Top events of Jule 2017

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

1. US Congress passes bill reinforcing Russia sanctions

   The month began with the Putin-Trump meeting that inspired positive hopes and expectations. The presidents seemed to like each other. But this probably scared many figures in the United States, and there were calls not to leave Trump alone with Putin. So, they decided not to leave him alone with Putin, and passed a rather tough bill that actually enables US authorities to impose sanctions against in fact any energy project that involves Russian companies. So, it is up to the US judicial machinery to employ repressive mechanisms against American companies. The situation is obviously quite alarming, as these sanctions actually bring us back to the summer 2014 – it is a new round of confrontation. When such decisions are made, it means that, despite the fact that there are pragmatic politicians in Russia and the USA, significant part of American elites believes that Russia is a dangerous country. It also means that Russia is gradually coming to the conclusion that there is no reason in attempts to agree with the United States, that it is useless, it is like talking to hear your own voice, that it means it is time for tougher actions. And this logic is the most dangerous.

2. Exxon gets $2m fine for Russia sanctions breach

   It continues the logic mentioned in the first paragraph. There are obviously pragmatic forces in America – businesses first of all, and their representatives who came to politics, e.g. Donald Trump and ex-boss of Exxon Rex Tillerson. Yet, they do not dominate political elites in the USA. There are too many people with old thinking; these people promote rather archaic decisions, 20th century decisions. It is absolutely evident that a $2m penalty will not hurt Exxon financially. It is incomparable to a $9bn fine France’s BNP Paribas was to pay. Yet, it is an indicative decision. It is an attempt to show that no normalization of relations with Russia should be allowed, and they should not even think of implementing some joint projects with Russia.

3. Trump visits Poland, promises to send abundant LNG supplies to Europe

   It is not the case of Trump behaving as a ‘kind granddad’. He evidently lobbies interests of American energy companies. Throughout the whole July there were speculations about the USA exporting its LNG to Europe. By the way, these speculations were largely linked to the new sanctions bill, as many observes considered the document as an attempt to block construction of gas pipelines from Russia to Europe, and correspondingly to fill Europe with American liquefied natural gas. In reality it is obviously too early to make such bold forecasts; it is enough to examine some figures. Last year Russia exported 179 bcm of natural gas to Europe, against 0.55 bcm of LNG shipped by America. It is almost a 350 times difference. It is a huge distance that cannot be easily covered. Everybody is aware of the price issue: LNG from America is much more expensive that Russian gas supplies through pipelines. Besides, Russian piped gas supplies are profitable, while costs of American LNG are often estimated on the basis of delivery costs. America has indeed entered the LNG market swiftly with some supplies made in 2016; and such deliveries will continue. However, there is no ground to expect the USA to win the European market. Moreover, it is a growing market with declining domestic gas production. The results of Russian gas sales in early 2017 answer well this question. In the first seven months of 2017 Russian gas supplies grew by 12% there. This is what you need to know about the current competition.

4. Conflict around supplies of Siemens turbines to Crimea

   This story is also rather unpleasant, because American sanctions affect European entities too. Many entities in Europe began thinking whether they should follow the USA and fully implement sanctions proposals of Washington. We can see how rigid the position of some European politicians is, although they cannot be viewed as friends of Russia (e.g. Frau Merkel). They are resolutely defending the Nord Stream-2 project. On this background the scandal around Siemens turbines and rumors leaked in the German mass media that Putin personally had promised not to deliver these turbines to Crimea, are definitely very unpleasant. It is an absolutely unnecessary case. Siemens probably suspected the final destination of these turbines, and that it would not be Taman. Yet, this story could have been avoided; it was too risky. The desire to solve all problems in a hit-or-miss fashion may cost us too much.

5. Gazprom start building line 2 of Turkish Stream

   Despite sanctions or because of them, Gazprom has accelerated implementation of pipeline projects. Gazprom cannot have settlement of these problems delayed for a long time, and we very well understand why. On 1 January 2020 the current contract on gas transit with Ukraine will become void. Thus, it is necessary to lay two lines of the Turkish Stream, and two lines of the Nord Stream-2 by that time. Gazprom realizes that the weak link in this process is Switzerland’s Allseas that is an official partner of the project. Switzerland did not impose sanctions on Russia, and Allseas does not have large commercial interests in America. Yet, Americans are very good at finding weak spots. We should see if they manage to find them at Allseas. In the meantime, Gazprom is speeding up the construction process. Though, the main reason is the deadline of 1 January 2020.

6. China’s Xi Jinping visits Russia, meets with Vladimir Putin

   There are two main stories concerning this visit. Firstly, it is the selling of a 20% stake in Rosneft’s Verkhnechonskoye project to China. It was a long story, and the sides involved finally drew a legal line in this case. Secondly, Gazprom pledged to begin supplies through the Power of Siberia in December 2019. On one side, Gazprom has committed itself to rather tough activities, as the gas giant will have to complete three pipeline projects by the end of 2019. Firstly, the Russia-Ukraine gas transit contract expires on 1 January 2020, which means by this deadline it will be necessary to complete two lines of the Turkish Stream and two lines of the Nord Stream-2 to solve the Ukraine problem and not to sign a new transit contact. Besides, it is necessary to finish the Power of Siberia. However, the task is real; there is quite active construction of pipelines underway, and there are no problems around Chayandinskoye – Gazprom will certainly cope with the technical side of the task. It is interesting why the gas giant decided to begin supplies early, because the contract provides the company with a possibility to postpone gas deliveries until 2021. It is probably caused by forecasts and expectations of oil prices. Many Western analysts believe that in 2020 prices will start going up noticeably. Everybody is waiting until the deficit of investments in the oil industry leads to growth in oil prices.

7. OPEC, non-OPEC monitoring committee meets in St. Petersburg

   Everybody is waiting for growth in oil prices, but they are not really going up. The deficit of investments in oil production has not had its impact yet. The main role is played by speculative factors. The latest meeting of the Joint OPEC-Non-OPEC Ministerial Monitoring Committee ended optimistically; the sides declared about possible prolongation of their current agreement in 2018 (it expires after Q1 2018). However, in reality there are certainly many problems. They are generated inside OPEC – Nigeria and Libya increase oil output and do not want to join the deal, and there are big difficulties with Iraq. But the main problem is activities of oil producing nations in North America that are outside this oil production cut deal. North America keeps expanding its production making use of growing prices; it is not going to limit the output. This is why it is difficult to claim that everything is all right. Nevertheless, the deal is in force, and oil prices are around $50. We have got used to this situation more or less.

8. Sistema-Rosneft dispute

   The dispute is quite symbolic. Sistema is resisting and talking back. The ‘great and powerful’ Igor Ivanovich Sechin is failing to swallow up Sistema. There is fierce resistance: Sistema appeals to various instances, independent directors write letters to Putin, Sistema representatives give interview about the conflict, the rules of the game and informal agreements collapse. Sistema is trying to present the case as a process that ruins the rules of the game in Russia. It is interesting that Igor Sechin has faced such fierce resistance. So far we are watching development of this process. Sistema seems to be surrounded, but it is not going to surrender. The story certainly attracts higher attention. Let’s see what will happen next.

9. FAS deputy head says no increase in gas transportation tariffs for independent producers

   You can always hear about independent gas producers being treated badly and living poorly. Meanwhile, without any restructuring of the domestic market they are expanding their share on it. What we see now is that domestic gas prices are increased, while gas transportation tariffs for independent producers are said to remain intact. Independent gas producers seem to employ their lobbying resources quite confidently.

10. Erginskoye field auction over

    The field was probably the last big asset that the state had not sold. It is over now; the state has nothing more to sell. After the struggle for the Trebs and Titov fields there was an opinion voiced that, since there was nothing left, the struggle for remaining assets would be frantic. However, there was no struggle at all. The auction finished quite quickly. Major bidders were represented only by Gazprom Neft and Rosneft. The former gave in rather quickly. It seems that Vladimir Putin does not want to turn such auctions into the ‘clash of the titans’ with very far-reaching consequences, because the Trebs and Titov auction in fact ended with the Bashneft case, the Sistema story, and a conflict between Rosneft and LUKOIL. Thus, the Trebs and Titov auction was the beginning of a very large series of conflicts.