Top events of April 2018

The National Energy Security Fund introduces top-ten events in the oil and gas industry in April 2018 and is ready to comment on them in detail.

1. New anti-Russia sanctions introduced, heads of major energy companies blacklisted

   The tension between the USA and Russia reached another high in April. We were very close even to a military clash. However, the sanctions imposed on April 6 demonstrate that Washington has moved towards declaring an economic war against our country. The US actions were rather dubious towards energy companies: on one side, the heads of companies, including Gazprom CEO Aleksey Miller, were blacklisted; on the other side, Gazprom was not added to the sanctions list that includes companies affiliated with the Rotenbergs, not with Gazprom, despite bearing its name. It means that Gazprom may have certain problems. Miller is likely to have to delegate his right to sign some documents to other top managers. Nevertheless, it could have been much worse, if Gazprom or Rosneft had been blacklisted. The fact of tough sanctions against some Russian businessmen, e.g. Deripaska and Vekselberg, and demands for them to withdraw from equity capitals of their companies to prevent these companies from being blacklisted, as well as serious problems with Rusal aluminum supplies to the US market, means this time sanctions are very serious, as Washington is putting its threats into practice. It can certainly mean that sanction lists will be expanded affecting the energy sector. Therefore, we are anxiously waiting for further reports.

2. Offshore segment of TurkStream’s Line 1 completed

   On April 30, construction of the offshore segment was completed. The pipeline has reached the Turkish coast. There is no ground infrastructure there; it is necessary to lay segments of the pipeline from the coast to consumers, and it is necessary to settle commercial disputes over pricing. Nevertheless, the project is progressing, and the main intrigue is around Line 2 – it should be laid to Turkey, and then it will be necessary to decide on the route and destination of natural gas pumped through it. There will be much more intrigues around Line 2 than around Line 1, because the latter is to cater for the Turkish market.

3. Finland gives final permit to build and operate Nord Stream 2

   Thus, two countries – Finland and Germany – have issued permits. The other two – Sweden and Denmark – are yet to do that. The sword of Damocles in the form of US sanctions is hanging over the Europeans – Washington last summer fixed a possibility of application of US sanctions against Russian gas pipelines. Though, it is just a possibility – it does not mean that they will be necessarily applied. Although this April Washington clarified that there were no plans to apply sanctions, this intrigue is currently one of the main topics in the world energy politics – it is about what will happen to the Nord Stream 2 and how politics will influence construction of this gas pipeline.

4. Gazprom, Naftogaz start discussing contract on gas transit after 2019

   Gazprom has already filed a suit demanding termination of the current contract with Ukraine. Negotiations will obviously be very difficult. The matter is that Kiev wants very much to preserve gas transit. Gazprom is building the TurkStream and Nord Stream 2 pipelines, and it is ready to leave some symbolic quantities of gas transit through Ukraine, because the European Union insists of that. The spread of transit quantities to be negotiated is also visible – Aleksey Miller again declared that Gazprom was ready to pump 15 bcm of gas through Ukraine, while Ukraine’s energy minister Nasalik insisted on 40 bcm. Thus, the negotiations positions are 15 bcm vs. 40 bcm. It is quite a good start for Gazprom, because there is a chance to fix it at some 25 bcm to 30 bcm, although it is also quite a large amount for Gazprom, given throughput capacities of new pipelines bypassing Ukraine. On the other side, given growth in natural gas consumption in Europe, the expected termination of production at Groningen, and the 200 bcm of gas expected to be pumped to Europe this year, some 20 bcm to 25bcm can be considered as the amount for the sides to bargain over. Though, Gazprom’s Aleksandr Medvedev in April said that construction of the Nord Stream 3 was possible, if gas demand in Europe keeps growing. Thus, Gazprom is ready to lay bypassing pipelines, and Ukraine should not count of these gas quantities. Therefore, the talks are expected to be tough, and we will continue watching this situation.

5. Summa Group co-owners arrested, struggle for NCSP Group sharpens

   The arrest of the Magomedov brothers coincided with the period when they seemed to have reached an agreement with Transneft on withdrawing from the equity capital of the Novorossiysk Commercial Sea Port in favor of Transneft. The arrest certainly gave rise to numerous speculations and rumors about how it is connected to the fate of NCSP Group. Some experts said Transneft was not happy with the price demanded by the brothers, which contributed to their arrest. Others claimed that Rosneft wanted to undermine the deal. The Magomedov brothers are facing serious charges. According to media reports, the brothers had been eavesdropped for half a year before the arrest; accusing them of organizing a criminal community requires serious evidence. The Magomedovs declared about the NCSP deal in February, and it would be very difficult to organize such a case within two months. However, one thing is clear – it was not a coincidence that the case “detonated” in April. The business deal involving the Novorossiysk port could not be the reason for the arrest of the brothers, just because there was no sufficient time to prepare this case. This is why we think the Novorossiysk port is an important reason, but not the only one. Close relations between the Magomedovs and Dvorkovich, and between Dvorkovich and Medvedev are no secret. Therefore, the attack was likely aimed at Medvedev’s government, and it was launched exactly when fierce battles for seats in the new Cabinet began.

6. LUKOIL-Rosneft rivalry over their market value

   It was quite an interesting episode. LUKOIL’s market value surpassed that of Rosneft causing a rather nervous reaction of the latter. It led to evidently sponsored publications in the mass media that inter alia accused LUKOIL’s Alekperov of readying to sell LUKOIL in the West. Such denunciation is typical these days – it seems the main accusation is of being ready to betray the Motherland and flee to the West. In reality however LUKOIL’s higher market value just demonstrated management problems of Rosneft and the fact that the market does not fully trust Rosneft’s management strategy; the market is very concerned about the company continuing its aggressive expansion. Therefore the market consciously supports LUKOIL and hopes its managers will fight for the company. The scenario of restoration of the “oil ministry” with Rosneft taking over all players is perceived by market players as a huge problem. This rivalry is reflection of these concerns.

7. Appeal in Ulyukayev case heard, Sechin visits court

   There is an opinion that Igor Sechin attended the court hearing because Vladimir Putin had publicly voiced such a desire; therefore Sechin came to provide evidence in court. However, there was a reason why it happened on the eve of formation of a new government. Sechin is certainly one of those players who are fiercely fighting for this Cabinet. The fact that Sechin came to court means that it was fundamentally important for him to make sure that the appeal would be rejected. If Ulyukayev’s sentence had been seriously reduced, it obviously would have been perceived as defeat of Sechin. The Rosneft head could not afford it on the eve of formation of the new government. As a result, the appeal was dismissed showing Sechin’s brutality, toughness and power.

8. Meeting of commission for foreign investments, Schlumberger gets permit to buy large stake in Eurasia Drilling Company

   The American company is allowed to buy from 25% to 49% in the Russian services company. Although it is not a controlling stake, the deal is quite important. According to the top story in our rating, we are very close to economic war against the United States. Yet, in these conditions the American company is ready to buy a significant stake in Russia’s major independent oil services provider. It is actually necessary to mention that US services companies have not left Russia since sanctions were imposed. If they did, it would create huge problems for the industry where no import substitution has been observed. The Russian services sector is still in a very difficult condition; Chinese partners have not been as friendly as expected: although they came to the market, they did not bring technological know-how. Moreover, they are trying to benefit from this difficult situation. The fact that the government allows US investments in the Russian services sector means nonresidents should be taken care of even despite some calls for driving them out of Russia. This topic may surface again in the context of discussion of the bill on counter-sanctions to be debated by the State Duma in May. So far, the first version of this bill does not cover the American services business.

9. Finance minister Siluanov requests PM Medvedev to settle dividend question

   This case was discussed last year. The finance ministry wants state companies to allocate 50% of their profits on dividend payments. In their turn, state companies are looking for ways to evade paying this indirect tax. Some companies, e.g. Gazprom, say they have huge investment programs that cannot be implemented if 50% of profits are paid as dividends. Others, like Rosneft, use a different strategy: Rosneft declared it was ready to allocated 50% of profits on dividends; however, state shares in Rosneft belong to Rosneftegaz that is not going to transfer these payments to the state budget. Thus, Rosneft will in fact pay dividends to Rosneftegaz that will keep using the money non-transparently.

10. Excess profit tax bill passes first reading at State Duma

    Russia’s energy minister proudly declared that this law would enable to develop 5bn tons of new oil reserves. Yet, there are some outstanding questions. When will this bill be finally approved? When will it come into force? How much oil will it cover initially? These 5bn tons of oil is “two birds in the bush”; we would like to understand what “bird is in the hand”. The new tax philosophy will be introduced as experiment during quite a long period. The finance ministry wants introduction of the excess profit tax to coincide with elimination of tax preferences. The ministry actually wants total tax payments by the sector not to decrease, but to increase. Besides, the finance ministry insists on the accelerated tax maneuver, although it does not solve the problem of the refining segment and some other questions. Thus, the taxation issue remains one of the biggest dramas of the domestic oil industry. It is too early to rejoice at the bill having passed its first reading.