Business as Usual in Russia’s Oil and Gas Sector

A series of articles in Upstream Online illustrate well the mentality of those attempting to run Russia’s oil and gas industry.  First up is a report of yet more “tough talk” from Igor Sechin, Russia’s deputy prime minister and chairman of Rosneft.  Unfortunately, “tough talk” – for which read macho posturing and anti-foreign idiocy – is pretty much all we ever get from Sechin, who – not for the first time – could probably do with reading up on how businesses operate in the world outside Russia’s borders (he’s not the only one).

Russian gas giant Gazprom must raise its game by penetrating the swiftly growing markets of Asia after a fall in exports to European Union customers, Russia’s Deputy Prime Minister Igor Sechin said today.

Oh, we’re back to this again.  Every year or so some Russian bigwig says that Russia will start supplying Asia with oil and gas, usually accompanied by a crude threat aimed at Europe.  Firstly, why can’t Russia start supplying Asia anyway regardless of what Europe is doing?  Secondly, why is the chairman of Rosneft telling Gazprom what to do?

Gazprom usually supplies a quarter of the EU’s gas needs but exports tumbled last year as some customers turned to cheaper alternatives such as liquefied natural gas on the growing spot market.

Oh.  So Gazprom, at times, cannot compete.  So, what should they do?

In a sign of the seriousness with which Moscow views the changes to the world gas market, Sechin called on EU customers – Gazprom’s biggest source of revenue – to give a clear projection of future demand.

“We would like to understand the long-term projection of consumption,” Sechin, the official in charge of Russia’s mighty oil, gas and metals sector, told Reuters in a 90-minute interview.

Where to begin?  Firstly, if Sechin has no idea of Europe’s future gas demand then he probably should not be in charge of Russia’s mighty oil, gas and metals sector.  Secondly, out in the real world which Russian deputy prime ministers seemingly don’t inhabit, suppliers normally ascertain for themselves what customers want and produce a volume accordingly, ensuring they have enough for any increased demand but not too much that they have product left unsold.  Demanding that your customers tell you exactly how much they need for the forseeable future in order to dissuade them from buying from other, cheaper, sources is a method of doing business probably unique to Russia.

“The winter was hard and a host of partners started to replace gas with cheaper spot prices but spot is temporary,” Sechin, who is also board chairman at Russia’s biggest oil company, Rosneft, said. “For stability you have to pay.”

Erm, buying overpriced gas from a single supplier who has a habit of switching off supplies during political spats is probably not most European’s idea of stability.  Indeed, being able to diversify their supplies by buying LNG on the spot market not only increases stability but saves them money too.

Sechin said the market conditions showed Gazprom, the world’s largest gas producer, had to boost its effectiveness by entering new markets and spoke of the intense interest China, Japan, Vietnam and South Korea had in securing Russian supplies.

Right: Europe is acting in its own best interests instead of being shafted by us, so we will look for other mugs to do business with.

“As market conditions show, Gazprom must increase the effectiveness of its work by diversifying its markets,” he told the news agency. “We also see the risks linked to one market and… Gazprom will continue to work with the aim of entering new markets.”

Well, yes.  You’ve been talking about this for years.  What has stopped you from diversifying into Asian markets?  Muddled thinking, stifling bureaucracy, and general incompetence at home or a failure to find Asians stupid enough to do business on terms you would like?

The deputy premier rejected suggestions that private gas companies, such as Russia’s Novatek, might be allowed to export gas as well as Gazprom.

“We will not cancel Gazprom’s monopoly on exports,” he said.

So there’s any pretence at providing stability out the window.

“We can ensure gas for Europe and for Asian partners but we would like Gazprom to have a long-term perspective of clear work with all our partners,” Sechin added.

I can help you with that by providing some useful advice.  Firstly, estimate how much gas your customers are going to need.  Secondly, produce a quantity of gas somewhere close to that figure, allowing for some spare should demand increase.  Thirdly, ensure that your gas is competitively priced against that which others are supplying to your customers.

As part of a plan to feed the energy-hungry economies of Asia and move dependence away from sales to Europe, Russia is trying boost oil production in East Siberia.

But investors in major East Siberian oil producers have been spooked by a tug of war among senior officials over re-imposing an oil export duty on 22 oil fields in the province.

So much for providing stability and ensuring supplies at a competitive price, then.

When asked about the issue, Sechin called for an overhaul of the oil taxation system which he said was a decade old.

Sechin was Putin’s deputy president from 1999 until 2008, and since then he has been deputy prime minister.  He has been chairman of Rosneft since 2004.  Perhaps he’s been too busy to get in touch with Yuri Trutnev, Minister of Natural Resources since 2004, to discuss the issue?  I’ve often noticed that Russians often consider their plight to be wholly the result of something imposed upon them.  Sechin should not be calling for an overhaul of the oil taxation system, he should be asking himself why the hell such an overhaul never happened in the decade of which he has been a senior member of government.

“One option is to move to taxation on excess profits,” Sechin said.

I’m sure that’ll reassure potential investors.

So, we have a senior Russian politician berating its energy customers for occasionally buying gas more cheaply elsewhere, tedious threats to export their gas to Asia instead, empty assurances that Russia is a dependable supplier to both continents as officials row over taxation and a commitment to maintaining Gazprom’s export monopoly, all in the name of stability.  In other words, business as usual!

Sechin seems to think that bribing a single supplier to keep the taps open represents stability, perhaps not realising that stability for Russia and Gazprom is chaos everywhere else.  Stability, in the eyes of most westerners, is about knowing what is going to happen and when, and when you look at Russia’s flip-flopping over their Yamal development plans you start to realise that instablity in Russia’s energy sector is going to be with us for a while.

December 2008:

Gazprom executive chairman Alexei Miller has given a ray of hope to foreign companies by saying this week that they may be able to work on building LNG plants on the remote Yamal peninsula in West Siberia.

As well as Shell and Repsol, Gazprom is considering other major players as possible partners for LNG solutions.

February 2010:

TOTAL of France and Russia’s largest independent gas producer Novatek have signed an agreement to form a joint 
venture to develop the Termok-arstovoye gas field in the 
remote Yamal-Nenets region of West Siberia.

June 2010:

Russian Prime Minister Vladimir Putin has endorsed a proposal by French giant Total to invite Qatar to join major gas projects on Russia’s Yamal, Total’s chief Christophe de Margerie said.

Total is also talking to Russia’s gas giant Gazprom on taking part in liquefied natural gas projects on Yamal while Gazprom is looking itself to expand co-operation with Qatar.

7th July 2010:

The head of Russia’s top independent gas producer, Novatek , says it can do without a foreign partner “at the moment” in developing Russia’s biggest liquefied natural gas project Yamal.

15th July 2010:

Russia’s largest independent gas producer Novatek is looking to offer a 49% stake in developing the country’s biggest liquefied natural gas project to a foreign partner, Kommersant reported today.

28th July 2010:

Total and Russian partner Novatek may lose a licence to develop an Arctic natural gas field in a venture agreed on last year that was green-lighted by Prime Minister Vladimir Putin.

The Natural Resources Ministry’s environmental watchdog put a permit for the Terneftegaz venture on a list for possible early termination, according to its website.

The Moscow-based regulator, Rosprirodnadzor, did not cite a reason.

So, foreigners were courted, Total signed a deal with the operator Novatek in February 2010 with tacit approval from Putin before Novatek decided it did not need a foreign partner just over a week before they announced they were looking for one.  Then the deal between Total and Novatek gets scuppered by the environmental regulator, who could not be bothered to provide a reason but is almost certainly at the behest of some political master or other.  Meanwhile, Novatek is getting its wings clipped in other areas:

9th July 2010:

According to Novatek, the company has paid $10 million to buy Tambeyneftegaz, a Russian company that holds an explor­ation and development licence for the Malo-Yamalskoye gas field.

6th August 2010:

Russian authorities have refused to approve a deal whereby the country’s largest independent gas producer Novatek would buy a 100% stake in Tambeyneftegaz, which holds the licence for the Malo-Yamalskoye gas field in the remote Yamal-Nenets autonomous region in West ­Siberia.

Novatek announced in July that it had acquired Tambeyneftegaz for $10 million from a group of offshore-registered investment companies understood to be controlled by Russian businessman Gennady Timchenko.

However, according to information from Russia’s Supreme Arbitration Court, the deal has failed to gain statutory approval from the country’s Federal Antimonopoly agency.

The agency claimed that ­Novatek must obtain permission for the deal from Russia’s foreign investments commission, headed by Prime Minister Vladimir Putin, because stakes in the gas producer are held via offshore-registered firms, and thus Novatek is technically a ­foreign entity.

So, not only is Novatek unsure about whether it wants a foreign partner or not despite having already signed a deal with one of them, the company itself seems to be hitting rough political waters.

I’m sure all of this will do wonders to expedite Russia’s oil and gas developments, thus reassuring potential investors and customers alike.

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4 Responses to Business as Usual in Russia’s Oil and Gas Sector

  1. David Duff says:

    One side effect of your Russian reports, Tim, is that they make me feel so much better about my own stumble-bum country!

  2. Cyrill says:

    Tim, a great writeup on my former “classmate”… I graduated the same year with Sechin from the same school. And the funniest part – I have no memories of him. He was so meek and gray – as any snitch would be.

    I doubt the guy has any clue of real business world. After all, He spent early 1990-s hobnobbing with Malyshev – then the leading gangster in St Pete. He is a typical Russian oligarch. They know how to swim in murky waters but have no clue how real capitalism works. (in this regard he reminds me of our friends at SRB)

    Lets not forget that Sechin became the rosneft chairman right around the famous Baikal affair that landed Yukos’ assets in his (or rather Putin’s) lap.

    He started as Putin’s secretary when Vlad was responsible for attracting foreign capital to St Pete. I know from 3 independent sources that the Putin/Sechin tandem charged $300 in bribes per each joint venture they authorized. Then there was that affair with German money paying for retired soviet officers to start their homestead farms… Lots of fun old Igor went through.

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