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Home / Issue Archive / 2008 / September #9 / Russian Think Tank Chief Weighs Competition and Turmoil

№ 9 (September 2008)

Russian Think Tank Chief Weighs Competition and Turmoil

The Fund for National Energy Security (FNES) was created by Konstantin Simonov two years ago.  Its creation logically followed the work of the Center for Political Conjuncture of Russia (CPCR), of which Mr. Simonov is also the president.

By Alexei Chesnokov

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The Fund for National Energy Security (FNES) was created by Konstantin Simonov two years ago.  Its creation logically followed the work of the Center for Political Conjuncture of Russia (CPCR), of which Mr. Simonov is also the president.  The CPCR has conducted research in political risk for many years, and this theme was further developed in the FNES.  The Fund also studies the mutual influence of energy on politics and politics on energy in Russia, as well as in the world.  The access of foreigners to upstream, conflicts between suppliers and buyers, export routes, problems resulting from political influence (and it is present practically everywhere). This is to subject to analysis and research by experts and specialists of the Fund.  The FNES is a non-governmental organization, which is funded by the sales of its own various reports and research.

Some reviewers call the FNES the mouthpiece of the Kremlin, based on the fact that many high officials in governmental structures came from that organization.  However, Mr. Simonov assures that his research is absolutely impartial and says the government appointments of FNES personnel are simply a testament to the high professionalism of the FNES specialists.  “In any case,” says Konstantin Vasilievich, “these rumors don’t bring me any dividends.”

General Director of the Fund for National Energy Security Konstantin Simonov, who holds a PhD in political science, answers the questions of Oil&Gas Eurasia:

OGE: What do you think of the current strategy of Russia’s Oil& Gas industry?

K. Simonov: The existing strategy forecasts through the year 2020 and is declarative and unrealistic.  It fails to acknowledge the forecast of demand for hydrocarbons, property, implementation of new technologies, and training of new specialists for the industry.  Also, the involvement of foreign companies is undetermined, and geopolitical questions are not addressed.  My colleagues and I are trying to create a club of experts, with whom we can discuss the country’s energy strategy through the year 2030. We would like the new Minister of Energy to listen to the specialists’ opinions.  In order not to plan for planning’s sake and to implement the country’s Energy Strategy, the process must be discussed by a wide range of specialists; it must pass through expert evaluation.

OGE: In your opinion, does the crisis in the Caucasus have a hidden oil and gas motive?

K. Simonov: The United States is playing an active game in the Georgia region.  Why is Vice President Cheney visiting Georgia and Azerbaijan, describing Russia as an unreliable transit country and supplier of hydrocarbons? The United States does not care about Europe’s energy security.  I think America is concerned about where oil is going to go from Central Asia, and in the future, from Iran.  Today Iran has the largest proven gas reserves after Russia.  The United States is interested in Iran and created political conflict zones around the country.  It is an important goal for the United States to prohibit Iran from supplying hydrocarbons to China.  The U.S. provoked the Georgian conflict by promising Saakashvili support. They use Georgia as a puppet, and are now looking for an excuse to deploy troops to the north of Iran—in Georgia and Azerbaijan. The political tension around Iran is not subsiding. After Cheney’s visit, I absolutely don’t dismiss the possibility that Azerbaijan will attack Karabakh within six months. There is also a possibility of military action by the U.S. against Iran.

OGE: What can you say about Russia’s cooperation with the Central Asian republics in the oil and gas sphere?

K. Simonov: Kazakhstan, Uzbekistan, and Turkmenistan are our neighbors, but not partners in the full sense of this word.  Russia has not yet done enough for them to become such.  There are many projects and conversations, but in practice little is being done. For instance, the Caspian Pipeline Consortium and the Burgas-Aleksandroupolis pipeline projects are not developing fast enough.

Kazakhstan recently agreed to increase their gas supply to China by 30%. However, Turkmenistan’s reserves are not yet confirmed by international audit and so it is possible that agreements with Russia and China will not be honored, because there will not be enough gas for everyone. 

OGE: What is the fate of major foreign investors in the oil and gas industry in Russia?  How are the PSA projects (production sharing agreement) developing?

K. Simonov: Today, countries that possess large hydrocarbon reserves are tightening regulations concerning foreign companies.  This process is happening in Kazakhstan, Venezuela, Saudi Arabia, the African countries, and Norway and the phenomenon causes a backlash.  Refining and retail companies are trying to prohibit oil producing countries from entering their markets.  New laws are being adopted in the United States and Germany, the rules of access to downstream are tightening.  The EC practically excludes Russian companies from this sector of economy.  The countries that recover natural resources understand what riches they posses and do not want to share.  And the countries that have a sales market, in turn, do not let oil producers near it.  By the way, there is data that the Russian investment in European downstream is 7-8 times less than the European investment in the Russian upstream.  On the whole, foreigners do not feel so bad in the Russian oil and gas industry, especially if you compare it with Venezuela.  For example, Shell remained a minority shareholder in Sakhalin-2 project.  Now this company’s participation in the new projects on the Yamal peninsula together with Gazprom is being discussed.

The German firm BASF is taking part in the Southern Russian field development, which is, by the way, one of the last fields with uncomplicated conditions of Senoman gas production.  ENI participates in the joint project with Gazpromneft.  Total and StatoilGidro became Gazprom’s partners in the Shtokman field project.  An example of a mutually profitable deal is the deal with the German firm BASF, which offered Gazprom a share in the German gas company in exchange for access to the Southern Russian field.

Really, the biggest problem for foreigners in Russia is not even the law or political will, but the moment when they begin working with our companies and see what kind of ineffective system of decision making prevails among company officials.  The problem of quality state-corporate management is not solved here yet.

OGE: How can you comment on the rivalry between the two major state companies Gazprom and Rosneft?

K. Simonov: Many experts often use the phrase “The Kremlin decided,” but we have been trying to explain for a long time that it is incorrect.  There is no Kremlin. The concept of Kremlin can be approached from many sides.  There is Putin, there is Sechin, there is Medvedev, and there are concrete people and concrete interests. Gazprom—Miller’s interests and those of Medvedev’s, and Rosneft’s interests and Sechin’s interests differ for understandable reasons. 

For example, let’s take the Shelf—recently adopted amendments to the Subsoil Law and the Law on Continental Shelf stipulate that only the companies with no less than 51 percent of state-owned shares and which have a minimum of five years’ experience of shelf development may participate in the exploration of the Shelf.  We have just two such companies—Gazprom and Rosneft.  So we need to somehow divide the Shelf.  These are state companies, but Gazprom has 49 percent private shareholders, and Rosneft sold 14 percent of shares to private investors.  Therefore the relations [between Gazprom and Rosneft] are not just those of conflict, but of open conflict.  To give you an example, Daltransgaz vividly illustrated this when Rosneft sued Gazprom in court.  Or, for instance, FAS has recently been actively attacking Gazprom, seeking to divest it of its monopoly in the market.

OGE: To what extent does this confrontation damage the state’s interests?

K. Simonov: In my opinion, it certainly causes damage, because creates uncertainty among investors.  While the argument is going on regarding sections of the Shelf, nobody is going to invest in its exploration projects.  Overall, we don’t give enough attention to the problem of subsoil ownership.  One of the main reasons for insufficient investment in the development of fields with complicated recovery conditions is the companies’ uncertainty about the long-term status of their work at these subsoil plots.  That is why the heads of oil companies are not being entirely honest when they say that they are being smothered by taxes.  Taxes are not the main reason for insufficient investment.  A series of measures have recently been taken to decrease taxes, and next year we will see how much more investments into the industry have increased.

OGE: Some Western politicians are appealing to Europe to abandon buying energy carriers in Russia, to find other suppliers.  How real is this?

K. Simonov: According to many European companies’ estimates, Europe will need additional 140 billion cubic meters of gas by the year 2015.  Who can provide such an amount?  Norway is capable of supplying 30 billion cubic meters at maximum, after that its recovery will begin to decrease.  North Africa will give a maximum of 50 billion cubic meters.  Where will the remaining 60 billion cubic meters come from?  From the liquefied gas market?  There is not so much of it there, and the demand is very high; a new, extremely powerful consumer is entering the market—China.  Therefore there is no real alternative to Russia.  The politicians who talk about this in earnest may be called the “Brussels dreamers”.  This also concerns the plans to switch to alternative fuel.  In 2005 EC adopted the plan to increase the use of alternative types of energy to 5 percent.  The plan was not realized.  Instead, another plan was adopted, to increase the share of alternative energy to 20 percent by the year 2020.  Now, let’s wait for the year 2020.

OGE: In your opinion, which is more correct: to invest large amounts into exploration of East Siberia and the Shelf of the northern seas or to direct these means into increasing the recovery efficiency of already existing wells, which may also produce a huge effect?

K. Simonov: True, we have huge losses.  We have low recovery efficiency, and burning of associated petroleum gases, and even loss of electricity from the power grid. We are falling way behind in energy supply, the world has moved well ahead.  Of course, we must deal with all of this.  But Russia must also develop the Shelf, and be present at the liquefied gas market.  These two directions do not contradict each other and must develop simultaneously.  But the saddest thing is that we are discussing right now what needs to be developed. Where do we invest? In East Siberian exploration and the Shelf, or to increase recovery efficiency and the use of associated petroleum gases? In reality nothing is being done concerning either one of these issues.  The Shelf exploration is progressing very slowly with huge difficulties, for example, at the Shtokman project. Meanwhile, we have seen no improvements recently in recovery efficiency or in the use of associated petroleum gases.  Something needs to be done.

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