Top events of November 2016

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

1. Arrest of economy minister Ulyukayev

   Russia’s ex-minister of economic development is accused of demanding a bribe from Rosneft for his consent to the latter purchasing Bashneft. This case is obviously considered in the context of the upcoming sale of a 19.5% stake in Rosneft. The arrest of Ulyukayev looks like intimidation of the financial macroeconomic wing on the eve of the sale of these shares or, to be precise, their transfer from Rosneftegaz to Rosneft. Rosneft head Igor Sechin probably tries to show liberals that Bashneft and Rosneft are his companies, that the future of Bashneft and Rosneft is within his competence, and they should not interfere in these processes, and they should not prevent him from privatization of these assets or from changing their owners the way he wants it. The signal is quite clear. Igor Sechin shows he is capable of making the toughest step to drive off liberals from Bashneft and Rosneft. If he finds it necessary, he will provoke a serious government crisis. The government has withstood this time, and even president Putin in his state of the nation address somewhat pulled up the law enforcement agencies urging them to stop staging anticorruption shows. Yet, the liberal camp has received the signal on Rosneft. Bastrykin and Sechin have preserved their positions; it means they can perceive this case as their success. And this success is likely to develop further, which means the government should not be surprised at new blows.

2. OPEC decision to reduce output by 1.2m bbl

   Oil prices reacted to the news by a serious rally to $55 per bbl. It has been the highest oil price this year. The concluded agreement obviously raises many questions, such as if OPEC members will manage to observe it. We should also mention the monetary factor’s serious influence. It means that not only oil producers can influence oil prices. The main intrigue is Russia’s readiness to take the responsibility and reduce its oil production for the first time in its history. Russia is ready to cut its output by 300,000 bbl per day. It is quite interesting, because if this norm is valid for a year, given that we wanted to increase output by 8m to 10m tons in this period, it means that we will have to refuse approximately 25m tons of oil. It is a significant amount. However, how Russia will honor its obligations will be decided in early December. And this issue is likely to top our December 2016 rating.

3. US presidential elections

   November actually had quite a number of breaking news events. And Donald Trump winning the US presidential race is one of them. It will have a serious impact on the energy sector. Trump is known for supporting coal and oil production. It means he is ready to support American petroleum companies. There have been speculations that Trump will give licenses to operate offshore in the Arctic and other territories. However, there is nothing better for maintaining oil production in the USA than growth in oil prices. In this regard Trump is likely to play into the hands of OPEC and Russia, as he has serious levers to make this happen. He can abolish some laws passed during Obama’s tenure that restricted the inflow of the money to speculative markets, including the market of oil futures. It will certainly drive prices upwards. However, the market will be obviously influenced by the US readiness to intensify shale oil production that becomes not sufficiently profitable at oil prices below $50. This is why no super fast and serious advance in oil prices should be expected in 2017.

4. USGS discovers giant Wolfcamp shale deposit

   It looks like the US Geological Survey has decided to congratulate Trump on his victory. However, this discovery raises many questions, given that this petroleum province is not new. Estimation of its reserves is also disputable. Russia’s natural resources and environment minister Sergey Donskoy even declared about falsification. But actually it again highlights the fact that shale oil is a weighty part of contemporary oil production, and the USA will evidently stake on its development, especially while Trump is in office.

5. EC vice-president Maros Sefcovic visits Moscow, winter package talks begin

   This visit by the EC vice-president for Energy Union means the European Commission is concerned about the current heating season. Kiev is perceived as a problem partner capable of creating difficulties this winter. Moreover, Kiev has entered this heating season with the lowest gas reserves at its underground storages. The winter package parameters have been identified, the Russian price is known. Russia is ready to provide any amount of natural gas under advance payments. A corresponding agreement is likely to be signed. Ukraine has again reaped profits, because the money to buy Russian gas will be received from Europe. Thus, Kiev has converted the gas blackmail into credits.

6. Gazprom’s subsidiary Nord Stream 2 announces tender on laying pipes in shallow waters of Germany and Russia

   The Nord Stream 2 project is entering its practical phase. Next year the project is to receive permits from countries where the pipeline’s sea section is to be laid. Yet, political resistance to the project in Europe remains. The current European bureaucracy is seriously overloaded by developments around Trump’s victory and elections in EU member-states. It is possible that we will find a compromise in the gas issue. Moreover, there are signals about their readiness for that.

7. Launch of Russia’s Urals oil exchange trade, Urals presented as new Russian benchmark

   It is a project of the Russian energy ministry. It is an attempt to restart the idea of the Russian oil benchmark. The idea is simple: Urals is currently linked to Brent with some discount that makes us lose significant money. So, the idea is absolutely sound. But it will be rather difficult to put it into practice. It is not about ensuring a certain amount of trade or a quality level. The matter is that Western traders are used to buying Urals with discount against Brent; they are used to paying less. Meanwhile, there is serious competition on the market at the moment; there is no deficit of oil. To come and say “hey, guys, we think you should pay us more, buy our oil in St. Pete for rubles”, and persuade them to do that will not be as easy as our government thinks.

8. Conflict between Transneft and oil producers over tariffs of oil transportation through Zapolyarye-Purpe pipeline

   This conflict highlights an evident problem: when the state smothers oil producers with taxes, resources become scanty, and companies start fighting each other for preferences and tariffs. This situation is a bright example of a conflict between producers and those responsible for transportation. Transneft wants to get the money to have a possibility to invest in new projects. This is why it often sets absolutely ungrounded tariffs that oil producers are not eager to pay. And it is part of a larger story, because everyone in the sector discusses the appetite of Rosneft that wants to acquire Transneft and introduce the same system in the sector as in the gas industry. The fact that there are independent producers in the gas sector does not hinder the largest gas producer from possessing the gas transmission infrastructure. We see how much discrediting evidence about Transneft has been disseminated. Yet, the company is holding the line. The appointment of former vice-president of Rosneft Larisa Kolanda as Transneft top manager seems to be part of defense tactics of Transneft head Nikolay Tokarev against attacks of Igor Sechin.

9. Rosneft, NOVATEK request gov’t to give up gas price liberalization experiment

   It is an important moment. Initially it was declared that gas consumers should benefit from reforms in the gas sector. However, since then the idea of the gas market reform has changed significantly. The main objective at the moment is that independent gas producers should benefit. Thus, consumers and prices are forgotten. Gazprom admits that gas prices may go down, but independent producers demand that it must be prevented. The letter very vividly shows that at present consumers are absolutely forgotten, unlike in the past when independent producers tried to substantiate their claims by consumer interests. And it is a sad fact.

10. Belarus intends to raise fee for Russian oil transit on Jan. 1, 2017

    It means the conflict between Moscow and Minsk is not settled. This case is comprehensive and it is obviously linked to gas supplies. We definitely do not have a clear and reliable model of relations with neighbors in the energy sphere, and Belarus still employs the tactics of transit blackmail. This case again confirms the fact that the best way to deliver Russian gas to consumers in Europe is to have direct supplies via sea pipelines. The oil transit demarche is the result of problems related to prices of Russian natural gas supplies to Belarus that is also a transit country. We cannot drop it in the near future, at least until we solve the problem of Ukraine.