Top events of June 2019

The National Energy Security Fund introduces top-ten events in the oil and gas industry in June 2019 and is ready to comment on them in detail.

1. Prolongation of OPEC+ deal

   Vladimir Putin and the Saudi leader declared at the G20 Summit in Osaka that they had agreed parameters of the deal extension. Iran’s reaction was very negative – Tehran said there was no consensus, since only two countries made the decision. On the other side, these two countries produce some 10m to 11m bbl/day each, while the output of others is significantly less. Therefore, it is evident that these two nations define the format of interaction, especially when Iran is under sanctions and it cannot increase its output even if it wants to. Thus, risks and fears of decline in oil prices outweighed arguments of Rosneft that in June publicly and strongly criticized the deal. In the past Mr Igor Sechin was rumored to have written critical letters about the deal to the Russian President, but this time he voiced his opinion publicly while delivering a bright speech at the St. Petersburg International Economic Forum. Thus, Rosneft was a headliner speaking against the deal prolongation. Rosneft’s claim that Russia is losing the market to American shale oil producers that are not part of the deal is not the only argument that, by the way, can be mentioned against the deal. The matter is that this time Russia will have to really limit its oil output, which Sechin actually refers to. We have already lost at least some 15m to 20m tons of output as a result of this deal. It is also quite costly in terms of Russia’s economic growth. Nevertheless, the risk of drop in oil prices prevailed. Despite the budget surplus, the main fear of Putin and the government’s financial and economic bloc is about the economic sphere. So, let’s see what oil companies will say.

2. Moratorium on growth in domestic fuel prices not prolonged

   It was a rather unexpected decision. It seems that oil producers and Rosneft that publicly spoke against this agreement have won. This decision was particularly surprising because not long before, at his phone-in session, President Putin said that in addition to petrol and diesel fuel, it was necessary to add kerosene and bitumen to this deal to prevent growth in their prices. And yet, they have made this decision. Though, it seems that nothing really has changed, because Dmitry Kozak immediately said there would be sufficient instruments available to control prices without the deal. Thus, it means that the Cabinet has not formally agreed to growth in fuel prices. They also say that the dampening mechanism formula has been corrected, and oil producers will get compensations. In reality everybody understands that at first the minerals production tax (NDPI) will grow and then this money will be given back to oil companies. Thus, before the money is put into the right pocket, it is taken from the left pocket. Everybody realizes that fuel prices are likely to grow, and the government will again try to solve its budget problems that actually do not exist at the moment, because the budget surplus is fantastic now, and the National Prosperity Fund is filled very quickly. Yet, the government anyway believes that citizens should pay, because growth in fuel prices in this configuration is unavoidable anyway. The scenario of developments is known: prices grow, people are indignant, this information reaches the head of state who bangs his fist on the table: “How long!” – growth in prices is suspended for some time and some moratorium can be concluded, but then prices begin going up again. There is no choice with the current fiscal policy.

3. Druzhba pipeline scandal continues

   This story has lasted for two months already, and there is no end to it. In June Transneft was under attack, but it has not led to HR changes in the company yet. Nevertheless, the practice shows that if a toxic topic emerges, everybody wants to avoid it like the plague; nobody wants to assume any responsibility. There are always players who can politically benefit from a scandal; this is why they warm up this story not thinking of national interests and reputation.

4. Oil tankers attacked near Strait of Hormuz, situation in Persian Gulf sharpens

   Explosions occurred at two tankers near the Strait of Hormuz on June 13 and were followed by the downing of a US drone – this led to a serious geopolitical crisis in the Persian Gulf. The USA and Saudi Arabia believe Iran was behind the attacks. American generals even suggested that President Trump should order an attack on Iran. However, it is interesting that it was the US President who acted as a peacekeeper this time and called off an attack this time. We obviously would like to see that oil prices are maintained by geopolitical tension in the Persian Gulf instead of the OPEC+ deal. On the other side, war against Iran is an absolutely unpredictable scenario: prices may rise even to $200 at first, but then the process of oil substitution will start with consequent panic and hysterics, and with fantastic growth opportunities opening up for green energy. This is why risks should not lead to a combat catastrophe. By the way, it is Trump, usually portrayed as a crazy warmonger, who holds the much more conservative American generals.

5. EC Vice-President for Energy Union Maros Sefcovic visits Moscow

   Russia’s Minister of Energy Aleksandr Novak received the European official. They exchanged ideas on prolongation of the moratorium by Gazprom and Naftogaz. The companies seem to be ready to talk about prolongation of the transit contract, but their opinions differ immensely. Therefore it is absolutely impossible to predict what will happen to gas transit. Gazprom demands that payments under the Stockholm Arbitration Court’s decision should be scrapped, the pump-or-pay provision should be removed and no significant gas transit quantities should be fixed in a new contract. On its side, Naftogaz demands a new long-term contract on transit of 60 bcm per year. This is why Aleksey Miller’s sad joke at the annual shareholders’ meeting about the “merry” year 2020 may come true. At least this autumn’s negotiations will be tough and unpredictable.

6. Consortium of Japan’s Mitsui and JOGMEG buys interest in Arctic LNG 2

   The project of NOVATEK has Total and Chinese companies as shareholders. NOVATEK has sold 40% in the project as it initially planned. It is a nice example of how successful lobbyism is converted into hard currency. NOVATEK actually sells not a stake in the project but successful lobbyism solutions – the project with challenging economic conditions receives fantastic preferences from the state and infrastructural support turning it into a very successful venture that attracts foreign investors.

7. NOVATEK, Sinopec and Gazprombank sign accord on selling LNG and natural gas in China

   The agreement is presented as some breakthrough, because nobody has ever been granted the right to sell gas in China. However, the situation reminds of an old joke about the man nicknamed “Uncatchable Joe”, who was uncatchable because nobody needed to catch him. It is indeed true that nobody before obtained the right to trade gas on the Chinese market; but it was for one simple reason – nobody asked for this right. It is actually not profitable to sell gas on the Chinese market. This market is regulated by the state, and Chinese companies suffer losses on it. This is why, amid tough state regulation and protection of consumers by the state that makes state companies sell gas at unprofitable prices, it is not correct to present this deal as a breakthrough. Nevertheless, the agreement was quite enthusiastically hailed.

8. Annual meeting of Gazprom shareholders

   The meeting was held in the “congress of winners” style; Gazprom attempted to highlight production and commercial successes and approved record high dividends. Following the spring crisis, when the company went through a substantial reshuffle with rumors about the fate of Aleksey Miller, the Gazprom CEO has had his powers prolonged meaning that he will not retire this year. The impressive last year’s economic parameters of Gazprom are evidence of this.

9. Annual meeting of Rosneft shareholders

   It is remembered by Mr Sechin’s tough speech, first of all about Transneft. It is necessary to stress that Rosneft was the headliner of attacks on Transneft organized in the mass media in June; even plans of this offensive campaign were leaked into the mass media. It is difficult to say whether they were authentic or not, but they actually contained many names of experts who had long been suspected of working for this state company.

10. LUKOIL decides to invest in offshore projects in Congo

    This caused a nervous reaction of Russia’s Minister of Finance Anton Siluanov who remarked that the government provided them with tax preferences but they invested in Africa instead. LUKOIL actually regularly states that it would obviously use a possibility to operate at Russian offshore fields, if it had this opportunity. The company, however, is not given this opportunity. This is why investments of LUKOIL are a sad reminder about the necessity for the Russian government to liberalize some aspects of the law.