Top events of March 2009

The National Energy Security Fund introduces top-ten events in the oil and gas industry in March 2009 and is ready to comment on them in detail.

1. EU and Ukraine sign declaration on modernization of Ukraine’s gas transportation system (GTS)

   EU members have long been concerned about the issue of modernization of Ukraine’s gas transit routes. Yulia Timoshenko has in fact deceived Putin and now Russia may refuse a $5bn credit promised to her. Anyway, the Ukrainian PM has to postpone her visit to Russia. However, there are big doubts that the EU is really ready to invest in Ukraine. If one reads the text of the March 23 declaration attentively, it may turn out that Europe does not take any obligation at all. The document seems to be politically motivated: the European Commission is trying to show that it has not left the January gas row unnoticed and has started taking measures.

2. Construction of Nabucco pipeline is questioned

   There are doubts about laying the Nabucco pipeline – this is not about a usual delay in timeframes but about freezing the project as such over the deficit of resources because the project is not a priority, though it sounds strange. It seems that repetition of a Russian-Ukrainian gas crisis does not scare Europeans as much as the prospect of investing infinite resources in the expensive pipeline whose filling is doubtful as there is no clarity over its resource base. Nabucco has also political problems. As a result, Europeans have even invited Gazprom to join the project. Yet, it would be more logical to consider integration of Nabucco and South Stream into one project rather than speak about Russia’s participation in Nabucco, because neither the EU nor Russia is able to independently implement both projects.

3. Surgutneftegaz buys stake in Hungary’s MOL

   It is no secret that Surgutneftegaz is experiencing problems with refining, i.e. the company produces much more than it refines. But the matter is that oil refineries in Europe that belong to MOL do not accept Surgutneftegaz’s oil. In other words, currently these assets are not integrated into the company’s production chain. Everybody expected Bogdanov’s company to buy assets in the Russian Federation and some production and refining projects were named in this regard. Nevertheless, resources were unexpectedly invested abroad. It is possible that Surgutneftegaz is concerned about the fate of its business. Bogdanov may possess some information that prompts him to make such unexpected decisions. More news may come from the company in the spring.

4. Sistema buys controlling stakes in Bashkortostan oil enterprises

   According to preliminary estimations of capitalization, Sistema paid some $2.5bn for the Bashkortostan assets. This is quite a substantial amount for Sistema but the company is their temporary owner. It bought assets not in its own interests. The most probable candidates to purchase these oil assets are Surgutneftegaz and Gazprom Neft so far.

5. Gazprom declares cut in taking gas from independent gas producers into its gas transportation system over drop in demand

   The global decrease in the demand for energy sources makes the Russian gas industry reduce its production. Since the beginning of the year only Gazprom has been reporting a decrease in the output while independent players have been increasing their production. Meanwhile, the latest statistical data worried the second largest gas producer, Novatek: the March production dropped by over 11% compared to the February results. Gazprom proposes to forget about Putin’s personal demand he made last summer to liberalize access of independent producers to Gazprom’s pipelines. Now liberalization is not even discussed.

6. Deputy PM Igor Sechin says at OPEC conference in Vienna that Russia may consider joining this organization if “all agreements are observed”

   Contrary to expectations of market analysts who predicted an unavoidable new restriction on oil output, the cartel did not make such a decision. Thus, OPEC has acknowledged the obvious fact – the organization has lost the ability to influence pricing policies. Under these circumstances deputy PM Igor Sechin’s intention to drag Russia into this club of oil exporting nations looks quite strange – we are proposed to join the organization whose influence is declining. Sechin tried to act as a radical reformer. In particular, he called on shifting to long-term contracts. But it is clear that OPEC is not eager about this idea. Thus, Russia’s accession to the oil cartel so far resembles an operation covering decline in production in the country.

7. Russian Energy Ministry drafts General Plan of Gas Sector Development till 2030 and submits it for consideration to Russian Government

   The draft has not been published yet because some changes are likely to be introduced into it following a meeting of the government commission. The general plan of the gas sector development till 2030 was drafted by Gazprom last autumn. It is not yet clear how substantially it has been amended but considering Gazprom’s strong influence on the energy ministry the new variant of the plan will almost fully correspond to that of Gazprom. So, Sechin may well use this occasion for another attack on ‘Petersburg lawyers’.

8. Relative stability of oil prices

   Despite forecasts of a possible fall in oil prices in February to March, they did not plunge. Though, they are not really growing either but fluctuating around $50 per barrel. The market is under pressure of short-term trends related to decline in the demand for energy sources. On the other side, everybody realizes that there are fundamental preconditions for growth in prices. First of all, this is attributed to the growing number of the population. Besides, oil production at traditional deposits is decreasing. In this regard there is a necessity in new huge investments in projects. But this year will be a more difficult year for the industry, resulting in declining investments in 2010, which will become a signal for growth in oil prices.

9. Russia-Turkmenistan negotiations on highest level

   Russia is trying to struggle against Europe over Central Asia with no less persistence than over Ukraine. As a result, this is to the advantage of Central Asia states. The introduction of the Europe-less-transit principle of pricing is their serious victory. If one believes Putin, who declared that Russia would pay $340 per 1,000 cu m to Turkmenistan in Q1, it turns out that Russia simply subsidizes Turkmenistan. During a visit by Turkmen President Gurbanguly Berdymukhamedov an agreement on the East-West gas pipeline was expected to be signed. The pipeline is to deliver gas to the Prikaspiysky gas pipeline leading to Russia; its construction is scheduled for 2009. However, the document’s signing was postponed. Experts say about Russia’s defeat while the Kremlin is trying to present it as a temporary failure. But it is a big question whether Russia needs to invest almost $1bn in this project.

10. Rosatom State Corporation and Siemens AG sign MOU in Berlin stipulating creation of JV in atomic energy sector

    Vladimir Putin personally gave his blessing to the creation of a new atomic giant. The united company may become a leader on the world market of nuclear energy. However, nobody is rushing to clearly define the format of this partnership.