Gazprom Neft Completes Arctic Oil Terminal to Deliver New Crude Blend to Europe Year-Round

Gazprom Neft's Novy Port oil field off the Yamal Penninsula. Photo from Gazprom Neft.
Gazprom Neft’s Novy Port oil field off the Yamal Penninsula. Photo from Gazprom Neft.

Russia’s fourth-largest oil producer has finished building its Arctic terminal at Cape Kamenny on the Yamal Penninsula, which will facilitate up to 8.5 million tons of oil shipments year-round. Previously movement of crude from the oil field was limited to the ice-free season.

Setting up the Arctic terminal is a key step towards the start of year-round oil export of the Novy Port oil blend to European consumers,” Gazprom Neft’s First Deputy CEO Vadim Yakovlev said.

The terminal will process oil from the Novoportovskoye (Novy Port) deposit, which has estimated oil reserves of 230 million tons and 270 billion cubic meters of gas, with peak production of 8.5 million tons per year expected after 2020.

The route of oil from Novy Port once it reaches the new oil Cape Kammeny terminal. Photo from Gazprom Neft.
The route of oil from Novy Port once it reaches the new oil Cape Kammeny terminal. Photo from Gazprom Neft.

By 2016 oil supplies from Novy Port will increase to 2 million tons, and to 4 million tons by 2017, according to Yakovlev.

The low sulfur blend of crude oil has been given its own crude blend classification – Novy Port, which Gazprom Neft claims is better than both the Russian Urals blend and Brent.

After the oil reaches CapeKammeny, it is shipped by tankers to world markets. Final prep work will be completed in the coming months, and testing of the terminal will begin in early 2016.

map close up copy
Terminal plan. Photo from Gazprom Neft

Gazprom to Discuss Ruble Export Pricing at Board Meeting

Russia has long wanted to do away with the petrodollar
Russia has long wanted to do away with the petrodollar

On September 28, Gazprom’s Board of Directors will discuss fixing new export contracts in rubles, instead of dollars.

RIA Novosti first reported the development, after seeing the agenda of the upcoming meeting. However, this is an issue that Gazprom has already been discussing for a year and a half.

Western sanctions on the Russian oil and gas industry have made the conversation all the more relevant, since the Kremlin thinks a move towards ruble-based sales would slightly protect Russia from sanctions.

The idea is that more ruble-denominated product on the market will create a more robust demand for the ruble, and ultimately strengthen it. In the last year, the Russian ruble has lost more than 40 percent of its value.

Industry experts don’t expect a change anytime soon, Kommersant reported, citing sources who believe the gas giant is just preparing to for a brief on the fuel and energy sector to the president. Others believe Gazprom wants to hedge itself after the US sanctions on the offshore Yuzhno-Kirinskoye field, one of Russia’s largest gas reserves.

Whether its business or politics, settlements in rubles will not be useful until there is a functioning financial infrastructure. However, this infrastructure cannot just appear out of thin air, it has to develop alongside ruble pricing on export contracts.

Moscow has always viewed the sale of crude oil as an unjust dollarization of the global economy and the energy sector.

Gazprom could receive payments in rubles on short-term gas contracts, TASS reports. This could, in theory, apply to Gazprom’s last gas auction that ended September 10, when the company announced it had sold 1 billion cubic meters to be delivered to Europe, but did not disclose pricing.

Gazprom’s major gas deal with China’s CNPC could also provide an avenue to settle export payments in rubles.

In June, Gazprom’s general director Elena Burmistrova said that the companies are considering setting payments in rubles and yuan. In May 2015, just as sanctions against Moscow were ramping up over the annexation of Crimea, China signed a 30-year contract to supply 38 billion cubic meters per year from Russia.

Russia will pump natural from fields in Western Siberia and send it to China via the Power of Siberia 2 pipeline, which will deliver gas to Western China. The Power of Siberia will deliver to the east.

Last year, Gazprom Neft attempted to begin selling its product in rubles. Russian President Vladimir Putin acknowledged the need to switch to ruble payments but said “it’s not so simple.”

In late 2014, Russia’s Federal Antimonopoly Service, in reaction to the massive devaluation of the ruble, asked the Government to force oil and gas companies to settle export payments in rubles. The idea was dropped.

Global oil prices have been denominated in dollars since the end of World War II, since the US was both the biggest producer and consumer of world oil. Then, in 1973, President Nixon signed the famous ‘petrodollar’ agreement with Saudi Arabia, which set the trend of selling oil in dollars worldwide.

Each time a country sells oil or gas in its own national currency on a mass scale, the dollar weakens.

Putin Looks to Russian Oil Exporters to Support Budget, by the Billions

Putin meets with ministers to discuss the proposed levy on oil companies in order to patch up budget shortfall
Putin meets with ministers to discuss the proposed levy on oil companies in order to patch up budget shortfall

Today, Russian President Vladimir Putin met with his advisors to help the government find a solution to balance the budget, pay pensions and boost tax revenues.

In most countries, neither of these are closely linked to oil prices, but in an energy-dependent export state like Russia, oil prices permeate each and every branch of government.

The group met Putin at his Novo-Ogaryovo residence outside of Moscow, but no major budget decisions were taken.

One especially important issue that wasn’t resolved is what role Russian oil companies may be forced to play in order to mend the budget gap.

Ahead of the meeting, Finance Minister Anton Siluanov put forth a plan to raise taxes on the oil industry that could pump an extra 605 billion rubles ($9 billion) into the 2016 budget. This would only put a dent in the $40 billion, or about 3 percent of GDP, budget deficit expected for 2015.

Already, the Russian government relies on oil and gas export revenues for over half of its budget.

Under discussion is a proposal to raise extraction taxes and export duties on the oil industry, which may generate an additional 605 billion rubles ($9 billion) for next year’s budget.

“I am asking the Cabinet to look into bringing additional revenues into the budget received by our exporters as a result of the ruble’s devaluation. Naturally, we need to tread very carefully, in order not to weaken the economy of export companies, maintaining their investment opportunities,” Putin said at the meeting.

RBC, the Russian business daily, estimates this tax adjustment could cost Russia’s largest oil company Rosneft an additional 200 billion rubles ($3 billion) and Lukoil, the second biggest, 100 billion rubles ($1.5 billion).

This isn’t the first time the oil companies would be helping out the government. In December 2014, just after the ruble crashed and lost more than 30%, five major state exporters, including Gazprom and Rosneft, were ordered to sell a portion of their foreign currency earnings to support the ruble.

Though low oil prices would normally spell disaster for a hydrocarbon-dependent country like Russia, the 50 percent devaluation of the ruble in the last year has saved several Russian oil giants and then some.

With a majority of operation costs in rubles and revenues in dollars, Russia’s energy majors are turning record net profits (in rubles, that is).

Ilya Trunin, director of the tax department at the Ministry of Finance, may have described it best: “[Russian] oilmen must understand- if they want to pay less, they have to pay more.”

Analysts warn the initiative could have a negative effect on the industry, since it would reduce company’s cash flow and subsequently dig into development and investment in new fields and production. While there is no scarcity of oil reserves in Russia, the untapped reserves in the Far East are vital to develop and start drilling before the resources in Western Siberia run dry.

Igor Sechin, the head of Rosneft, was the only businessmen at Tuesday’s meeting with Putin, alongside Central Bank Governor Elvira Nabiullina, Economy Minister Alexei Ulyukayev, Energy Minister Alexander Novak, and several other government officials.

Sechin opposed the finance ministry’s initiative, RBC reported.

Oil prices continue to hover at 6-year lows and are not showing any substantial signs of recovery, as countries continue to produce more oil than the sluggish world economy can absorb.

This has caused the Russian ruble to collapse at a time when the economy was already showing distress, and the world’s 8th biggest economy is now facing its first major recession since 1998.

There is less money for government programs across the board, foreign investment into the country has been swiftly exiting, inflation is in record double digits, and wages across the country are depressed.

Lower oil prices didn’t trigger Russia’s financial problems but certainly exasperate the already fragile situation. If the government can’t summon up money from Rosneft and Lukoil, they will be forced to either peg pensions to inflation or raise the retirement age- both hugely unpopular political moves.

No final budget decisions were made Tuesday, and the group will again meet in late October.

The World’s Biggest Oil Cartel is 55-years old

Photo from Russiacouncil.ru
Photo from Russiacouncil.ru

On September 10-14 representatives from Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela met in Baghdad and established the Organization of the Petroleum Exporting Countries (OPEC).

The world’s largest oil cartel pricing system, which today accounts for more than 40 percent of global oil production, came into existence.

Over the next decade, nine more members joined. Qatar in 1961, Indonesia (which is no longer a member as of 2009) and Libya in 1962, the United Arab Emirates in 1967, Algeria in 1969, Nigeria in 1971, and Ecuador in 1973. Angola joined in 2007 and Gabon, no longer a member, held membership from 1975-1994.

For the first five years, the group was headquartered in Geneva, Switzerland and then by 1965, it had settled in Vienna, Austria.

In early 1974, without the consent of production companies, some countries decided to play a much more active role in determining the price of oil, abandoning the old pricing scheme that had been used for decades.

Several treaties between nations, as well as oil companies, were broken in order to rival the so-called “Seven Sisters”, the private multinational companies that dominated the oil market. Exxon (Esso), Shell, BP, Gulf, Texaco, Mobil, Socal (Chevron), and now what is France Total, controlled 85 percent of the world’s oil reserves.

The Arab-Israeli war in October 1973 was critical in the rise of OPEC. The cartel, which at the time accounted for about two-thirds of US imports, blocked all shipments Westward. As a result, oil prices increased four-fold, demonstrating just how much power OPEC really held. America literally ran out of gas.

1973 oil crisis hits US gas stations. Photo by David Falconer, US National Archives
1973 oil crisis hits US gas stations. Photo by David Falconer, US National Archives

From 1974 to 1982, OPEC more or less took control over global oil prices by setting a fixed price for the benchmark light Arab oil, only changing its price when all member states were in agreement.

The growing importance of influence in global commodities markets, paired with the nationalization of oil assets in most of the member states, absolutely killed the control that international oil companies once held. The Gulf states now had a coordinated monopoly on global energy.

After OPEC flexed its muscles, the West responded by creating the International Energy Agency, now based in Paris, in order to safeguard oil west of the Mesopotamia. The agency was formed on the initiative of former US Secretary of State Henry Kissinger.

Today, OPEC is best known for its quota system- which sets a production limit on member countries in order to maintain influence in the world market.

The quota system was a reaction to the 1979 Iranian Revolution when the rise of Ayatollah Khomeini more than doubled oil prices to $35 per barrel from $14.

The 80s were not nice to OPEC. Between 1982 and 1986, OPEC was forced to play defense while the IEA was diversifying its energy sources and supply chain of petroleum products.

Saudi Arabia, the undisputed unofficial leader of the cartel, decided to play ball. In September 1985, it increased its crude oil production knowing it would further sink oil prices, which remained weak for the better half of the decade.

In 1986, the sudden surge of production in the North Sea and Alaska, coupled with a sluggish global economy caused oil prices to collapse, sunk oil prices. And there wasn’t much OPEC could do about it.

crude prices in the 80s

It was time for OPEC to develop a new strategy. On December 19, 1986, it agreed to cut production by 7 percent, limiting daily production to 15.8 million barrels.

History of OPEC's quotas, courtesy of oildrum.com
History of OPEC’s quotas, courtesy of oildrum.com

Between 1987 and 2005, the organization decided to no longer set oil prices individually, but by taking into account a variety of crude products. This allowed the market to regulate individual grades of oil. A production ceiling was established, and divided among member countries, according to a formula that took into account each country’s oil reserves, production capacity, historical production share, domestic oil consumption, production costs, population, dependence on oil exports, and external debt. The ceiling was set at 17.6 million barrels (2.8 million cubic meters) per day . Currently, OPEC’s quota for oil production is 30 million barrels per day.

The ‘Asian Tiger’ economic crisis in 1998 and the warm European winter both decreased demand for energy. From January 1998 to March 1999, prices only fell $10 per barrel, but the recession was short-lived, and in1999-2000, oil prices again started to rise, in part due to OPEC’s decision to lower production.

As a result, prices gradually increase back to the $35 per barrel level, but signs of slowdown in the US economy in 2000, as well as huge fuel surpluses forced OPEC to set their basket price at $22 per barrel.

Wars in Afghanistan and Iraq damaged the US economy, and the rest of the world wasn’t doing so hot either. Sluggish demand caused prices to crash to $19 per barrel, and by the end of November 2002 they recovered to $20 per barrel.

In July 2008, oil prices reached a record high of $147 per barrel but collapsed after the financial crisis.

As oil prices imploded in the second half of 2014, OPEC sat by and watched as oil prices halved, in theory, to crush the North American shale business.

Now a barrel sells for just above $40 per barrel, due to a slowing China, and economic slowdown in Europe, and a strong dollar.

What happens next rests in the hands of oil ministers from Iran, Iraq, and Saudi Arabia.

Louise Dickson

Gazprom and the China Question

putin and chinese dude

A year ago, Russian and Chinese delegations met on a crisp September day on the outskirts of the Russian city Yakutsk, which in the game of Risk, is the small territory wedged between Siberia and Kamchatka.

Gazprom employees from the Chayanda gas field donned cerulean blue flame-resistant jumpsuits, and Russian President Vladimir Putin and his counterpart Vice Premier Zhang Gaoli wore suits and black overcoats.

Orchestral music triumphantly played as the two men affixed their signatures to the freshly-welded ‘Power of Siberia’ pipeline, which officially began its construction on September 1, 2014. In Russia, where natural resources account for 18 percent of GDP, the signing of new pipelines is always a grandiose affair.

Putin signs the Power of Siberia pipeline outside of Yakutsk on September 1, 2014. Photo from gazprom.ru
Putin signs the Power of Siberia pipeline outside of Yakutsk on September 1, 2014. Photo from gazprom.ru

It was indeed a show. There were a number of traditional Republic of Yakutia dances performed, and a grand finale of ‘Katusha’, the famous Red Army hymn, was sung in both Russian and Chinese.

Though the Parker Brothers gave Yakutsk its own colored sovereignty in its boardgame, in modern Russia, the territory is in fact part of Siberia, and is situated so far northeast that it is closer to Alaska than it is to Moscow.

Source: EIA
Source: EIA

Putin travelled all this way to sign a piece of metal because the Eastern Siberia region will soon have to make up for the fast depleting resources in Western Siberia. It is currently the third largest gas producing region in Russia.

Gazprom estimates resources in Eastern Siberia and the Far East hold 52.4 trillion cubic meters in onshore reserves.

In the pipeline

The plan is to build a 3,968 km pipeline from Eastern Siberia to China’s populous eastern populations. If completed, it will be the world’s largest pipeline. Russia’s largest steel pipeline manufacturer, TMK, will provide building materials.

Construction of the Power of Siberia in the Yakutia region
Construction of the Power of Siberia in the Yakutia region

Natural gas would flow to China from the Chayandinskoye field in Yakutia, and the Kovyktinskoye and Chikanskoye fields in the Irkutsk Region.

east siberia detailed map
Source: EIA

 

Click here to see the full version of this map.

If Rosneft is at some point granted permission to use the energy network, gas could also be pumped from the Vankor and Yurubcheno-Tokhomskoye fields, both of which Rosneft has offered shares to Chinese partners.

No Deal

Even though CEO Alexei Miller was in Beijing last week, Gazprom did little to solidify its agreements to supply China with natural gas from Siberia, a deal initially agreed on in May 2014.

The timing couldn’t have been more important. Relations with Europe were withering away over US-led sanctions and political feuds over the territorial integrity of Ukraine escalated. The China deal in May 2014, which Putin himself said was “epochal” marked Russia’s first public step in its ‘pivot’ toward the east.

Construction costs of the Power of Siberia are estimated to be $55 billion, more than the company is even worth. Gazprom’s current market capitalization is $50 billion, a mere shell compared to the robust $365 billion value in May 2008. Cut off from western financiers after Russia’s annexation of Crimea, Gazprom is trying to get China to put down capital to pay for the expensive pipeline project.

China only agreed to the 400 billion (2.4 trillion yuan) deal last May because Russia promised the Power of Siberia route, which will send gas to the overpopulated and coal-burning northeast region, instead of the western route it had been pushing for decades.

China has already begun construction on its section of the Power of Siberia, which will meet up with the Russian section in the city of Blagoveshchensk, a border town.

Russia is also trying to get China to agree to a cheaper western pipeline route, known as the ‘Altai’ pipeline, a much shorter pipeline that would send natural gas to the western province of Xinjiang instead.

If both pipes are completed, Russia will have the capacity to send 68 bcm to China, making it Russia’s biggest natural gas import client.

With talks currently at a deadlock, analysts believe Chinese and Russian leaders will resume discussions in 2016.

Europe back in focus

Meanwhile, Gazprom is preoccupied with two more straightforward European projects.

On September 4, Gazprom set up a joint venture with foreign partners (E.ON, Royal Dutch Shell, OMV, Wintershall, and Engie – formally EDF Suez) to build Nord Stream 2, which will supply an additional 55 billion cubic meters (bcm) of cubic gas to Germany, bringing the pipeline’s total capacity to 110 bcm, or about two-thirds of the total gas the EU imports from Russia. The cost will be about 1/5 that of Power of Siberia and is slated for completion in 2019.

The second distraction from China is the Turkish Stream, which is the reincarnation of the South Stream, and will deliver natural gas to central and southern Europe via Turkey and Greece. At this point, it doesn’t look like the grand 63 bcm capacity pipeline will come to fruition, but instead a single line that will deliver 15.75 bcm to Turkey.

For now, Gazprom is sticking to the gas game it knows best – Europe, which coincidentally accounts for 56 percent of the gas giant’s sales.

Russia offers China stake in Siberian oil field

rosneft sinopec
This could be a sign Rosneft needs cash, and fast.

After months of flirtatious offers, Rosneft has finally given China’s state-owned energy giant China Petrochemical Corporation (Sinopec) the opportunity to buy a 49% stake in eastern Siberian fields Russkoye and Yurubcheno-Tokhomskoye.

Proven hydrocarbon reserves at the Yurubcheno-Tokhomskoye field are 304.6 million barrels, according to an audit by DeGolyer & MacNaughton.

Located in the Krasnoyarsk region in Eastern Siberia, the fields are not yet producing oil, but once active, will in theory pump 100,000 barrels per day by 2019, much of which will flow eastward to China.

The share sale to China will help Rosneft, one of the world’s most heavily indebted oil companies, to finance capital-intensive projects needed to carry out drilling in the fields. Unable to borrow from Western banks due to sanctions, Russia has turned to China to cultivate foreign financing.

Under the agreement, Sinopec may acquire up to 49% in the East-Siberian Oil and Gas Company (ESOGC) and Tyumenneftegaz, which hold licenses for exploration and development of the fields.

Time is of the essence, as the fields in eastern Siberia will have to make up for the production gap of fields in Western Siberia, where resources are fast depleting. Analysts worry that Rosneft may fail to honor its commitment to China.

Russia is counting on China to become its biggest energy customer as demand from Europe weakens along with diplomatic relations.

Rosneft plans to increase oil exports to China to 1 million barrels per day, about 10 percent or Russia’s total production. Rosneft will also seek billions in pre-payments from China.

The agreement was inked by Rosneft CEO Igor Sechin and the head of Sinopec in Beijing on September 3, where Mr. Sechin is joining Russian President Vladimir Putin on a working visit.

Rosneft also signed an agreement for the Russian company to take over a 30 percent stake in ChemChina Petrochemical Corporation (CCPC), which was agreed in June 2015 at the St. Petersburg Economic Forum.

A separate memorandum of understanding was signed for Rosneft to allow ChemChina to acquire a majority stake in Russia’s Far East Petrochemical Company.

Louise Dickson

Gazprom to Finalize Nord Stream II Plans

Photo credit: Dresser Rand
Photo credit: Dresser Rand

Gazprom’s final Nord Stream II plans may be announced September 3-5, as the Russian gas giant anticipates signing binding shareholder agreements at the economic forum being held in Vladivostok, according to Russian business daily Kommersant.

A direct pipeline from Russia to Germany that at present delivers 24 billion cubic meters of gas via the Baltic Sea, Nord Stream will gas to markets in Germany, Netherlands, France, Denmark, and someday Britain if a new branch is added in the future. In the next ten years, Europe will increase gas imports by about 200 billion cubic meters, or more than 50 percent. According to Gazprom, Nord Stream will satisfy about 25 percent of the additional need.

The expansion of the Nord Stream was announced in June 2015 and Anglo-Dutch Shell, German E.ON and Wintershall, and Austrian OMV have already been named partners. Gazprom will own a 51 percent stake in the project.

Dutch Gasunie and the French energy concern Engie (formally called GDF Suez) which were both partners in the first two Nord Stream lines, have not yet been tapped for the project, but may be.

Any agreement made at the summit will be legally binding and set construction dates and the project schedule.

The two expansions of Nord Stream are expected to be complete by the end of 2019 and 2020, according to E.ON, Germany’s top energy utility. Since the pipe runs directly from Russia to Germany, and two of Germany’s two largest energy utilities are involved, analysts expect the project to be expedient and problem-free.

Gazprom CEO Alexei Miller estimates construction of the second part of Nord Stream will cost around €10 billion.