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Top events of February 2020

The National Energy Security Fund introduces top-ten events in the oil and gas industry in February 2020 and is ready to comment on them in detail.

  1. Situation on the world oil market, COVID-19 influence

    The panic caused by the coronavirus spread has sent crude consumption in China down by some 15% to 20%. The main thing, however, is not these figures but the panic that have seized world markets and speculators. At the end of February oil prices plunged below $50 per bbl. Having reached this symbolic threshold, the panic only intensified. The level of $42.5 per bbl is close – it is the stage where Russia will start spending the reserves it has accumulated before. Prices of Urals oil are even closer to this level. If fears keep strengthening, prices may go below $40 this spring. Such developments certainly raise the question of expansion of the OPEC+ deal parameters. Russia was contemplating the whole February, as all decisions seemed to be bad. Agreeing to expand the deal means evident stagnation in the economy, i.e. there will no economic growth in the country for sure. Regardless of speculations about diversification, projects in the oil and gas sector ensure at least some economic growth in the country. Oil companies are obviously not happy with the necessity to cut production. On the other side, if the deal is not supported, it is absolutely unclear what will happen to the Russian state budget with oil prices at $40. Our financial authorities are radiating optimism, as Minister of Finance Anton Siluanov says we will survive for four years with prices at $30. However, we understand very well that it is not quite true.

  2. Spot gas prices drop below $100 per 1,000 cu m

    Low oil prices are currently accompanied by low gas prices. It is actually logical, as natural gas prices are traditionally linked to oil prices. Such linkage is found in long-term contracts. It was promised that the spot market would disconnect gas from oil, but, as we can observe these days, it is not quite true. Thus, hydrocarbons that are our main export commodity are getting cheaper. This is obviously a serious test for our budget model that stipulates accumulation of reserves in the “rich years” and their spending when hydrocarbons are cheap. At present we are in the period of spending that coincides with the period of political transition that also requires the money badly. This situation questions our gas strategy, because Russia was the second biggest supplier of LNG to Europe in 2019, and LNG imports were a very important factor that contributed to decrease in gas prices on the spot market. Although this problem is bashfully avoided, the problem evidently exists. It would be expedient now to discuss some questions, such as why did we build LNG plants? Was it done to have low gas prices on the European market? Was it done to have gas cannibalism with our LNG sending gas prices down and taking away the market from our piped gas supplies?

  3. US sanctions against Rosneft Trading

    These sanctions are not surprising. It is even possible to say they are quite moderate. Rosneft was given three months to redirect oil flows in Europe from Rosneft Trading to other traders. However, these restrictions should seriously affect operations with Venezuelan oil. The main objective of the USA is to hit the Venezuelan economy and remove the Maduro regime. It obviously will be more difficult for Rosneft Trading to sell Venezuelan oil. There will be no problems with sales of Rosneft oil. The question is what should be done with Venezuelan oil? How to return investments made in this country? How to return existing debts? And the main question is how to supply crude to a giant refinery in India that Rosneft bought with partners? These problems are outstanding and rather painful.

  4. Oil and gas talks with Belarus

    This series was “broadcasted” throughout February, and it will continue in spring. No decision has been made yet, although in February the Belarusian President proudly declared that Vladimir Putin had promised him to compensate all losses caused by the tax maneuver. Aleksandr Lukashenko estimated them at $420m per year. The problem is that Russia’s Minister of Energy Aleksandr Novak said the discount would be $2 per ton. With supplies of 18m tons of oil, it is quite easy to calculate that compensations should total $36m instead of $420m. It is more than 11-time lower amount than ambitions of Lukashenko. At the end of the month the Belarusian President went off into hysterics having declared that Russian ministers did not follow instructions of Putin. However, Russian minister cannot disregard instructions of Putin. Novak’s statement means that he had received no instruction – Lukashenko just too freely interpreted words of the Russian President. Thus, this March we have every ground to expect statements about Belarus joining NATO or something like that.

  5. Belarus says it has agreed compensations for contaminated oil supplies in 2019

    Minsk declared that the compensation would be $15 per bbl. This is another case of wishful thinking of Belarus. Transneft immediately refuted the signing of any agreement. In reality an intergovernmental accord was made that reads that this topic should be settled. Transneft did not pledge to pay $15 per bbl, given that the company had taken back the chloride contaminated oil from Belarus. This is why it is not clear what it is that the company should pay compensation to Minsk for. Such payments were made to enterprises that kept the contaminated oil. Belarus gave it back. Mozyr Refinery was certainly affected by the oil quality, and the Belarusian side estimated the damage at some $20m, although the facility did not suspend its operation even for a day. They tell us about disastrous damages, but the refinery worked then and keeps working now. It will soon be a year since the incident occurred, but disputes with countries are far from being settled.

  6. New reshuffle at Gazprom

    Radical changes in the top management of Gazprom continue: chief accountant Elena Vasilieva retired, once powerful deputy head Mikhail Sereda, who ran Aleksey Miller’s office, became just a deputy head of Gazprom Export, i.e. demotion by two steps of the hierarchical ladder. Gazprom evidently tries to demonstrate its ability to change. Its logic is probably the following: HR changes should prevent structural changes. This is what Miller is actually busy with. Contrary to rumors, nothing seems to be threatening his positions, especially when it is necessary to complete laying the Nord Stream 2 and the onshore part of the TurkStream.

  7. Sharp deterioration of relations with Turkey

    At the end of the month Russia and Turkey almost reached the state of war. Everybody certainly got concerned about the fate of the TurkStream that was launched just two months ago – Ankara may well use the project as an instrument of energy blackmailing. Moreover, Turkey hinted at a possibility of blocking its straits for Russian oil tankers. In November 2015, Turkey downed a Russian combat aircraft, and this almost put an end to the TurkStream project. Nevertheless, Moscow and Ankara demonstrate how business can be separated from politics. We actually have never had easy political relations. Yet, the project was implemented and mutually beneficial economic cooperation continued. This is why we hope that the TurkStream will not fall victim of the situation in Idlib.

  8. US Secretary of Energy Dan Brouillette says Nord Stream 2 will not be completed

    Besides the above opinion, the US Secretary of State, Mike Pompeo, declared that the United States was allocating $1bn on development of projects countering dependence on Russian energy supplies. Actually at the Munich Security Conference the USA finally acknowledged that politics and energy were intertwined. Although Russia is constantly accused of using “the energy weapon”, we can see that it is the US Secretary of State who visits Europe and openly offers a whole lot of money to Europe to stop buying gas from Russia, and simultaneously the USA imposes sanctions against the Russian commercial project. This case is turning into political struggle between Russia and the USA resembling the early 1980s when America introduced sanctions against the Urengoy-Pomary-Uzhgorod gas pipeline.

  9. Igor Sechin visits Vladimir Putin to advertise Vostok Oil

    Sechin claims this project will contribute 2% to the GDP growth. The bill concerning this project was submitted to the State Duma, and it passed the first reading in February, although Putin ordered to calculate everything thoroughly. The main thing about the Vostok Oil project is that Rosneft will get tax deductions on one project (Vankor) and will have a possibility to spend the money on another project. The case is actually about direct budget subsidies rather than tax incentives for Vostok Oil. This situation should be a pretext for a big and serious discussion. The oil sector was customary accused of being subsidized by the state, although it was not true. Usually there were just some exceptions from repressive regulations. However, this time the new oil project is indeed awarded tax subsidies. Igor Sechin has managed to get them. Thus, it is formation of a new reality that we still have to comprehend.

  10. The Hague court awards $50bn compensation to former YUKOS shareholders

    This case is interesting not only because it is about YUKOS and therefore about oil. It is interesting that the court referred to our participation in the Energy Charter. It was an important argument for the Dutch court that Russia was a member of the Energy Charter, although we did not ratify it and even withdrew our signature later – yet, they blamed us for that. The lesson for us is that we should treat international documents seriously. The same attitude is currently observed towards the Paris Agreement. Some say “there is nothing to worry about; it is just a framework accord, nothing serious; we can easily withdraw from it”. Meanwhile, we may face quite serious problems. Some time ago we joined the Energy Charter, signed it and later realized that it was not positive for us.


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Analytical series “The Fuel and Energy Complex of Russia”:

State regulation of the oil and gas sector in 2023, 2024 outlook
Gazprom in the period of expulsion from the European market. Possible evolution of the Russian gas market amid impediments to exports
New Logistics of Russian Oil Business
Russia’s New Energy Strategy: on Paper and in Fact
Outlook for Russian LNG Industry

All reports for: 2015 , 14 , 13 , 12 , 11 , 10 , 09 , 08 , 07

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