Top events of April 2016

The National Energy Security Fund introduces top-ten events in the oil and gas industry in April 2016 and is ready to comment on them in detail.

1. Doha talks fail

   There were big expectations before April 17. However, Saudi Arabia’s stance undermined the OPEC-2 project. Russia is unlikely to start serious negotiations with Arab states that demonstrated their outright inability to come to an agreement.

2. Oil prices grow

   It was probably the main paradox in April. Despite the failure of Doha talks, oil prices did not dive. There was slight retreat only the day after the negotiations, but on the following day prices began to rise. Initially it was attributed to a strike in Kuwait. The strike stopped three days later, but prices kept moving upwards and almost reached $50 per bbl. First of all it means that traditional explanations that attributed oil prices to the balance of demand and supply do not work well. According to these patterns, the failure of negotiations in Doha should have sent a signal to the market about producers’ inability to agree and that they would not remove that excessive oil supply of 1.5m to 2m bbl/day that some analysts had been speculating about, although its existence is questionable.

3. New proposals on gas exports liberalization by independent producers

   Debates on the future of natural gas exports and the domestic market continued in April. This topic will obviously be the hit of 2016. Independent producers are not going to give up. It is about allowing them to sell natural gas abroad; selling their gas through the system of the single exports channel in particular. Apparently it is just a step towards full-fledged reforms. Ideally independent producers would like to link liberalization of gas exports to reforms in the domestic gas market. However, the struggle is going to be tough. Gazprom is repulsing attacks so far, but independent producers will not calm down.

4. Dmitry Medvedev approves increase in dividends of state companies

   In April the government seemed to make sure that dividends of oil and gas companies would be raised. There was an idea to increase them to 50% of profits calculated in accordance with the international financial reporting standards. Later, however, it turned out that state companies were capable of lobbying their interests. Restoration of world oil prices to the level of about $50 also played into their hands, since it is the price Russia’s state budget is based on. Thus, oil and gas companies began crying that additional revenues were no longer required with rising oil prices, but they needed the money for different investments. Despite the signed decrees, the government had to pull back in this issue.

5. First tanker with American gas arrives in Portugal

   The mass media immediately focused on this story claiming that Americans began forcing Russian gas out of the European market, although Russian gas has never been supplied to Portugal or Spain. They are too far away to stretch gas pipelines there – it will make such deliveries expensive. As far as the American gas tanker is concerned, unfortunately, this situation is politicized. With current prices of Russian gas in Europe LNG from America cannot be competitive. Prices are very low, just like they are low at Henry Hub in the USA. It means Americans do not have any potential to reduce prices: prices at Henry Hub are very low, liquefaction and transportation costs have dropped significantly; it is unclear how to reduce production costs further. This is why Americans may count only on political decisions in their favor. And they will be lobbying them aggressively. It is evident.

6. Dmitry Pristanskov appointed Rosimushchestvo head

   This appointment means possible changes in the pace of privatization, as Rosimushchestvo ex-head Olga Dergunova was a careful person. Despite pressure by economic development minister Aleksey Ulyukayev, she did not rush to unleash the privatization process, because she wanted to ensure herself against risks of being personally responsible for any wrongdoings. The pressure came from Ulyukayev, but if something had gone wrong, she would have been charged. Appointment of a new head of Rosimushchestvo is likely to result in acceleration of privatization, but it does not mean there will be no conflicts in this process. The main question is about the privatization pattern, but this issue has not been solved yet.

7. Russian authorities debate creation of benchmark and platform to trade Russian oil

   The idea is simple: it is necessary to form our own benchmark and sell this crude in Russia for rubles. There is some sense in this idea. It’s no secret that Russia’s Urals is not traded independently; its price is linked to Brent with $2 to $2.5 discount, although consumption of Urals oil is much larger than of Brent. But these are rules of the game. To change them you need to have oil quantities sufficient for buyers, and you need to have buyers that want to buy this oil for rubles in your territory. However, it may become a problem on quite a competitive market. This is why this plan is certainly understandable, and it has reasonable substantiation. The question is how it will be implemented amid strong devaluation of the ruble over the past 1.5 years. Such a currency cannot be trusted.

8. Finance ministry refuses to transfer excises to filling stations, tax debates continue

   The energy and finance ministries had not agreed their positions on the excess profit tax, a new tax regime, by May 1. Thus, the trend of the finance ministry beating the oil and gas industry in taxation issues continued in April. Excises were increased. Oil producers requested to change their taxation structure, but the finance ministry rejected their claim. So far the industry is losing in the taxation sphere.

9. Paris climate change agreement signed

   It is a framework document so far; it has objectives, but instruments to achieve them are not quite clear. However, the climate change issue is still a driver of the world economic development. Many things will depend on it; the climate change question will remain on top of the agenda. And this situation is very negative for hydrocarbons, because the logic is simple: the main threat to the climate is global warming caused by consumption of hydrocarbons. Thus, the Paris Agreement is a bomb planted under hydrocarbons. However, not everyone fully realizes that.

10. Gazprom agrees price correction with some consumers

    Corresponding agreements were achieved with France’s Engie and some Turkish companies. Gazprom is definitely demonstrating its flexibility in relations with clients, even with such politically difficult ones as Turkey. At the same time it is interesting that since Turkey downed a Russian aircraft in November 2015 Gazprom has had no conflicts with Turkey’s state company BOTAŞ. There were disagreements with private companies, and in April they were settled, which is very important for the gas business development. Gazprom is trying to show that it is ready to play in accordance with the European rules hoping that its tolerance will be taken into account, although the latter raises doubts.