Top events of January 2017

The National Energy Security Fund introduces top-ten events in the oil and gas industry in January 2017 and is ready to comment on them in detail.

1. OPEC, non-OPEC states implement oil output resolution

   A particular attention is paid to this event. Many observers believe that oil prices depend on implementation of this accord. In January, commitments under this agreement were achieved and even over-fulfilled. Russia was to reduce its output by 100,000 bbl/day, but cut it by 117,000 bbl. The agreement implementation discipline remains high. Fears of low oil prices make producers cut oil production, which affects prices positively. Oil prices fluctuated between $55 and $58 in January, which is pretty high these days. At least, it is higher than planned in Russia’s state budget. Everything above $50 per bbl is good for us. However, the agreement will generate more questions, especially by the middle of the year. Yet, at present the arrangement works and fulfills its objective.

2. Rosneft-Transneft legal dispute

   Rosneft refused to sign a schedule of oil supplies through the oil transmission system of Transneft citing overrated parameters of oil losses, and went to court, which is an unprecedented case in Russia. In our system different clans control different companies, which is also part of the general system of checks and balances. However, the fact that such cases become so public, and that state companies file suits against each other is the evidence of overall nervousness of the current political moment. The Rosneft-Transneft conflict is not new, but in the current situation it is accompanied by speculations about a possible takeover of Transneft by Rosneft. Such debates create expectations of serious transformation in the sector. It means the inter-corporate Byzantine-style case becomes part of the future vision of the sector.

3. Gazprom sets another record of daily exports to Europe

   The winter has been quite successful for the Russian gas giant. The year 2016 also saw some records set, e.g. 179 bcm of natural gas exports. And January met positive expectations. Europe’s demand for natural gas seems to be restoring gradually. It is too early to make some far-reaching forecasts, but the current conjuncture is quite positive. The European market has not attracted alternative gas supplies yet.

4. Rosneft suggests selling gas to BP for exports

   It is another attempt of independent gas producers to reform the domestic market, and to restructure it. The initiative is rather questionable, because putting such ideas into practice will lead to competition of Russian gas against Russian gas on the foreign market. It is absolutely unclear why it is necessary. Other producers press Russian gas pretty strongly, and contributing to this process would be a rather strange decision. Rosneft obviously claims that it will expand the market for Russian gas. But it is a disputable statement. If BP indeed had possibilities to sell additional quantities of gas, the company would address Gazprom and would negotiate prices with the Russian producers. But BP addresses Rosneft, which is evidence that the foreign company wants to make use of competition between Russian gas suppliers to gain a discount. It is as simple as that. Therefore, BP is interested in this game only if it gets discount off Gazprom prices. It is competition that leads to decline in prices of Russian gas. European consumers obviously applaud this story, but Russia’s benefit is doubtful, especially given tough competition for the European gas market.

5. Concerns about Ukraine transit, Gazprom expands claims against Naftogaz

   We were strung-up throughout the whole January, because at the end of 2016 the Kiev court ruled to recover over $6bn from Gazprom. In January Gazprom presented counterclaims against Naftogaz. However, a legal battle is one thing, while the risk of siphoning off natural gas from transit quantities was real. January was not an easy month for Ukraine. The country had to seriously cut domestic gas supplies and gas consumption, impose restrictions and get frozen in some areas, as the winter temperature was not always comfortable. Yet, the system withstood the pressure, and no serious failure occurred in January. We should feel relieved too, since we absolutely do not need the Ukrainian system to collapse at present. We pump quite serious quantities through it. Amid growing exports of Russian gas we have to engage Ukraine’s GTS actively. The gas transit through this country advanced in 2016.

6. Energy dispute with Belarus sharpens

   In January Belarusian leader Aleksandr Lukashenko held a big press conference where he again made rather tough remarks about Russia. Belarus demonstratively signed a contract with Iran. It is interesting that the amount stipulated in the contract was rather insignificant, and several days after promotion of this deal, the topic disappeared from the agenda, which obviously reminded of purchases of Venezuelan oil some time ago. There was much fuss about that deal, but in the end, Venezuelan oil turned out to be Azerbaijani oil that anyway did not arrived in Belarus. Later, a compromise with Russia was achieved; thus, the issue of Venezuelan supplies was trolling by the Belarusian president. This time the dispute with Minsk is getting protracted; no solution has been found yet. It started from a gas debt. In 2016 Belarus unilaterally revised the gas pricing formula and began paying the amount it wanted to pay. In January 2017 the accumulated debt was approximately $550m. Russia responded with substantial reduction in oil supplies that dropped 20% in January. It led to emergence of serious economic problems in Belarus. Instead of making a compromise, Lukashenko raised the ante. This was the condition of the Russia-Belarus dispute when February began.

7. Georgia, Gazprom Export agree to replace barter deal with monetary payments

   It is quite a noteworthy decision, because barter is always bad, while the money is always good. Tbilisi attended to arguments of Gazprom, although in Georgia significant part of the opposition dubbed this decision as betrayal of national interests. In reality, Georgia remained a transit state; the deal concerns gas supplies to Armenia. The Russian side’s proposal was aimed at making economic transactions more civilized. The transit price fixed in the contract is quite comfortable for Russia. Thus, the solution was mutually beneficial.

8. Donald Trump sworn in as US president, Rex Tillerson appointed state secretary

   Trump becoming the US president is certainly a major event for Russia-US relations. Its influence on the sector is, probably, not so evident; therefore, we do not place it on top of our rating. But the obvious fact is that many things depend on US policies, including in the oil and gas sector. Appointment of a prominent representative of the oil industry as US state secretary is also a very interesting case. Let’s see how the US foreign policy will change. Those who claim that Trump is a pro-Russia politician are certainly wrong. Nevertheless, there are some positive things in his election. For instance, he will be able to speak a common language with Vladimir Putin. Trump is clearly a businessman. He obviously knows the notion of profit, his profit. The same concerns Tillerson. They will be tough in defending their interests. But they will negotiate, while Clinton’s administration would be unlikely to negotiate; they would continue pressing Moscow. This is why there are different expectations, including removal of sanctions on the Russian oil and gas sector. However, sanctions are not the most complicated issue. It would be very interesting to see how Exxon Mobil will behave, as the company closed all projects in Russia, except Sakhalin-1; ConocoPhillips in fact left Russia; Chevron practically is not present in Russia. In this regard, the question what Exxon and American companies will do in Russia is open.

9. Vladimir Putin meets with new shareholders in Rosneft

   This is last year’s story; therefore it is at the end of the rating. However, its influence on the oil sector is surely huge. The story continued; new details of the deal surfaced in January: VTB was probably involved in the deal, i.e. state money. It turns out that the state money was used to purchase the stake, and the state money was transferred to the state budget, and only after that credit was syndicated, and Intesa transferred $5bn. The bottom line is, the deal turned out to be very dubious and scandalous. Putin’s meeting with new shareholders was to rehabilitate and vindicate it for the public: ‘here these investors are, Putin is meeting them’. Meanwhile, in its official report Glencore indicated that it possessed less than 1% in Rosneft. The question is where other shares are, and who controls them? Thus, the deal will keep drawing our attention in 2017.

10. PM Medvedev chairs meeting on 2035 energy strategy

    Russia has failed to compile a serious strategic document, not some formal paper, to serve as foundation for the sector development. Why has it failed? – Because there are several difficult questions that cannot be answered at present without infringing on interests of influential players. There are no answers, but it is good that some questions were raised at this meeting – about offshore production, about domestic gas market development, about taxes, and etc. But we would like these questions to be seriously discussed in public at first. A formal and non-committal strategy is not required; we had them in the past. So far the approach to writing this document seems to be pretty formal, and suggested papers look like some science fiction.