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№ 1 (January 2008)
As the year 2008 approaches, researchers and operating experts of the oil and gas sector working in Russia or in some way interested in Russia are increasingly keen on looking into the nearest future: what changes will the coming year bring?
By Alexei Didevich
It concerns not only the fact that next year in Russia a new Parliament and a new President will start working and also that the energy monster RAO UES of Russia is to disappear by the end of summer and that will, certainly, result in certain changes both in the oil and gas business and the general energy market situation. One of the 2008 events is passing the law that grants foreign investors an access to the richest sites of the subsoil reserves of the Russian Federation – to its strategic fields.
A law on strategic reserves development
Passing this legislation was scheduled for the year 2007 but it was hindered by the amendments to the Law on subsoil proposed by the Ministry of Natural Resources of the Russian Federation headed by Yuri Trutnev. These amendments stipulate, in particular, the list of criteria for strategic fields that can be developed only by companies with over 50 percent Russian ownership. According to legislation, the fields with reserves exceeding 70 million tons of oil, or 50 bcm of gas, or 50 tons of vein gold, or 500,000 tons of copper, as well as fields located on the continental shelf are considered of strategic importance.
The law hasn’t been passed yet but the list of strategic oil reserves has already been expanded. According to the resolution of the RF Government, signed in late November 2007 by the RF Prime Minister Viktor Zubkov, 23 onshore fields and 9 offshore fields were transferred from the unappropriated reserves fund to the category of strategic fields. The criterion was the volume of reserves (ABC!) no less than 50 bcm. Total reserves of 32 fields (18 of them located in Yamal-Nenets Autonomous District, 5 – in Yakutia and 9 – on the Barents, Okhotsk and Kara seas shelf) are about 5.2 tcm. The largest are Kruzensternskoye (1.7 tcm of gas) and Chayandinskoye fields (1.2 tcm of gas). Besides, Severo-Tambeyskoye (929 bcm), Utrenneye (747 bcm), Malyginskoye (745 bcm) and Tassiyskoye fields (441 bcm) have enormous oil and gas reserves. Appropriation of these fields will start from 2009.
This fact, to some extent, confirms the policy of consolidating the oil and gas assets that the RF Government pursues. The best that the foreign investors will be able to do is just participate in the development of the strategic fields as minorities but only in case new technologies are in demand or there’s a need to share financial risks. It’s quite possible that finally the proprietor of the fields will be Gazprom and Rosneft.
The preliminary list of strategic gas reserves made by the Ministry of Industry and Energy and Ministry of Natural Resources included 37 and not 32 subsoil sites. In particular, the final list did not include the Kumzhin field located in the Nenets Autonomous District (94 bcm of gas) acquired through a tender by SN-Invest affiliated with the Swedish company West Siberian Resources.
Gazprom will be the gas producer at the majority of federal fields, states Agvan Mikaelyan, General Director of Finexpertiza. “Only a monopoly is capable of developing many of these subsoil sites,” he says. However, he also supposes that other Russian companies, e.g. NOVATEK, could participate in development of some strategic fields. Mikhail Krutikhin, partner of RusEnergy, a consulting company, believes that many strategic fields won’t be developed at all but will be inherited by the future generations. “Now foreign companies will be able to participate in the development only as junior partners because their share in the project won’t exceed 50 percent,” notes the expert. Krutikhin is sure that the amendments to the Law on subsoil proposed by the Ministry of Natural Resources and approved by the government will eventually be passed. However, these amendments are yet to be approved by the State Duma of the new convocation.
If the amendments are successfully made in their present form, the list of strategic fields will considerably expand. But many foreign investors are worried that the law on restricting the access to the strategic sectors, prepared by the Russian authorities, will lead to the deterioration of investment climate.
The recently appointed Minister of Economic Development and Trade Elvira Nabiullina has tried to calm the investors. As she said, “The absence of clear rules of access to the Russian market made the situation more complicated and created unnecessary problems for both the foreign investors and the Russian government. The law on access of foreign capital to strategic sectors should regulate the access of foreign investors to such sectors and make the regulations of the foreign capital flow to Russia more transparent and understandable.”
In any case, in the 1st quarter of 2008 the oil section of Chayandy with estimated reserves of 50 million tons will be offered for bidding. Minister Trutnev notes that the development of the oil section of the Chayandynskoye gas condensate field will just be an addition and not an alternative for oil from Yurubcheno-Tokhomsky area that will be used to fill the pipeline Eastern Siberia – Pacific Ocean (ESPO). According to the Eastern gas program, developed by the Ministry of Industry and Energy, development of Chayandynskoye field will begin in 2016. However, according to the new amendments, this field is a strategic one and that means a restricted access of foreigners. Chayandynskoye has already repeatedly been in the list of reserves allocated for the bid. But the bid never took place because of the lack of legislative amendments. That’s why, due to the pending launch of the first stage of ESPO, the Ministry of Natural Resources has offered to speed up the field development, placing its oil rim for the bid.
Russia’s oil and gas treasury
The proven reserves of natural gas in Russia, extractable from the productive strata according to geological, technical and economic parameters, amount to about 48 tcm. It’s almost 27 percent of the world proven reserves. As for the proven reserves of Russian oil (including gas condensate and oil condensate fluids), they amount to about 9.9 billion tons (6.1 percent of the world reserves). According to expert estimations, these oil reserves in Russia will be last for 50 years of production and gas reserves – for 75 years.
Apart from the above mentioned fields, Russia plans to replenish the stock of its hydrocarbon reserves and, respectively, increase their production mainly at the expense of Kovyktynskoye gas condensate field (2 tcm), oil fields of the Vankor group of oil deposits (about 330 million tons), Prirazlomnoye field in the Pechora bay, Shtokman field in the Barents sea hydrocarbon fields on the Caspian sea and on the Sakhalin shelf. Russia also lays claim to the Lomonosov ridge in the Arctic Ocean shelf that an arctic expedition has visited recently. The potential of this site is enormous: 5 billion tons of hydrocarbon fuel equivalent.
According to Yury Trutnev’s statement, the materials obtained in the course of Arktika-2007 expedition are enough for Russia to make an international application to add the Lomonosov ridge to the Russian Exclusive Economic Zone
He quoted some figures to illustrate the way these reserves could replenish the state treasury. The cession of rights to use the reserve sites will add 120 billion rubles to the state budget in three years and setting up 10-12 new production centres will give the budget an increase of 0.5 trillion rubles. According to the Ministry of Natural Resources, the geological exploration is also improving. 127 billion rubles of private capital were invested into this sphere in 2004–2006. In the next two years – 2008–2010 – this indicator will increase by 3.5 to reach about 450 billion rubles.
The recoverable reserves of Prirazlomnoye field are located at the depth of about 2.5 km and are estimated as having 83.2 million tons of oil. Further potential reserves are located at a larger depth of about 100 km. The main site of field construction is an offshore ice-resistant fixed platform constructed by Sevmashpredpryatie. With its help it is planned to drill 48 wells that will increase the production rate up to 22,000 tons of oil per day. The development of Prirazlomnoye is a burning issue for Russia because the infrastructure created for the project implementation will become the basis for further development of hydrocarbon reserves of the Barents and Karskoye seas.
The Shtokman gas condensate field (Sevmorneftegas, a Gazprom structure, is the holder of license for its development) is located in the central part of the shelf within the Russian sector of the Barents sea. Its reserves are 3.7 tcm of gas and over 31 million tons of gas condensate. The preliminary works are due to start at the site in 2008; field construction is scheduled for 2010. In late 2007 the Norwegian StatoilHydro, with a broad experience of hydrocarbon production from Arctic offshore fields, became the second foreign parner of Gazprom, Russian gas monopoly, after Total (France). The Norwegians have managed to prevail over ConocoPhillips, an American oil and gas trust, which was hoping to join the project till the last moment. Now the partners’ shares in the development project are as follows: Gazprom owns 51 percent, the French Total owns 25 percent as of July 2007, and 24 percent are owned by Norwegian StatoilHydro. This share distribution is unlikely to change in the nearest future.
During the first stage of the Shtokman field development Gazprom, together with the foreign partners, plans to produce 23.7 bcm of natural gas per year. According to Alexander Ananenkov, deputy chairman of Gazprom Management Committee, the holding will work together with foreign partners only during the first stage of Shtokman development; the second and third stages will be developed independently by Gazprom. In the framework of the first stage it is planned to start gas supplies through the gas pipeline by 2013 and to begin LNG production in 2014. Shtokman, among other Yamal fields, is considered to be a resource base for Russian gas export to Europe through the Nord Stream that is to run along the Baltic seabed. Since December of 2007 the Shtokman project has entered the FEED stage – initial technical design of the first stage of field development. According to Alexander Medvedev, deputy chairman of Gazprom Management Committee, judging by the pre-FEED results, the preliminary costs of the first stage implementation were estimated at about $12 billion. The final costs will be defined after the technical design document is ready.
In December, following the official ceremony, the giant Yuzhno-Russkoye field at Yamal was brought into production. Significance of this event was so high that the ceremony was attended by the first vice prime minister of RF Dmitry Medvedev who most likely will succeed Vladimir Putin, chairman of Gazprom Management Committee Alexei Miller, and Frank Valter Schteinmeier, federal minister of foreign affairs of Germany. The field’s proved reserves are estimated at 805.3 bcm of gas and 5.7 million tons of oil.Gazprom’s subsidiary, Severneftegazprom, holds the license for the field’s exploration and development.
According to the assets exchange agreements between Gazprom and BASF AG, the German company received 25 percent minus one ordinary share in the charter capital of Severneftegazprom. Also, it received one preferential share without the voting right, which is the equivalent to a 10-percent share in the project.
It’s still too early for applause to ESPO
It’s not all so good with the Eastern hydrocarbons. “It’s a true victory,” said Semyon Weinstock, the former president of Transneft, during the opening ceremony of the 1,000th kilometer of the ESPO pipeline welded in a thread in July of 2007. But now it’s evident that the first stage commissioning is being suspended.
The regions adjacent to the route of the ESPO under construction will provide less than a half of its oil needs in 2010. The main hopes for filling the pipeline are connected with the Vankor field, however oil transportation along this route can turn out to be commercially non-viable for Transneft. The Irkutsk region decreased its oil production by almost 7 percent in 2006 as compared to 2005. Meanwhile the region is to become the main oil source for filling ESPO after its launch in late 2008. If the real oil pumping amounts turn out to be considerably less than the planned 30 mln t per year, it will be long before Transneft repays the construction costs that have already considerably exceeded the initially claimed $7 bln. Moreover, the pipeline (officially – due to environmental considerations, and actually – at Putin’s insistence lobbied by environmental circles) is transferred 40 km north of Baikal that is a natural reserve, one of the UNESCO sites. It makes the works a great deal more complicated and increases the project costs, given that the construction period for the pipeline remains the same. Besides, it is also not clear whether the Rosneft subsidiary, Vankorneft, that intends to put into operation a 544 km Vankor – Purpe site in 2008, will keep to the approved schedule.
The Vankor oil will have to make the distance of 5,800 km (including 3,300 km – along the newly constructed pipelines) to come to the border with China near Skovorodino where the first stage of ESPO ends. It’s not yet clear what it will cost Rosneft to pump each ton of oil to China because Transneft hasn’t yet finished the preparation of the feasibility study for all the sites of the changed route and, respectively, can’t estimate the construction costs and the estimated tariffs.
Due to the large scope, cost and tight deadlines ESPO is often compared with the Soviet “construction of the century” – BAM, the Baikal-Amur Main. But the BAM construction, as it is widely known, was much delayed and the project as such was not so in demand as it was supposed to be initially. The ESPO project that started in April of 2006 has over 15,000 participants; about 5,000 are involved into construction. The first stage is 2,757 km of pipe from Taishet (Irkutsk region) to Skovorodino (Amur region) that costs about $11 billion.
According to Valery Nesterov, the analyst of Troika Dialog, in case ESPO doesn’t meet the construction deadlines, it will have the most painful impact on Rosneft that plans to supply 1.8 million tons of oil as early as 2008 along the eastern pipe to China from the Vankor field (9.8 million tons in 2009). In his view, in case of an unforeseen scenario of events the company will have to look for opportunities to supply Vankor oil to the West or even suspend the production till the pipe is put into operation.
Meanwhile the Russian officials are optimistic: as Anatoly Yanovsky, deputy head of Ministry of Industry and Energy, said, the construction of the first stage of ESPO pipeline will be finished in time in the second half of 2008, in spite of the observed “a 3-4 month lag at certain project sites.”
Energy dialogue-2008: changing the vector
One of the important events of the last few months is an expanded session of the Shanghai Cooperation Organization (SOC) in Tashkent where the Russian Prime Minister Victor Zubkov called the countries for a more active cooperation in the field of power engineering. Moreover, the head of the government, in fact, stood up for creating an Asian direction of energy dialogue on a constant basis, calling for the creation of the Energy Club of SOC states. Zubkov noted that “The creation of this non-governmental consultative body is already underway but we would like to see a more active cooperation of the core authorities of our countries.” Probably this energy club, that was first voiced by Putin two years ago at a SOC session, will appear as early as 2008.
Chingiz Veliev, an Azerbaijani expert of macro-economic issues, highlighted one of the proposals of the Russian prime minister that is important not only for the organization members but also for Azerbaijan and other countries interested in cooperation with SOC, when he commented on the results of this meeting. “The information of the Russian financial intelligence service, one of the strongest on the post-Soviet territory, could be very useful for Baku,” said the expert, noting that “Moscow’s intention of preventing the expansion of Central Asian hydrocarbons export in Europe is clear and evident.” This intention is more than welcomed in China whose market needs can in five to seven years exceed the aggregate demand of the EU countries. Both Moscow and Beijing are making efforts to lay the bed for Central Asian oil and gas flows to Southeast Asia.
For this reason it can be assumed that starting from this year the energy dialogue with Russia’s participation will be unfolded in the East- and South Asian directions however with a regular look for the reaction of the EU partners. This route diversification comes in handy for Russia: Russia can win from the geo-economic point of view (supplying Siberian hydrocarbons to Asia will in the future be less costly than to Europe) and also accounting for the fact that the EU intends to develop nuclear and alternative energy system to decrease its dependence from hydrocarbon supplies.
Hydrocarbons to cement international relations
Russia does not only supply its hydrocarbons abroad but also participates in the development of foreign fields. One of the recent examples: in December it became clear that Gazprom was going to invest about $100 million in exploration work at a hydrocarbon site in Lybia. The gas holding was announced the winner of the bid for exploration and development of hydrocarbons at an onshore site No. 64 (blocks 1, 2, and 3) in the basin of Gadames river. Oil reserves at the site are estimated as 20 million tons. The bid was organized by a state Lybian oil and gas company National Oil Corp. and 16 companies took part in it. A year before that Gazprom won a bid for block 19 located at the Mediterranean shelf that also belongs to Lybia. The planned investments in exploration will be $200 million. The company plans working on other projects in Lybia. It is a known fact that according to framework agreement on assets exchange signed between Gazrpom and BASF, Russian company will receive 49 percent share in Wintershall AG, which holds license for hydrocarbons development and production under concession agreements.
Meanwhile the RF government is still finalizing the long-term strategy of chemistry and oil chemistry development; however, with the issues of economy diversification and escape from the oil and gas dependence there is not much progress. Certain steps and declarations of intentions – such as the claim of Rosneft vice president Peter O’Brian that in 2008 the company is to increase crude oil processing up to 1 million barrels per day – do not change the situation dramatically.
Forecasts are a thankless work but still expert forecasts should be taken into account. The International Energy Agency (IEA) dramatically cut the forecast for oil demand in early 2008 stating that the price shift towards $100 per barrel was the reason for reduced consumption. The Agency that consults 26 developed countries decreased the forecast for oil consumption in the 1st quarter of 2008 by 180,000 barrels per day. According to IEA experts, “The consumers, nevertheless, seem to adapt to the constant price growth based on yearend results.” Do they actually have a choice?
As Anatoly Chubais, head of the RAO UES of Russia, said at the World Energy Congress in the middle of November in Rome, “There are no drivers capable of forcing investors to increase their investments in Russia.” Will such a long-expected condition for investors (including foreign ones) come in the form of legislation on the access to strategic fields? As Victor Khristenko, the RF Minister of Industry and Energy, said at the same Energy Forum in Rome, “The new Russian energy policy should be open, transparent and predictable.” Thus, the state has declared its aspirations, particularly in the oil and gas sector.
Happy New Oil and Gas Year, ladies and gentlemen!