Archive for the 'Oil&Gas News' Category

Gunvor Group Wins Rosneft Export Tender

Wednesday, October 31st, 2012

Gunvor Group, the world’s fourth largest crude oil trading company owned by Gennady Timchenko and Torbjörn Törnqvist, announced today that it won a tender to export Rosneft petroleum products through the company’s Baltic and Black Sea oil terminals. A one-year contract between Gunvor Group and Rosneft will allow it to export up to 6 million tons of oil products from Rosneft’s refineries in Russia’s Samara region. “This is a landmark deal that results in a major Russian oil company receiving access to the most cost-effective export facilities created by Gunvor Group,” according to a press release by the company today. The Ust-Luga terminal on the Baltic Sea, which began commercial operations late last month, is 100% owned by Gunvor Group. The company also owns a 50% stake in the Novorossiisk oil terminal on the Black Sea.


Ben Priddy
Central Asian Analyst

Gazprom Announces Contest to Name New Far Eastern Pipeline

Wednesday, October 31st, 2012

For those interested in participating in one of Gazprom’s newest PR projects, the company’s information directorate announced yesterday the opening of a contest to come up with the best name for it’s new pipeline system in the Far East. Names may be submitted in both English and Russian, and the winner will be announced by the end of the year, according to Gazprom’s website. The gas trunkline will lay the foundation for a new east-west transit corridor and help Russia to build up new export capacities to Asia-Pacific markets.

Eastern Gas Trunkline
Source: Gazprom


Ben Priddy
Central Asian Analyst

U.S. Shale Gas Forces a Weakened Gazprom to Turn East

Tuesday, October 30th, 2012

Vladimir Putin warned Gazprom last week to consider the negative impacts of converging developments in Western gas markets, particularly involving the shale gas revolution in the U.S., Russian newspaper Vedomosti reported October 22. On October 29, Putin met with Gazprom’s Alexei Miller and announced plans for an Eastern Gas Program. Gazprom’s position in Europe is under increasing threat and Russia is looking to open an ‘Asian Vector’ to bolster it’s gas business.

Last month, EU antitrust officials opened an investigation into Gazprom to determine whether the company has hindered competition in European gas markets. If found in violation of EU rules, Gazprom could be fined as much as 10% of its global revenue, The New York Times reported. To add to the company’s concerns, Gazprom to face a financial crisis at home stemming from costly political pipeline projects and insufficient upstream investment.

The 16 billion euro Nord Stream pipeline connects Russia to Germany via the Baltic Sea and became fully operational at the beginning of October. The second branch of Gazprom’s energy pincer maneuver to Europe, the South Stream pipeline that would connect Russia to Bulgaria via the Black Sea, is projected to cost between 19 and 24 billion euro (see more here on the South Stream pipeline). Nord Stream and South Stream aim to bolster energy security in Russia’s largest gas market, according to each project’s website. At home, however, Gazprom has failed to channel sufficient investment into the modernization, maintenance, and expansion of upstream projects to support a long-term position in Europe, despite record high profits over the past several years. Now, with the rise of shale gas in North America, Gazprom faces a new threat.

Enter American Shale Gas
Gazprom’s Alexei Miller declared in 2010 that the shale gas revolution in the U.S. would not pose a direct threat to Russian gas export markets. That view was repeated until as recently as October 1 of this year, when a Gazprom official stated that rising American shale gas production will not threaten Gazprom in European markets.

“Although we heard that the motive of these activities was to decrease dependence of certain countries on Gazprom gas, the end results of these efforts will be utterly favorable to us,” the AP quoted Gazprom’s head of export contracts and pricing, Sergei Komlev, as saying. “The reason for remaining tranquil is that we do not expect the currently abnormally low prices in the USA to last for long.” Vladimir Putin’s announcements over the past week seem to signal a change in outlook and Gazprom’s tranquility regarding shale gas may not last much longer. That is because an unexpected, but direct, consequence of the U.S. shale gas revolution is leading to the displacement of Russian gas in Europe.

The rate of transition from coal-to-gas consumption in the U.S. over the past 3 years has increased steadily due to the rise in shale gas production. This transition has caused a decline in coal prices and an increase in American coal exports to alternative markets. BP reported over the summer that global demand for coal grew by 5.4% in 2011, which is a higher increase in demand than any other fossil fuel during the same period.

And in the past year alone, American coal imports to Europe increased by 38%, leading to a displacement of gas consumption in some of Russia’s primary gas export markets, Vedomosti reported October 22. This, combined with the slump in gas demand from the economic slowdown, has led to a 9.9% decline in demand for Russian gas in Europe over the last year, according to Vedomosti.

Russia’s Asian Vector
As a result, Putin has ordered Gazprom to turn east, where the energy-hungry markets of the Asia-Pacific region are in search of new supplies of oil and gas. My latest article for OGE sheds light on one possible strategy for the Russian gas industry in the region: the creation of a Russo-Korean gas partnership to expand into East Asia. But China is the primary target for Russia’s gas diplomacy.

Yesterday, Putin and Miller announced plans to connect the giant Chayanda and Kovykta oil and gas condensate fields with a dual east-west 3200-kilometer pipeline system in the Far East by 2017. The western branch of the system will connect to the United Gas Supply System at Tomsk and supply the domestic market with gas. The second branch will transit east to Khabarovsk and Vladivostok, where plans are underway to connect Russia’s oil and gas infrastructure to East Asian markets.

Russia's Eastern Gas Program
Source: Gazprom.com, Eastern Gas Program

According to President Putin, connecting the enormous gas reserves in Russia’s Far East will enable the creation of a new export center to the Asia-Pacific region. “In the near term we can create a gas export capacity [in the region] that rivals gas exports to Europe, perhaps even surpassing [the amount of Russian gas exports to Europe],” Miller added. A new LNG terminal is scheduled to be completed by 2018 to increase Russia’s LNG export to regional or global markets. But is that soon enough?

At a conference on Russia’s Asian strategy in Moscow last week, Oleg Nikiforov of Nezavisimaya Gazeta voiced concern over the slow pace of Russian expansion into East Asian energy markets. “Time is short. By 2016, the United States will have the capacity [to supply the region] with LNG, if they desire to do so,” Nikiforov said. American shale gas is a growing threat for Gazprom.


Ben Priddy
Central Asian Analyst

Putin and Miller Announce Plans for Eastern Gas Program:

Tuesday, October 30th, 2012

President Vladimir Putin ordered Gazprom’s Alexei Miller yesterday to finalize plans for an Eastern Gas Program and begin construction of two new pipelines in the Far East, Russian newspaper Interfax reports. The new pipeline system will connect the giant Chayanda and Kovykta oil and gas condensate fields near Yakutsk in Eastern Siberia to Vladivostok. “We have come to the next stage of the Eastern gas program – to the beginning of work on developing fields in the Yakutiya and Irkutsk regions, the Chayanda and Kovykta fields,” Interfax quoted Putin at the meeting. Chayanda holds an estimated 1.3 trillion cubic meters (tcm) of natural gas and Kovykta holds approximately 1.5 tcm. Gas reserves will supply domestic demand first, but a new Asia-Pacific export center will also be established, Putin said. Miller announced that the new 3200-kilometer pipeline system will be completed by 2017 and enable Russia to increase LNG supplies to Asian markets, namely Japan and China.

Sources: Interfax, http://www.interfax.ru/business/txt.asp?id=273323 (in Russian)


Ben Priddy
Central Asian Analyst

Weekly Kickoff - October 29

Monday, October 29th, 2012

What the Russian Papers Say:

Battle Over Offshore Exploration Rights in Russia’s Far North Intensifies:
Allowing private companies to participate in offshore oil and gas projects may speed up exploration of the Arctic, which is particularly important considering the decline in production of traditional oil and gas provinces in Russia, sources at the Ministry of Natural Resources stated last week. State companies are inefficient and slow in their exploration efforts, officials said. Gazprom and Rosneft hold drilling rights to 41% of oil and gas reserves in Russia’s offshore fields and stated that they are categorically against allowing private companies to participate in offshore exploration. Earlier this year, Lukoil, Surgutneftigaz, Bashneft, and TNK-BP wrote a joint request to the government to expand offshore access to private companies, but Vladimir Putin advised the companies to commit to partnerships with Rosneft. In the latest development, Lukoil promised last week to invest $2.7 billion in the exploration of four areas in the Laptev, Eastern Siberian, and Chukchi Seas in Russia’s Far North. The Russian government is to decide by November 1 if it is worth opening offshore areas to private companies.
(Vedomosti, October 26)

Russia's Offshore Oil and Gas Exploration
Source: Interfaxenergy.com

Gazprom to Appeal Austrian Ruling on Take-or-Pay Contract:
Gazprom Export announced last week that it will appeal a ruling by the Austrian Supreme Court that frees Czech RWE Transgas from fines for violating a contract agreement. The Austrian court ruled October 24 that RWE Transgas does not have to pay a $500 million fine to Gazprom Export for refusing delivery of gas supplies and violating its take-or-pay commitments between 2008 and 2011.
(The Moscow Times, October 26)

Gazprom Begins Commercial Operations at Giant Yamal Gas Field:
The Bovanenkovo natural gas field, with reserves estimated at 4.9 trillion cubic meters, began operations October 23. Annual gas production at the field is projected to start at 115 billion cubic meters (bcm) and eventually reach 140 bcm. Gazprom is currently constructing a 2500-kilometer pipeline and 8 compressor stations to connect the field to a new regional gas hub at Ukhta, and later to Russia’s united network of natural gas pipelines.
(Argumenty i Fakty, October 23)

Yamal Gas Infrastructure
Source: Gazprom

Central Asian Dispatch:

Turkmenistan Reveals New Oil and Gas Infrastructure in Caspian Sea:
Turkmen President Gurbanguly Berdimukhammedov stressed the importance of working with international partners to attract foreign investment and develop the country’s offshore hydrocarbon reserves in the Caspian Sea. Currently, Petronas, Dragon Oil, Buried Hill, RWE, and Itera are exploring the Turkmen sector of the Caspian. Further talks with BP, Chevron, TX Oil, ConocoPhilips, Marathon, and ExxonMobil to explore an additional 32 offshore blocks are currently underway.
(Trend.az, October 23)

Delays at Super Giant Kazakh Offshore Oilfield Worry Investors:
Officials from the North Caspian Operating Company (NCOC), the Western-led consortium developing Kazakhstan’s Kashagan oilfield, voiced concern last week over long-term returns on their investment. NCOC partners have invested $46 billion over 12 years in Kashagan and production has not yet begun at the field. The current Production Sharing Agreement between NCOC and the Kazakhstani government expires in 2041, bringing into question whether investors will be able to recoup their costs given the slow development of the technically-challenging field.
(Reuters, October 22)


Ben Priddy
Central Asian Analyst

Weekly Kickoff - October 22, 2012

Monday, October 22nd, 2012

Deal of the Decade? BP to Announce Plans to Sell 50% Stake in TNK-BP to Rosneft October 22:
BP is set to announce a preliminary agreement in the much talked about TNK-BP-Rosneft deal that would make Rosneft the world’s largest publicly-traded oil company, in terms of reserves and production. The deal will be valued at $26 to $28 billion and leave BP with just under a 20 percent shareholding stake in Rosneft. Rosneft is also negotiating to buy out BP’s original partners in TNK-BP, AAR, for $28 billion in cash. A final settlement could come in November.
http://online.wsj.com/article/SB10001424052970203406404578070520757309716.html

Leading news on the deal:
“Rosneft Said to Have Deal for BP’s Russina Venture,” The New York Times- http://www.nytimes.com/2012/10/18/business/global/deal-on-russian-oil-venture-seems-near.html?_r=0

“Rosneft set to clinch deal on TNK-BP,”-
http://www.ft.com/intl/cms/s/0/5960144a-1846-11e2-80e9-00144feabdc0.html#axzz2A0XpuNj9

“BP escapes with $27 billion. Now the oligarchs have to deal with Putin,” Steve LeVine, Quartz- http://qz.com/17915/bp-escapes-with-27-billion-now-the-oligarchs-have-putin-to-contend-with/

“TNK-BP/Rosneft: turning the clock back to 1993,” beyondbrics Blog, FT.com-
http://blogs.ft.com/beyond-brics/2012/10/17/tnk-bp-rosneft-turning-the-clock-back-to-1993/#axzz2A0KQp0qH

Does the BP-Rosneft Deal and the rise of U.S. Shale Gas weaken Gazprom?:
Rosneft Chief Executive Igor Sechin plans to meet with President Vladimir Putin October 22 to discuss the landmark deal that would speed up Rosneft’s eclipse of Gazprom as the dominant force in Russia’s energy industry. Rosneft’s deal with BP would increase the company’s oil production to about 4 million barrels per day, more than any other oil producer except Saudi Arabia, and raise the company’s market value to rival that of Gazprom’s. At the same time, a rise in independent gas producers in Russia and the boom in U.S. shale gas production threaten Gazprom’s traditional market share.
http://www.businessweek.com/news/2012-10-18/rosneft-to-replace-gazprom-as-putin-energy-driver-after-tnk-deal

More on the rise of Igor Sechin (AKA “Darth Vader”) and Rosneft:
“Rosneft’s Sechin marks rise of Kremlin as oil power”-
http://www.reuters.com/article/2012/10/18/rosneft-tnkbp-sechin-idUSL5E8LI4ZC20121018

“With a BP deal, Russia’s powerful oil czar may also finally get his revenge,” Steve LeVine, Quartz- http://qz.com/16962/with-bp-deal-russias-powerful-oil-czar-may-also-finally-get-his-revenge/

Gazprom Increases Blue Stream Gas Exports to Turkey:
…Meanwhile, a pipeline carrying Iranian gas to Turkey was damaged after an explosion on October 18, halting Turkish gas imports from Iran. Turkish company Botas requested an increase in gas supplies from Gazprom, which responded by raising daily gas supplies to the country to 48 million cubic meters, via the underwater Blue Stream pipeline. Turkey is Russia’s largest gas customer after Germany.
http://www.reuters.com/article/2012/10/19/russia-turkey-gas-idUSL5E8LJ47U20121019

Central Asian Dispatch

China Begins Construction on New East-West Pipeline for Central Asian Gas:
China National Petroleum Corporation (CNPC) began construction on a $19.93 billion, 5,000 km cross-country pipeline to transport Central Asian gas to southeastern China. The new pipeline will start in China’s Xinjiang province in the west, linking up to existing gas pipelines coming from Kazakhstan. It will have the capacity of 30 billion cubic meters per year and construction should be completed in 2015.
–Key takeaway: “The surge in gas imports from central Asia has also contributed to an impasse in gas pipeline talks between Russia and China, through which Moscow had hoped to sell 68 bcm of gas per year.”
http://www.chicagotribune.com/business/sns-rt-us-china-gas-pipelinebre89f0dj-20121016,0,656524.story

Kazakh Deputy PM Calls for Economic Diversification:
Kazakh Deputy Prime Minister Kairat Kelimbetov announced on CNBC that his country needs a new economic strategy to reduce it’s dependence on oil. Kelimbetov said opportunities to expand mining, chemicals, food processing, and agricultural industries offer a way to diversify the Kazakh economy and attract outside investment. The Kazkah GDP has grown 5.6% this year, down from 7% in 2011. But the supergiant Kashagan oilfield is set to come online in 2013, which might boost the country into the top 10 oil-producing countries.
http://www.cnbc.com/id/49474343

Watch this space – Week of October 15, 2012

Wednesday, October 17th, 2012

Jumping off last week’s entry on issues shaping the Eurasian energy scene, here are a few bigger-picture stories from the web with implications for Russian, Central Asian, and Western oil and gas majors…

Changes in Global Oil Production
“A big shift in oil will bring price relief”
A rise in global spare capacity and new oil supply from the U.S., Iraq, and Libya point to a likely drop in world oil prices, even to as much as $89 per barrel for Brent by 2017. What would this mean for oil-dependent economies like Russia and Kazakhstan? Read further at:
http://qz.com/14859/a-big-shift-in-oil-will-bring-price-relief/

Russia and Shale Gas
Can the U.S. become import independent and a major gas exporter by exploiting it’s shale gas bounty? Shale gas boom “changes the position at the bargaining table for everybody…” read more:
http://www.businessinsider.com/russia-and-shale-gas-2012-10#ixzz29LLB7qCw

Nord Stream Becomes Fully Operational
Gazprom’s Nord Stream pipeline bypasses Eastern European transit countries that have complicated Russia’s relationship with Western European gas customers in the past. But did Nord Stream come at too high a cost for Gazprom? At a price of 7.4 billion euros ($9.7 billion) for construction of offshore sections, the project’s first line that became operational last year hasn’t even reached 50 percent capacity. Reuters reports: http://www.reuters.com/article/2012/10/08/russia-nordstream-idUSL6E8L8EKJ20121008

China in Central Asia
Constructing new energy export routes and establishing trade links with regional powers has enabled China to strengthen it’s strategic presence in the region. What requirements will come from China’s supply chain needs? Will this increase competition between Western IOCs and Russian and Chinese NOCS?: http://www.atimes.com/atimes/China_Business/NI25Cb01.html
China’s latest coup in Central Asia, as reported by The National in the UAE on October 7: acquiring operational control over a deep-sea port on Pakistan’s south-west coast: http://www.thenational.ae/thenationalconversation/comment/a-great-game-begins-as-china-takes-control-of-gwadar-port

East and West in Central Asia
Kazakhstan seeks to balance it’s ties between east and west with a multi-vector policy. Erlan Idrissov, ambassador to the U.S. for the past five years, is now the new Kazakh foreign minister. What energy policy implications follow, as Chinese influence in the country grows and IOCs increasingly worry about the simultaneous rise of resource nationalism? http://www.jamestown.org/single/?no_cache=1&tx_ttnews%5Btt_news%5D=39936&tx_ttnews%5BbackPid%5D=7&cHash=dcbefa13b15c9c04d131463c86a99c28

Direction of Oil and Gas Production in Eurasia: Key Variables – Part I

Friday, October 12th, 2012

It is an exciting time for oil and gas in Eurasia, but many questions surround the direction of some of the region’s top producer countries. Developments in global markets, growing Chinese demand for natural resources, resource nationalism, and the rising potential for resource conflict are just a few of the overlapping issues that present opportunities and challenges in the Eurasian energy scene.

One of the hottest discussions right now surrounds the implications of the North American ‘shale gale’ on Eurasian energy giants like Russia. At a conference I attended in Washington over the summer, industry analysts and think tank gurus predicted that ‘single-crop’ natural resource-dependent countries like Russia would be the biggest losers of the boom in U.S. shale gas production, because it creates a more volatile commodity price environment that challenges the market share of the country’s biggest energy producer Gazprom (Running Out, or Runneth Over? Scrutinizing a Potential New Golden Age of Oil, and What it Could Mean for the Next President, New America Foundation, July 13).

A recent article by the AP also concluded that the boom in American and Canadian shale gas could fundamentally alter Russia’s position as global gas exporter and shake up world energy markets (The Washington Post, September 30). But while developments in oil and gas markets halfway across the world definitely influence the industry here, the direction of Eurasian energy developments also hinges on the interactions of many other variables, local and global.

The purpose of this blog is to examine some of the major local and regional energy issues currently taking place in detail and to link them to a larger global picture. The blog’s focus is not just Russia. I intend to frame the issues in a context that includes other top energy producers of the former Soviet Union. Kazakhstan, Turkmenistan, and Uzbekistan hold significant reserves of oil and gas that are attracting a lot of foreign investment and political attention. Additionally, regional concerns over water, electrification, and energy efficiency are emerging topics of interest for all energy producers and consumers nations. Developments across all of these sectors hold significant strategic implications for policymakers and businessmen involved in this region.

The first few entries here will outline some of the key concepts that create a framework for the rest of the blog, and help readers and myself alike try to better understand some of the key factors that shape the energy scene in contemporary Eurasia.

Geopolitics – A Key Driver for Regional Energy Developments

Access to, and control over, natural resources and export routes are the primary drivers of geopolitical energy interests in Eurasia. Russia’s natural gas ‘pincer move’ to Europe - the Nord Stream and South Stream Pipelines – is one of the clearest examples of geopolitics motivations for energy projects in the region. The construction of these pipelines enables Russia to completely control upstream production and downstream distribution of natural gas, bypassing any troublesome transit state (like Belarus or Ukraine) and establishing a direct physical link between Russia and downstream consumers. I will pick up on the important issue transit states in another post, but for a quick read on one of the most recent developments regarding regional transit states, see my September article on Ust-Luga and the BTS-2 pipeline on our homepage.

Central Asian energy producers, as compared to Russia, are limited by a lack of geographic proximity and ease of access to markets global commodity markets. The region is primarily landlocked, which means that the bulk of hydrocarbons must be transported by rail, road, or pipeline to reach end users. Furthermore, region is surrounded by politically unstable regimes and is the focus of great power interests, multiplying geopolitical concerns over energy in the region.

A number of key Western-backed pipeline projects in Central Asia are currently in the works. The Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline is one of the most strategically important projects, as it is part of the U.S. government’s high priority ‘New Silk Road’ strategy to create trade and transportation linkages between the countries of Central and South Asia. ‘New Silk Road’ strategy will also be examined in a later post.

TAPI would supply two of the regions largest economies, Pakistan and India, with much needed natural gas to fuel electric power generation. Both countries’ electricity grids are already at capacity (and sometimes over capacity, see this summer’s electricity outages in India), and both governments are seeking ways to supply growing consumption requirements. TAPI would also (in theory) create a physical link between all of the transit countries, tying the interests of producer and end-users to the security of the pipeline. This is a critical element of the geopolitical equation, since it tethers these countries’ interests to the security of Afghanistan post-2014, when the U.S. is scheduled to leave.

Other pipeline projects include the Iran-Pakistan-India (IPI) gas pipeline and the Trans-Anatolian Pipeline (TANAP) to supply Europe with gas from Azerbaijan. Russia’s Gazprom originally showed interest in participating in the IPI gas pipeline, but was just turned down by Pakistan this week (Bloomberg, October 2). Instead, China is gaining a foothold in the country by securing operational control of a deep-sea port at Gwadar in Pakistan’s Balochistan region (The National, October 7). Chinese authorities are planning to connect the port with China’s western Xinjiang province through rail and road linkages, creating a potential energy and trade corridor that bypasses the volatile Strait of Hormuz.

The Western-backed TANAP project is also gaining ground, as more European countries give their political support for the project. Turkey and Azerbaijan agreed to build TANAP over the summer, which would connect Azeri gas fields in the Caspian Sea to feeder pipelines that would supply Europe (Euractiv.com June 28). Two competitor feeder pipelines, Nabucco West and the Trans-Adriatic Pipeline, are currently on the table and TANAP capacity could be expanded to up to 60 billion cubic meters (bcm) of gas, if a Trans-Caspian pipeline is constructed between Azerbaijan and Turkmenistan.

The economic, political, and security interests of all energy producer and transit countries involved in these projects combines to form a geopolitical playground in Central Asia over the long-term.

Rising Challenge of Resource Nationalism

Another major factor driving policy and business interests in Eurasian energy production is the challenge of resource nationalism. Resource nationalism is a growing trend around the world and has become such a challenge for international oil companies that Ernst & Young labeled it the biggest business risk for extractive industries in 2011-12. Examining the correlation between rising government regulation and increasing outside interest in Central Asian hydrocarbons is an essential part of understanding the regional energy scene, and Kazakhstan is currently the largest post-Soviet country outside of Russia that is experiencing a rise in resource nationalism.

Kazakhstan adopted a creative multi-vector foreign policy after the collapse of the Soviet Union in order to balance out the triangular east-west-Russia relationship. Having been forced to play by Russia’s rules for most of the 20th century, an assertive and independent Kazakh government emerged in the 1990s and sought to establish strong trade and energy links with China and Western majors. But the Kazakh government has changed it’s approach to energy development since the beginning of the 21st century and has attempted to reign in the activities of Western oil majors and other foreign actors in the country’s hydrocarbon sectors. Now, it seems, increased government regulation and moves to strengthen economic and political ties with China spells trouble for international oil companies and others operating in the Kazakh energy industry.

The Kazakh government plans to expand the ‘Kazakhstan-China’ pipeline to 20 million tons capacity per year, according to a press release from the Kazenergy Forum in Astana at the beginning of October. At the same time, however, the Kazakh government is seeking to take back control over the country’s wealth of natural resources from Western IOCs, which it believes took advantage of the turmoil of the 1990s to rob the country of it’s wealth. In fact, Reuters reported on October 2 that KazMunaiGas (KMG), Kazakhstan’s main national oil company (NOC), seeks to take over ConocoPhillips’ stake in Kazakhstan’s giant Kashagan oilfield (Reuters, October 2). KMG’s interest in weaseling it’s way into the project comes as no surprise, as the Kazakh government becomes increasingly assertive in policy towards Western international oil companies (IOCs).

As outlined in my article in September’s issue of Oil & Gas Eurasia, resource nationalism in Central Asia, particularly in Kazakhstan, is growing. This trend is certainly worrying for Western businesses in the region, as it creates uncertainty in the investment climate. I will pick this up in a later post and examine the complicated nature of government-to-government and government-to-business relations in the region.

More on factors shaping the energy scene in the next post…

Benjamin Priddy

Troika Dialog – Sberbank Forum Sees Russia at Crossroads

Thursday, February 2nd, 2012

The fifth annual Troika Dialog Russia Forum is happening right now in Moscow. This year Troika is teaming up with Sberbank. And I wanted to share some insights from Chris Weafer, Chief Strategist for Troika.

I thought Chris’ report on a panel discussion of the challenges facing Russia are worth mentioning. He’s one of the most admired analysts in Moscow – because he really does know what he’s talking about.

Here’s Chris take:

One of the main conclusions is that the state still has a role in creating a better business and economic environment, but then should get out of the way and help rather than hinder or compete against private enterprises.

Regarding business startups, Russia needs to make it much easier for new businesses to start and grow. Right now this is too difficult and has resulted in the economy remaining skewed toward large enterprises in extractive industries.

Corruption and overly bureaucratic procedures remain major obstacles to business development. Panelists also identified the unpredictability factor in Russia, stating that the lack of clear rules and fair arbitration too often puts off foreign investors.

Russia continues to lose too many of its most talented people every year, people who are starting up new businesses in other countries but should be doing so in Russia. This is a normal trend in developing economies where people leave for better lives elsewhere but then, after 20-30 years, start to come back. But the faster the state helps make it easier to do business in Russia, especially to start a business, the sooner the trend will reverse.

There is too often a lack of a clear division between state and private enterprise.

East or West? Panelists generally agreed that the clearest economic growth opportunities lie to the east but that Russia should look much more to Europe for examples when building institutions and regulatory frameworks.

Sergei Guriev (Rector of New Economic School in Moscow) said that the state needs to speed up the privatization process to reduce its dominant role in the economy. He said that Russia also needs to demonstrate very clearly that it is dealing with issues such as corruption by speeding up the adoption of Article 20 of the UN convention against corruption. He said there are some very public corruption scandals in Russia today where the state could act more decisively. He called for the release of ex-YUKOS chief Mikhail Khodorkovsky and the firing of everybody involved in the case of Hermitage lawyer Sergei Magnitsky.

Kenneth Rogoff (Professor of Economics Harvard University) highlighted the fact that while Russia’s annualized growth (4.0% expected in 2012) is very good compared with developed markets and most other developing economies, Russia is capable of much more. He said that Russia should have, and needs to develop, new export-led growth in such
areas as hi-tech.

Lars Thunell (CEO, IFC) commented that WTO entry will help the evolutionary process continue, but added that the state needs to involve the private sector much more. He said the state is now trying to drive too much, which keeps the system overly bureaucratic and focused too much on the older, mainly commodity-based, industries.

Alexei Kudrin (former Finance Minister of Russian Federation) referred to the fact that the current political system is obsolete and needs to change as part of the process of building a new economy. He referred to current political changes as a very positive
development that will force faster changes. He highlighted what he called the positive response from the prime minister.

The panel also reviewed the changes now taking place in the global economy and the serious challenges it faces. Against that backdrop, the panelists reviewed the particular challenges facing the Russian economy, especially given the uncertainty over the trend in oil revenues. The panelists were asked if they consider it possible, under such conditions, to support economic growth in the country and, specifically, to review what policy instruments the government has, and needs, to achieve this goal.

So that’s what the experts think. How about you?

Russia, LNG and Access to the Sea

Tuesday, January 31st, 2012

Go back to the roots of Russian nationhood and you’ll find a key driver of its foreign policy interests: attaining access to the sea (any seacoast). Peter the Great was obsessed with this passion, but in my mind the quest actually started with Ivan IV because it was Ivan whose army and Kremlin-funded explorers ploughed through the Mongol front and expanded Russian territory well into Asia.

This 500-year-old obsession is alive today. And you can see it played out in Russia’s insistence that LNG has a place in the energy supply mix. With U.S.-influenced producers so focused on shale and other unconventional gas sources. In late January, Gazprom CEO Aleksei Miller and Sovcomflot’s General Director Sergei Frank meet and decided that Russia should ship LNG produced in the Arctic along a Northern Sea Route to the Asia-Pacific region. Gazprom quoted Miller in a press release as saying:  “With regard to gas exports to the region, the development of LNG production is an absolute priority in comparison with pipeline deliveries. Consequently, the deliveries of Russian LNG through the Northern Sea Route allows us to significantly reduce transportation costs, thus making the LNG highly competitive.”

Think about it! Peter the Great sought access through the Baltic Sea. That’s why control of Lithuania, Latvia and Estonia has historically been so important to Russia. And Russia has succeeded in controlling that territory off and on. But now those states are part of the European Union, and for Russia that means “hands off.” South is certainly no option. Russia’s czars in the 19th Century played “The Great Game” with Great Britain in Afghanistan and Central Asia in an attempt to gain access to the Indian Ocean. The Soviet Union’s good relationship with India had to do with this.
So today, we see the Kremlin and Gazprom are clearly playing to Russia’s future asset - the longest coastline of any country in the world — locked up in the Arctic Sea, but navigable from June to November.

In November, Oil&Gas Eurasia, wrote about the successful transit of the 3D seismic vessel Polarcus Alima from Norway to Asia-Pacific via Russia’s Northern Sea Route. Though the route is not open year round, it is open to navigation enough that it presents a viable shipping lane for Russian LNG to the Far East. And since the route is shorter and less costly than other routes, it enables Gazprom to price the gas to sell. NOVATEK has been using this sea lane for two years already.
In November, Oil&Gas Eurasia wrote about the tanker “Perseverance”, which carried 60,000 tons of stable gas condensate for NOVATEK, through the Bering Strait and into the Pacific Ocean. In 2011, a total of nine high-tonnage tankers carried NOVATEK’s stable gas condensate to the Far East. Russia’s Northern Sea Route (NSR) starts at the port of Murmansk and heads East to the Bering Sea passing Alaska. Tankers also go West to Europe and the United States and Canada from Murmansk (which is a year-round warm water port.) But LNG destined for those markets had to be rerouted when western buyers shifted gears in the direction of domestically produced shale gas. Europe could still use Russian LNG but the economics of shipping it are complex if the US market is taken off the table.

So we wait and see. According to NOVATEK, the NSR is an economically viable alternative to the existing routes through the Suez Canal and the Strait of Malacca, and a new link between Russia and Europe to countries of the Asian-Pacific region. Interesting. Imagine how far Peter the Great might have gotten if he’d just have had the right technology.

If you have an opinion on the NRS, Russian LNG policy or the ultimate contest between shale gas and LNG, please give us your comments.