TRENDS AND DEVELOPMENTS IN RUSSIA’S OIL AND GAS COMPLEX

By Sergei Kolchin

There have been perhaps three main themes to recent events in Russia’s oil and gas complex. The first is the growth in world oil prices. Overall, Russia’s oil companies have received an unexpected bonus. And there is unlikely to be a fuel crisis along the lines of that in western Europe. Balance targets are even being over-fulfilled, although the rise in fuel prices has become a serious problem in Russia too.

The second event, of national importance, was the appointment of yet another fuel and energy minister. While Viktor Kalyuzhny’s dismissal from the job came as no surprise, the choice of successor has mystified many people. The new minister is the former mayor of Kogalym, Aleksei Gavrin, a little-known figure in Moscow. For the first time since Yuri Shafranik the ministry is headed by a man from western Siberia, after a long line of people who had made their mark in Moscow’s corridors of power or in the oil sector elite. (Petr Rodionov was from Gazprom; Sergei Kirienko from former vice-premier Boris Nemtsov’s group; Sergei Generalov was a former Yukos man; while Viktor Kalyuzhny was rumored to be associated with oligarch groups.)

It is very tempting to view the new minister as first and foremost a LukOIL man. Certainly Kogalym is one of LukOIL’s oil fiefdoms (Kogalymneftegaz currently accounts for almost half the company’s oil production). But it is not that simple. It is worth at least recalling that the new minister, together with the head of Surgutneftegaz Vladimir Bogdanov, was behind the foundation of the Yugra political movement (in other words a connection can be traced between Gavrin and Bogdanov, who was once even rumored to have been earmarked for the prime minister’s job). And then, from the Moscow perspective, Gavrin is more of an “outsider” than his predecessors, in line with Vladimir Putin’s declared policy of keeping the oligarchs at a distance. It is unlikely that his LukOIL roots played a decisive role in the appointment, just as it is difficult to imagine that the president simply took a liking to the new minister during his short visit “to the north”. On the other hand, it is not easy for someone from the provinces to take over the running of the ministry’s considerable assets; but here a great deal depends on exactly which of the assets will remain in his control.

The change in the ministry’s name from “Fuel and Energy Ministry” (Mintopenergo) to simply “Energy Ministry” (Minenergo) has naturally fueled speculation that its functions may be reduced.

This speculation has it that some of the new ministry’s functions will be transferred to the ministry for natural resources (utilization of mineral resources), some to the ministry for economic development and trade (access to the transport infrastructure), and some to the ministry for industry, science and technology (strategic questions). These theories seem rather hypothetical. First, there is little point in bringing in a new minister from the oil regions only to remove the oil and gas issues from his purview. Second, according to information from the government apparatus: “In the president’s decree on the structure of the government, and in other official documents, there is nothing about changing the functions of the ministry.” Moreover, “the word ‘fuel’ did not appear in any of the normative documents regulating the work of Mintopenergo, in the field of energy strategy, for example, or in other areas, so there are no grounds for supposing that Minenergo will lose any of its powers.” In July some clarity was brought to the question of the status of the Energy Ministry with regard to running the fuel and energy complex. Prime Minister Mikhail Kasyanov issued a ruling stating that the ministry was a federal organ of power responsible for carrying out state policy in the fuel and energy complex, and also coordinating the activities of other federal departments in this sphere. Effectively it inherited all the functions and powers of the fuel and energy ministry in this area. Former Energy Minister Kalyuzhny has not been distanced from oil issues either; the president has appointed him his special representative on the problems of the Caspian region. He will coordinate the activity of a special group on Caspian issues which is being set up under the aegis of the foreign ministry.

Another significant recent development is the return to the idea of oil trading on the stock exchange. This type of trade grew rapidly in 1992-93 because of the collapse of the old procurement system. There was a special Moscow oil exchange, and there was active trading in oil and oil products on the Russian commodity exchange, the Moscow commodity exchange and a number of regional exchanges. Oil trading on futures contracts took off.

But after that commodity exchanges took a back seat in market operations, where the oil companies themselves and their associated traders started to play the major role. Then in mid-May this year the idea of oil exchange trading was resuscitated.

According to press reports, Roman Abramovich, Nikolai Aksenenko and Transneft head Semyon Vainshtok proposed a joint project which essentially meant that their organizations would establish an electronic exchange for trading oil, oil products, electricity and natural gas. The “engine” behind the project, Sibneft, describes it as a revolutionary step, and puts the potential trade turnover at tens of millions of dollars. They plan to make the Energy Trading System the main trading platform for the whole of Russia’s oil market. For this it is important that the export monopolists–Transneft, Transnefteprodukt and the Railways Ministry–are among the promoters. The project’s creators believe that the participation of the transport sector will mean that the sale of oil can include delivery to a specific place.

Other oil companies have not greeted the idea with particular enthusiasm as yet. Surgutneftegaz has even announced that it is setting up its own trading site on the Internet, together with SAP, the market leader in company software solutions. Apart from this, traditional commodity exchanges have reemerged. On May 31 the first oil deal took place on the Euro-Asiatic exchange, which has a license to sell oil. Its backers include organizations affiliated to one of the large oil companies. One way or another the signs are of a revival in the trade of oil and oil products in the commodity exchange sector.

The system which Sibneft proposed is scheduled for launch in early 2001. The sale of futures contracts is also to be revived. It had been assumed that an electronic oil exchange would be set up under the auspices of the Fuel and Energy Ministry, but the ministry became bogged down in staff shake-ups. A government decree making it compulsory for companies to sell a proportion of the oil they produce through the exchange may give a further boost to the development of oil trading. The purpose of the decree is to do something to neutralize the way in which the oil producers dictate the price, and to encourage suppliers to diversify.

Changes in Gazprom constitute the third theme of summer 2000. While the oil companies were showing more enthusiasm for developing new trade platforms than new oil fields, their gas cousin was holding its annual meeting of shareholders, which resulted in some very interesting developments. The bargaining over the size of the dividends ended in victory for the government. As a result, the dividends on Gazprom shares are to bring revenue of more than one billion rubles to the national budget–a fourfold increase on last year.

It may be said that the erstwhile powerful management of the company has suffered a defeat. Not only did the state manage to block amendments to the company’s charter which would have made Rem Vaikhirev irremovable; it also contrived to alter the composition of the board of directors. Five of the 11 seats are earmarked for representatives of the government–who are now by no means allies of Vaikhirev. Moreover, the latest meeting of Gazprom shareholders approved a procedure by which the head of the company may by removed a simple majority of shareholder votes. In addition to this, Gazprom must immediately pay interim dividends for the year 2000 of seven kopecks per share. As a result Mingosimushchestvo (the state property ministry) will receive 14 kopecks for every one of the nine billion Gazprom shares it owns, securing revenue of 1.26 billion rubles for the budget.

Gazprom’s German partner Wintershall decided to curtail its North Sea operations off the coast of Great Britain in order to concentrate on Gazprom projects. The company’s representative Mark Vogel announced: “We are completely withdrawing from the development of oil and gas fields in the United Kingdom and the sale of British energy resources on the world market; this decision to leave the British market will allow us to focus our attention on projects with the German company’s partner in Russia, Gazprom. In our view, cooperation with Gazprom is the basis for Wintershall’s further development.”

Gazprom is clearly continuing to “back two horses” in Germany; while expressing disapproval in public, the companies concerned accept these conditions. Gazprom’s affairs in the post-Soviet space are more complex. Ukraine’s debts are already a chronic problem, and Belarus has debts which, although they are not on the same scale, present an equally tricky problem.

Meanwhile, in Russia itself Gazprom’s position, which was practically inviolable under Boris Yeltsin, appears to be wavering. Vladimir Putin’s policy of concentrating power and resources in his own hands has inevitably affected the gas monopolist. When the “Vaikhirev era” comes to an end–which is inevitable, although it is not an immediate issue–Gazprom’s submission to the new rules of play will become even more obvious (the first signal was the business with the Media-Most debts). The fact that relations with the government are becoming more difficult is already a source for growing alarm among Gazprom’s bosses; as are the attacks from their competitors, who dream of getting their hands on the gas giant’s assets, financial flows, its tapped and untapped reserves, and its transport and processing infrastructure.

It is unlikely that the new president and his government will simply allow all this wealth to be redistributed. It is more likely that there will tougher control and direct participation from the state. Unruly regions and an unduly independent Gazprom do not fit in with Putin’s ideas of state-building and economic development. The oil companies have not yet been hit. At a time when price conditions are favorable, it would be foolish to disturb the goose that lays the golden eggs. With this in mind, more indirect measures are being applied to Gazprom too. But there have already been some signals–such as a leak about the possibility of bringing charges against individual managers in LukOIL and Yukos.

In the final analysis, relations between the authorities and the oil and gas industries will be very much determined by certain factors: the state of the world’s fuel markets, how flexible the oil and gas barons are, whether Vladimir Putin and his team have a clear plan of action in the oil and gas sector, and the general sociopolitical and economic situation in the country.

Dr. Sergei Kolchin heads the sector of economic statistics and comparative international analysis of the Russia Academy of Sciences’ Institute of International Economic and Political Studies in Moscow.