Page 80 - RusRPTOct19

The spot gas price in Europe has fallen to $85/kcm (a record low) on the back of the continuing global gas glut and close-to-full European gas storages. We remind investors that the spot price accounts for at least 40% of Gazprom’s realised gas price (30% directly and another 10-15% via hybrid pricing, with the rest being made up by the oil link) for European sales, according to our estimates. The gas giant’s 2H19 financial performance is likely to be weak, with a knock-on effect on dividends. If spot averages at $100/kcm through the year end, under a 50% payout the stock might deliver a DY of 9.8% (5.9% under a 25% payout). Driven by the abundance of gas globally the 93% full underground storages and weak European demand trends, European spot prices have reached a new historical low of $85/kcm (TTF). Therefore, the European netback (calculated from spot) is now 43% (or $30/kcm) below the domestic tariff in Russia’s Northwest (Figure 1).
Spot makes up at least 40% of realised gas prices. If Gazprom exported gas at spot prices, then given Nord Stream’s export cost of some $20/kcm, the 30% export duty, another $32/kcm transport cost to Yamal, some $18/kcm MET and $5/kcm in lifting costs, the company would generate a loss of $15.50/kcm at the wellhead. We note, though, that the calculations are not that simple: Gazprom is the owner of the gas pipelines in Russia, so it is quite difficult to estimate the company’s cash transport expenses (unlike the $32/kcm for independent gas producers that we use above). We also note that there is little information available regarding the volumes sold at spot. We know that the company sold only 0.65bcm in August (with same month delivery) at Electronic Trading System, which presumably sells gas at spot prices. The volumes sold at spot outside this system are not publicly available. We calculate that spot (directly and indirectly) accounts for some 40% of the final realised gas prices.
The reverse excise duty for Russian refineries could be increased to 30%, according to Vedomosti daily citing the meeting between Deputy Prime Minister Dmitry Kozak and Finance Minister Anton Siluanov. As reported by bne IntelliNews, in 2018 the Finance Ministry launched a so-called tax manoeuvre in oil industry, shifting the tax burden on the upstream sector. Reportedly, the higher netback on the excise duty for oil products could become available to companies that have made modernization contracts with the Energy Ministry of over RUB30bn ($456mn) and that have already invested at least 10% of the contract. BCS Global Markets welcomed the initiative on September 9 as positive, arguing that the increase could offset the effect of higher mineral extraction tax (MET) and stimulate modernization in the downstream sector. "However, the change would only apply to those refineries that plan to make major investments into modernization, such as Tatneft’s TANECO," BCS GM believes.
Russian government will review the dispute between Russia's largest oil company Rosneft and Transneft pipeline monopoly over the quality of domestic oil blends following the contamination of Druzhba pipeline and Ust- Luga port, Vedomosti daily and Interfax reported on September 20 citing the Minister of Energy Alexander Novak. As reported by bne IntelliNews, this month Rosneft argued that Transneft has not yet resolved the issues with paying compensations and diluting the contaminated oil from Druzhba that has been pumped back to Russia. Vedomosti reminds that the chair of Rosneft's board ex-German chancellor Gerhard Schroeder addressed the Russian government in August suggesting to toughen control over the quality of oil transported by Transneft, as well as to involve independent contractors.
80 RUSSIA Country Report October 2019 ww.intellinews.com