Page 7 - FSUOGM Week 46 2019

FSUOGM COMMENTARY FSUOGM
portion in the first nine months of 2019.
It is difficult to say how necessary these tax breaks are, although other producers have understandably taken issue with the fact that support for Russia’s two state majors is being subsidised with an industry-wide tax. Rosneft and Gazprom Neft are no happier, as together they account for more than 60% of national APG
production and will therefore be hardest hit. That the finance ministry views the tax as necessary highlights how much strain Russia’s budget is under. Russia’s oil taxation system, pri- marily based on MET and export duties, does not take specific project capital and operating costs into account. As such, projects that are high cost – either because of their remote loca- tion or geological complexity – are rewarded tax breaks on a case-by-case basis. As easier-to-de- velop fields become scarcer, the burden on government coffers has therefore continued to
grow.
Russia has been taking steps to roll out a
new profit-based taxation system, which would encourage operators to cut costs and allow the government to pinpoint projects that require tax relief more effectively. But momentum is slow.
Impact
If the finance ministry’s tax is adopted, it would have a detrimental impact on the industry in sev- eral key areas.
There is uncertainty about whether the tax
would apply to APG that is simply re-injected to preserve reservoir pressure (natural gas used for this purpose is not taxed). But in any case, the cost of using APG for power generation, or as refining or petrochemical feedstock, will creep up. Non-integrated smaller producers may find it harder to handle this burden.
Margins for refiners are already predicted to come under pressure next year because of stricter IMO rules on sulphur content in marine fuels. The rules have already driven down the price of heavier-sulphur fuel oil, produced in abundance at less sophisticated refineries in Russia.
Sibur and other petrochemical producers could also lose their competitive edge in global market, as they consume sizeable amounts of APG as feedstock.
Lastly, the tax could discourage producers from utilising their APG, prompting them sim- ply to flare the gas instead. This would have both an economic and environmental cost. Russia, the world’s biggest flarer, is still struggling to meet its target of 95% utilisation of APG, set a decade ago. Utilisation was at only 89% last year.
Given the strong criticism the tax has gen- erated, FSUOGM does not expect the finance ministry’s plan to be implemented. Russia’s oil industry wields considerable lobbying power, and will likely be successful in blocking the move. But if not from this levy, the ministry will need to cover the deficit caused by tax relief at Priobskoye somehow.™
PIPELINES & TRANSPORT
TANAP to reach full completion on Nov 30
TURKEY
The Turkish gas market is bearish at present.
THE final phase of Turkey’s Trans-Anatolian gas pipeline (TANAP) project is slated for completion on November 30, Turkish Energy Minister Fatih Donmez told local media this week. According to the official, the event will be marked with a ceremony in Turkey’s west- ern city of Edirne, attended by Turkish Presi- dent Tayyip Erdogan and his Azeri counterpart Ilham Aliyev.
The 1,800-km TANAP forms the central section of the Southern Gas Corridor (SGC) network of pipelines running from Azerbaijan to Italy. TANAP’s first section between Eskisehir was completed in mid-2018, enabling the flow of extra Azeri gas to Turkish consumers. The pipe- line has handled more than 3bn cubic metres of gas since shipments began.
TANAP’s second section continues to Edirne, near the Greek border, where it will connect with SGC’s final stretch, the Trans-Adriatic Pipeline (TAP). TAP is running behind schedule, with the head of its operating consortium recently admitting that it would not be ready until at least October 2020.
At peak capacity, SGC will deliver 6 bcm of gas to Turkey and 10 bcm to Italy, Greece, Alba- nia and other European countries.
Russia’s Gazprom is meanwhile preparing to launch a rival project, TurkStream, whose twin 15.75 bcm per year strings should be completed by the end of this year. But it is still uncertain when the pipeline will begin pumping gas. Both projects could suffer from bearish market condi- tions in Turkey at present.
“The economic turmoil in Turkey [has] made consumers there particularly sensitive to the price of gas being supplied, with gas consump- tion pressured by alternative cheap sources such as coal,” Moscow-based VTB Capital wrote in a research note on November 19.
Turkish gas consumption fell 5.5% y/y in Jan- uary to August to 30.6 bcm, while Russian gas supplies slumped 35% in the first nine months of the year to 11.7 bcm, because of competition from TANAP and LNG imports.
VTB said it did not expect to see a significant rebound in Russian gas supplies to the country, as TurkStream’s first string will simply carry gas that would otherwise have been pumped through Ukraine.
“Gazprom’s gas is probably the most expen- sive on the Turkish market, so to keep its market share the company is inevitably going to have to sacrifice the margin,” the bank said. ™
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