. He could not expect it from the US President, because he does not understand very well the logic of the big deal.

5. Report on domestic gas market reforms completed

   Information about the report began circulating long ago. Aleksey Kudrin ordered this research from RANEPA that subsequently hired American consulting companies to do the job. It actually turned out that the mountain has brought forth a mouse, because nothing new can be found in this report. It contains largely old theses of independent producers about how bad it is to live on the monopolized market and how quickly everything should be changed. However, Putin’s signal about impossibility of reforms on the domestic gas market at present was probably heard, and the report has a more careful recipe, e.g. to maintain the current system of the single exports window, but independent producers should have access to revenues from exports depending on the size of their natural gas output. Thus, it is an old story, and the report is unlikely to become a starting point of fundamental changes on the domestic gas market. Thus, the sector was more interested not in the report’s content but who had paid for it. Kudrin vaguely remarked about some business but did not specify which. It is still a secret whether it was NOVATEK or Rosneft.

6. NOVATEK outpaces Gazprom in market value

   This case shows that the market value does not mean a lot, although investment bankers just idolize it and argue that the market value is the main parameter of effectiveness. However, Gazprom produces seven times more hydrocarbons than NOVATEK does, and the gas giant’s reserves are massively larger. In terms of profits (it is possible to produce a lot, but it can be unprofitable), Gazprom’s profit is five times larger than that of NOVATEK. We indeed understand that NOVATEK pays interim dividends, and it has a buyback program. The company indeed reaches out to potential owners of shares, unlike Gazprom that is more careless about it. Therefore, the company is the victim of its carelessness, because, although the market proves that capitalization is a somewhat artificial parameter, everybody wrote about this case, and there was much stir around it.

7. New conflict between Rosneft and LUKOIL

   Rosneft through Bashneft complained to Russia’s Federal Antimonopoly Service of too high prices of oil transshipment at the Varandey terminal. It is not a new story. It is even possible to say that it is a traditional way for Rosneft to try to solve its problems at the expense of others. If the company does not have enough money, it starts thinking about who can pay.

8. A series of meetings of NOVATEK with potential suppliers of equipment for Arctic LNG-2

   NOVATEK is clearly trying to position Arctic LNG-2 as a project that will be actively buying Russian equipment. The idea is very simple. There is currently a discussion whether the state should continue supporting LNG projects in the Arctic. “Of course it should,” NOVATEK claims. Previously the main thesis was: we will bring Russian LNG to the market, and it is important, because LNG is the future of the gas market. The current thesis is different: we will create a Russian technology of LNG production, will load capacities of Russian manufacturers, and create many new jobs. Such meetings should support the thesis. In reality the situation with domestic purchases is much more complicated.

9. Gazprom approves expanded investment program

   Gazprom’s investment program is indeed expanding at quite a fast pace. It is also a response to activities of NOVATEK. Gazprom is nervous; it sees that competitors are demonstrating their effectiveness to Putin by showing how they create new technologies and buy Russian produce. Gazprom is kind of saying: “We are also investing, we are buying Russian pipes. Look at our investment program.” By the way, it is a good argument in a dispute with the Ministry of Finance over taxes and dividends. Taxes are growing, and Gazprom demonstrates that it is unable to allocate 50% of profits on dividends, because it has a huge investment program.

10. Meeting of Russian and Belarusian leaders in Sochi

    Russia again attempted to offset losses on the Belarusian direction, and Belarus tried to avoid it. The accelerated tax maneuver and the lifting of export duties in favor of the minerals production tax will cause serious losses to Belarus over understandable reasons. Oil exports will not be taxed when the crude crosses the border, instead, the whole oil produced in Russia will be taxed – all taxes will be paid in Russia. Belarus currently receives Russian oil without paying export duties, which makes prices lower. According to the new arrangement, Minsk will not be able to get these tax preferences any longer. However, Belarus managed to convince Russia that it is necessary to give certain discounts. At present, Belarus has a possibility to resell Russian oil. It does not happen physically – the difference between world prices and Russian prices is simply transferred to the Belarusian budget. In fact we simply donate the money to Minsk. This form of support continues. Belarus has managed to obtain advantageous conditions again, because politics sells: “if you do not give us the money, we will leave for the West”. We pay great attention to such threats after the Ukraine case. And Minsk certainly makes use of this opportunity.