Top events of May 2012

The National Energy Security Fund introduces top-ten events in the oil and gas industry in May 2012 and is ready to comment on them in detail.

1. New Cabinet formed, officials responsible for FES appointed

   Adherents of the “natural resources curse” idea received important posts in the structure of the fuel and energy sector management. In particular, Arkady Dvorkovich is responsible for FES, while new finance minister Alexander Novak served as deputy finance minister for four years. In this regard it is very interesting how they will be managing the sector that they have always considered unworthy of being called the flagship of the Russian economy. However, the first two weeks showed that Vladimir Putin is likely to be the main person responsible for the energy sector. Dvorkovich has already promised to consider the gas taxes issue soon, which means after Putin returns from his foreign trips. The relocation of former ministers into the Kremlin demonstrates where the center of making economic decisions will be. Ministers of the new Cabinet will be attentively listening to advice from the Kremlin.

2. Igor Sechin appointed Rosneft head

   Igor I. Sechin did not become part of the Cabinet but he has not lost his influence. First decisions showed that he is really capable of consolidating serious assets and property on the basis of Rosneftegaz. Certainly this does not mean that an oil Gazprom will be set up or the oil industry ministry will be reestablished (some observers already speculate about the merger of Rosneft and Transneft, but there is no logic in that); there are many rumors, but the obvious thing is that Sechin still has the most powerful resource – direct access to Putin.

3. Plan of privatizing state assets in fuel and energy sector discussed

   This is a key question. Journalists are wrong thinking that Russian elites are divided into two parts – opponents of privatization and its supporters. In reality all Russian elites stand for privatization. The main dispute is not whether to sell or not to sell, but when to sell and whom to sell. In this regard saturating Rosneftegaz with assets does not mean FES is going to be transferred to state ownership. This means the state takes its property out of one pocket and puts it into another and creates a special channel of privatization of this property, i.e. Rosneftegaz will be privatized according to schemes that will not be accessible for such people as first deputy PM Igor Shuvalov or deputy PM Arkady Dvorkovich. This is a red flag zone that the government has no right to interfere into.

4. Disputes around gas sector taxation

   The month was dynamic. A decision that independent gas producers will be deprived of preferences in 2015 seems to have been already made. The minerals production tax is growing, but this tax on independent producers does not grow as fast as on Gazprom. Now there are attempts to level these companies. This means the state has little money, and it has to find reserves wherever possible, even among its favorites like NOVATEK – the taxation pressure on it is rising. However, gas companies seem to have launched a coordinated attacked. In late May they declared this decision was destructive for the industry. Deputy PM Dvorkovich has not expressed his opinion yet. On one side, he is supposed to promote increase in taxes being an adherent of the “mineral resources curse” theory. On the other side, he is a deputy PM for FES and he is responsible for this sector. However, there is also finance minister Anton Siluanov, who is an administrative follower of Alexey Kudrin; he still insists on this way of solving the problem. This question may be settled in the way typical in contemporary Russia – after Vladimir Putin returns from China, he will decide who is right and who is wrong.

5. Situation on world oil market amid expectations of new wave of crisis

   Oil prices began seriously falling in May: the actual loss is 17% over the past month. Prices dropped below the psychological level of $100. But it is too early to panic, because objective premises point to possible restoration of oil prices in the medium-term perspective. This certainly does not mean that oil will not become cheaper during some short periods. But for us possible decline in production is much more important than oil prices going down. This raises much more issues, and this is what should really scare us, not the fact that oil prices are below $100 per barrel.

6. Rosnedra revokes Trebs and Titov licenses from Bashneft Polus

   The decision is very indicative; it was made on the first day of work of the new government. This was a response to a request of oil companies for liberalization (there was quite a powerful pressure regarding access to offshore deposits). LUKOIL even wrote his own variant of amendments to the law on subsoil but the position of state companies is fundamentally different. Besides, state companies have influential patrons in the sphere of licensing policies. It is absolutely clear what the position of new authorities of the natural resources ministry will be. They demonstrated it when it was necessary to remove LUKOIL from the project and, possibly, add one of the state players.

7. Mikhail Fridman retires as TNK-BP CEO

   The story began four years ago, and in late May it developed in an unexpected way: Fridman decided to leave his post of chairperson of the management board. In response BP declared it was ready to sell its block of shares. Many experts rushed to declare that everything was clear: Sechin will come and Rosneft will become a shareholder. We think this scenario is not that definite. So far we can fix the following moments: relations between Fridman and the Britons are very complicated; Fridman intends to attack the Britons, he put forward conditions of sale of his stake, which is exchange for BP shares. In fact, Fridman suggests getting back to the scheme stipulated in the BP-Rosneft deal, but it is Fridman now instead of Rosneft. A 50% block of shares in TNK-BP is a very sensitive asset for BP; this is one third of the output volume, one fifth of revenues and a substantial part of reserves on the balance. Actually if this company is sold, BP’s capitalization will sharply drop, although it is clear that the deal can be beneficial. Some time ago a 50% stake in TNK-BP was bought for $7bn, and even during the BP-Rosneft deal the company was worth $40bn. In this regard, BP investments were paid back long ago, but it is still too early to close this case.

8. Expectations of new wave of fuel crisis in Russia

   The elections are over, moratoriums are over, and we again face a possible increase in gasoline prices. However, declining oil prices are playing against oil producers now. Obviously there will be a lot of questions like why oil is getting cheaper but gasoline prices are rising. It will be very hard for oil producers to explain that they were freezing prices for five months before Vladimir Putin’s inauguration and now they just need to somehow compensate their losses. It is clear that FAS and other regulators will be attacking them. So, we think that oil producers will simply wait for the right moment. They can calculate very well: as soon as world oil prices start going up, as soon as they have a pretext, gasoline prices will certainly jump. Moreover, the oligopoly on the Russian fuel market has not changed.

9. Rosneft, Statoil sign strategic partnership accords

   The second foreign participant of Shtokman received a new project in Russia (previously Total entered the shareholder capital of NOVATEK and joined Yamal LNG). There were many rumors that Statoil would withdraw from Shtokman. This has not happened; the company still intends to take part in this project. Now both Statoil and Total have alternative projects, and they will have more possibilities to press for taxation preferences. Well, nonresidents keep coming to the Russian FES, and this is a positive sign. However, the key question is when these projects will be implemented? Foreigners join complicated projects, and it is not ruled out that they are simply looking for variants of putting reserves onto their balances to raise capitalization. All projects they speak about will become profitable next decade at best, if they ever get implemented.

10. Moscow-Kiev gas relations sharpen again, Kiev attempts to diversify gas supplies

    Kiev expected that a big gas accord would be signed in May; they expected concessions from Moscow. But Moscow does not want to yield, and Ukraine is stubborn. The two presidents are scheduled to meet in June. But the window of opportunities is closing. It is hard to image how Ukrainian president Viktor Yanukovich will divert his attention from football (Ukraine is co-hosting the 2012 UEFA Cup in June, which is a very significant event for Kiev). Thus, one should not expect a gas agreement to be signed in June. Later Ukraine will be readying for elections. After the elections the Supreme Rada will be dominated by the opposition, as Yanukovich has done everything to lose the parliamentary elections. Imprisoning Timoshenko was a huge political mistake, and the retribution for that will be severe. It will be impossible to ratify a decision on Gazprom entering the shareholder capital of Ukraine’s gas transportation system without having the majority in the Supreme Rada. If it is impossible to enter the GTS capital, Russia will not provide a gas price discount. It is a vicious circle. In December construction of the sea section of South Stream will start. Thus, if it goes like that, Ukraine may lose the status of transit state for Russian gas. This will definitely cost us a lot. For Ukraine it will be even more expensive. But realizing all economic losses Kiev keeps talking about alternative sources and energy independence. Everybody understands this is bluffing, but they continue repeating these plans.