Russian Petroleum Investor 2007 Archives

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03 Jan 2008

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Europe Moving Toward Energy Battle with Russia
By Inna Gaiduk
The European Commission (EC) has suggested limiting investments into the European energy sector from non-European state companies, as well as the requirement to follow the so-called “principle of reciprocity.” According to this principle, the European Union (EU) can introduce restrictions against countries limiting investments from EU companies. To analysts it is obvious that the EC directs its proposals primarily against Gazprom. However, the suggested reforms must still receive the approval of the 27 EU countries. Page 5

Eastern Gas Program Approved
By Vladimir Baidashin
The Ministry of Industry and Energy (MIE) finally approved the Eastern Gas Program (EGP) in September. Gazprom developed the program over five years.  The plan initially consisted of 15 variations for development of deposits in Eastern Siberia and the Far East. Eventually,
Gazprom chose the Vostok-50 variant that assumes construction of a gas pipeline using the same route as the major Eastern Siberia-Pacific Ocean (ESPO) crude oil pipeline. Total program investments through 2020 will amount to $94 billion. In December, the MIE plans to present the Russian energy strategy project through 2030.  Page 10

Gazprom Eyes BP Route to US LNG Market
By Vladimir Baidashin

Within the limits of a tripartite strategic alliance agreement among Gazprom, BP (UK) and TNK-BP (Russia/UK), which in particular anticipates creation of joint ventures, BP has suggested contributing its share in the Atlantic LNG plant, located in Trinidad and Tobago. If the transaction takes place, Gazprom can become one of the largest suppliers of liquefied natural gas (LNG) to the US. This is becoming important to Gazprom, following its decision to prioritize gas deliveries from the Shtokman project via the Nord Stream pipeline to Europe, instead of the earlier plan to process the gas as LNG for delivery to the US. Gazprom has delivered LNG to America since 2005, but these transactions occur on swap contracts. Page 5

Russian Petrochemical Investment Attractive
By Inna Gaiduk

Market pressure is building for major investments in the Russian petrochemical sector. In addition, Russian President Vladimir Putin has told heads of the oil and gas companies that there is a need to develop oil and gas chemistry beginning with plastics and finishing fibers.  This is not simply a Kremlin-inspired move. The Russian petrochemical production markets—such as the markets for polyethylene, polypropylene and other plastics, show fantastic rates of demand increase. With practically 100 percent of domestic petrochemical loading capacities already in use and outdated plant equipment remaining from Soviet times, investments in this sector promise greater profit.  Page 10

Salym Petroleum Development Combines Russian and International Experience
By Vladimir Baidashin

On July 27, Salym Petroleum Development (SPD) entered a new phase in development of the Salym group of oil deposits in Western Siberia. Average daily oil production at the West Salym, Upper Salym and Vadelyp deposits has exceeded 90,000 barrels (12,278 tons).  After the beginning of oil extraction in December 2004, the company increased production quickly and plans to raise production to 4 million tons of oil. It is almost twice the volume of oil extraction in 2006. As general director of SPD, Harry Brekelmans has declared that such production rates will allow SPD to fulfill obligations to both the Russian state and the company’s shareholders.  Page 15

Vyborg Shipyard Wins Shtokman Drilling Platform Contract
By Vladimir Baidashin

The Vyborg Shipyard has won the Gazprom tender for construction of two offshore drilling platforms for the Shtokman deposit. Cost of the contract is $2.3 billion; term of execution is three years. The management of the plant does not exclude the possibility that Vyborg may also receive the contract for the remaining four platforms for the project. Vyborg will be the general contractor on execution of the order. The shipyard will construct the platform casings and chose suppliers for the remainder of the equipment via tender by the end of this year. Vyborg won the contract over Sevmash, one of the largest shipbuilding yards in Russia.  Page 21

Foreigners Not Reducing Investments in Russian Fields
By Elena Kirillova

Foreign investors continue to enter Russia, despite the prospect of pressure from Rosprirodnadzor (RPN). Small foreign companies are particularly noteworthy in this regard, investing actively in oil deposits. By discovering new reserves and acquiring new assets, these companies believe they can meet license obligations and avoid claims from RPN. Growing prices for oil and gas assets remain a favorable attraction for such investment.  Page 27

ESPO Volume Requirements Create New Auction Push
By Denis Krikun

Construction of the East Siberia-Pacific Ocean (ESPO) pipeline accelerates; prompting experts to question whether it will be possible to fill it with Eastern Siberian oil or require a redirection of a portion from Western Siberia.  Both Russian President Vladimir Putin and Minister of Natural Resources Yuri Trutnev have declared that they “have no doubts” ESPO will operate at capacity. Nevertheless, the Ministry of Natural Resources remains concerned over the slow rate of development at Eastern Siberian deposits and has directed territorial agencies to expedite auctions for sites located near ESPO.  Page 33

Tomsk Sees the Right Bank of the Ob River as Promising
By Vladimir Baidashin

The Tomsk area has successfully presented a detailed exploration program for the right bank of the Ob River to the Ministry of Natural Resources. The program will operate until 2009 and assumes investments from the federal budget of R1.1 billion. In 2010, Tomsk authorities plan to put oil reserves from the right bank of the Ob on the state balance.  The area administration believes
that such extraction would be of interest to investors, including foreign, because this oil will fill the Eastern Siberia- Pacific Ocean (ESPO) pipeline currently under construction, allowing exports to the countries of the Asian-Pacific region.  Page 39

News Briefs
Page 44 

Corporate Briefs
Page 46 

Caspian Briefs
Page 51

Conference Calendar
Page 55 

Statistics
Page 56

IN THIS ISSUE:

Gazprom Neft Offers Statoil Sakhalin Position
By Vladimir Baidashin
Gazprom Neft, the oil subsidiary of natural gas giant Gazprom, has received permission to extend the term for exploration activity on the Lopukhovsky block (the Sakhalin shelf). The Federal Agency for Subsoil Use (Rosnedra) approved the extension until 2010. The license had expired on May 31. This time Gazprom Neft has decided to divide project risks with a foreign partner, inviting Statoil (Norway) for joint geological work. Analysts assume that Statoil will work with Gazprom Neft on the same conditions as Total (France) has in the development of the Shtokman gas condensate deposit on the Barents Sea shelf—the raw materials remain under Gazprom Neft control, while Statoil will be involved as a co-investor.  Page 5

Eastern Siberian Projects Face State Pressure and Lack of Oilfield Services
By Sergei Chernyshov
Having committed to constructing the East Siberia-Pacific Ocean (ESPO) pipeline project, Russian authorities through the Ministry of Natural Resources (MNR) have strengthened
pressure upon subsoil users to accelerate exploration and development of oil reserves to fill it. Minister of Natural Resources Yuri Trutnev has promised to continue toughening performance requirements under license agreements in Eastern Siberia. However, one of the main problems faced by operating companies in the region is securing the oil field services necessary to develop the deposits.  Page 11

French Total Gains Place at Shtokman
By Inna Gaiduk
On July 13, Russian Gazprom and French Total signed an agreement of cooperation for the first phase of the Shtokman natural gas deposit development. The parties will establish a special purpose company to manage engineering, financing, construction and installations for the first phase of fieldwork. Gazprom will hold 75 percent of the charter capital in the company, while Total will have 25 percent. First phase development provides for extraction of 23.7 billion cubic meters annually, with deliveries beginning via pipeline in 2013 and as liquefied natural gas (LNG) in 2014. At the end of first phase operations, Total will concede its share to Gazprom. The agreement also provides an opportunity to attract other foreign partners holding as much as 24 percent, decreasing Gazprom’s position to 51 percent. Gazprom reserves 100 percent of the shares in Sevmorneftegaz, the company owning the deposit license, and all production marketing rights.  Page 18

Government Pressure Continues on Foreign Company Reserve Estimates
By Elena Kirillova
The Russian authorities, through Rosprirodnadzor (RPN, the Federal Natural Resources
Management Service), continue inspection of small companies working in the Russian oil and gas sector, including foreign companies.  In April, RPN accused Imperial Energy and several other companies of providing investors with false data about reserves. In May, an order from Minister of Natural Resources Yury Trutnev created a working group to validate whether the companies’ reserves confirm data of the State Commission on Reserves (SCR)
at Rosnedra (Federal Subsoil Use Agency). At the end of July, RPN announced a list of 19 companies subject to inspection by the working group. The first object of investigation is American oil company Transmeridian Exploration, which owns DNK—the subsoil user at the Gasha deposit in Dagestan. RPN has sent to Rosnedra the inspection certification of the company with a petition for early termination of its license.  Page 25

Behind the Sale of RussNeft
By Vladimir Baidashin
On July 30, the board of directors at RussNeft, one of the top ten oil companies in Russia, accepted the resignation of Michael Gutseriev as president of the company. Gutseriev declared he was compelled to sell the company and to leave the oil business because of pressure applied against him personally by law enforcement and tax bodies. In an official press release, RussNeft stated that affiliates of Swissbased Basic Element have made an application to the Federal Antimonopoly Service to purchase a controlling interest. Sector experts consider that in view of company debts and legal proceedings around it, RussNeft will cost Basic Element about $5.5-6 billion, maybe even less.  Page 28

Rosneft Continues to Restructure Assets
By Elena Kirillova
Rosneft has sold control over a 50 percent stake in Tomskneft to acquire assets purchased by Prana in the Lot # 13 auction of YUKOS property. Rosneft president Sergey Bogdanchikov has declared that the company may well give up several YUKOS assets, especially those considered non-core. At the same time, Rosneft does not plan to carry out purchase of new large assets in the near future.  However, according to its strategic plan, Rosneft wants to become one of three largest oil companies in the world on capitalization.  Page 33

Gazprom Moving Ahead in the Russian East
By Inna Gaiduk
In the fall, the government will consider the program to create an integrated gas production, transportation and supply system in Eastern Siberia and the Far East (the East Program), which was approved on June 15 by the government’s Commission on the Fuel and
Energy Sector (FES). However, Gazprom did not await its approval, did not suspend its move to the east and has undertaken several attempts to tighten the company’s positions there. After winning control over Sakhalin-2 from Royal Dutch/Shell (Netherlands/UK) and Kovykta from TNK-BP (Russia/UK), Gazprom announced interest in Chayanda in the Republic of Sakha (Yakutia), Sakhalin-3 and gas from the Sakhalin-1 project led by ExxonMobil (US). It then started development of the eastern gas pipeline project in parallel to the already under construction East Siberia- Pacific Ocean (ESPO) pipeline. Transneft has accelerated ESPO construction and soon will come near to the Chinese border. In July, the crude oil pipeline monopoly Transneft reported 1,000 kilometers of the pipeline’s first stage laid, with the entire first section slated for completion by the end of 2008. Commission of the second stage turn should occur in 2015- 2017.  Page 38

Will European Utilities’ Investment in Russian Power Pay Off?
By Peter Kernan, Eugene Korovino & Jennie Brookman (Standard & Poor’s)
The Fast-growing Russian power sector presents an increasingly attractive investment opportunity for Western European utilities. The industry predicts that the sector will grow at about 5 percent over the next few years and that it will need investments of more than $20 billion per year over the next 15 years to modernize power stations.  Page 44

News Briefs
Page 48

Corporate Briefs
Page 50

Caspian Briefs
Page 56

Conference Calendar
Page 60

IN THIS ISSUE:

Arctic Competition Increasing
By Vladimir Baidashin
The International Polar Year began in March, with a primary objective being to determine the possible economic development of the Arctic and  Antarctic regions. More than 200 international projects will take place over what amounts
to a two-year period (March 2007 to March 2009). One of the most significant has already begun—specifying the Arctic regional borders of the Russian continental shelf. Experts believe that in the Arctic areas outside Russia’s 200-mile economic zone, an area of some 1.2 million square  kilometers, are potential hydrocarbon reserves of at least 9-10 billion tons of conditional fuel.  Page 6

Investment Focus Shifts to Yamal License Auctions
By Elena Kirillova
Gas monopoly Gazprom had absorbed the majority of independent gas producers. However, the high prices paid by small oil and gas companies for subsoil licensing rights indicates that the number of independent manufacturers is now increasing with the addition of new companies. As auctions in Yamal attest, such companies are emerging not only on the periphery of oil and gas production but also in regions traditionally considered closed to all but Gazprom and a few other Russian majors. Is it easier to stand up to Gazprom if a small company has foreign participation? One example is the 100 percent French capitalized EuroTEK, which illustrates that having considerable money may make it possible to contest for subsoil on an equal footing with Gazprom.  Page 12

Following YUKOS Auctions, Rosneft is Russia’s Largest Oil Company
By Elena Kirillova

On May 10, after purchasing YUKOS upstream and downstream assets in western Siberia and Samara, Rosneft became the largest Russian oil company by virtue of both extraction and processing volumes. During auctions from March through May, Rosneft spent over R541.8 billion ($21 billion) on YUKOS property. The largest acquisitions were 9.44 percent of Rosneft’s own shares, production subsidiaries Samaraneftegaz and Tomskneft, as well as five processing enterprises—the Kuibyshevsky, Novokuibyshevsky, Syzransky and Achinsky refineries, along with the Angarsk Petrochemical Co.  Page 6

Will There be Sufficient Crude Oil for the ESPO Pipeline?
By Vladimir Baidashin

A debate is taking place over whether adequate crude oil volume will emerge
for the Eastern Siberia-Pacific Ocean (ESPO) export pipeline. Two years ago, the Ministry of Natural Resources (MNR) passed a program of geological study and deposit work for East Siberia and the Republic of Sakha (Yakutia), the expected sources for full ESPO volume requirements. Subsoil users, however, have inconsistently carried out that program.  As a result, following a review, the MNR has decided to establish rigid control over program and hydrocarbon reserve development for 2007-2008.  Page 12

Rosprirodnadzor Challenges Company Geological Information
By Vladimir Baidashin

Rosprirodnadzor (The Federal Natural Resources Management Service) has suggested that Russia’s Federal Security Service conduct an audit of the foreign companies working in the Russian Federation, and determine abuse arising from questionable geological information. According to Rosprirodnadzor, these companies have placed shares on foreign stock exchanges in 2005-2007, having artificially overestimated reserves, while at the same time not carrying out exploration as specified in their license agreements. The British company Imperial Energy, which operates three oil-extracting enterprises in the Tomsk Region, is the current primary recipient of pressure. Rosprirodnadzor has filed to remove Imperial’s licenses.  Page 18

Complex-Oil Extends Business
By Elena Kirillova

Nizhniy Novgorod Region-based Complex- Oil has begun to build its own vertically integrated structure. The company has managed to acquire a Western European enterprise, an accomplishment still eluding much larger Russian oil companies. While Complex assets are essentially tank farms, gas stations and railway tanker facilities, the company will likely obtain both oil extracting assets and refining capacities. A good company credit history indicates that Complex can attract funds for new purchases.  Page 23

Conference Considers US Russian Investment Relations
By Vladimir Baidashin

Every spring since 2000, the American Chamber of Commerce in Russia holds an investment conference in which representatives of both Russian and US business and political circles participate.  On April 4, the latest took place. Conference participants discussed the present status of Russian-American business relations, economic tendencies over the past year and the current business and investment climate in Russia.  Questions about pending legislation detailing foreign investment in strategic sectors of the Russian economy combined with concern over a continuing Russian government move to acquire greater state control over the oil and gas sector made this year’s annual conference a particularly noteworthy one.  Page 28

Significant Year Ahead for the Russian Electric Power Sector
By Alexander Plakhov, IES (Integrated Energy System)

By the middle of 2008 and the unfolding of electric power industry reform, the Russian monopoly Unified Energy Systems of Russia (UES) will cease to exist. Main and distributive networks, power dispatching
and almost all hydroelectric power stations will stay under state control. However, generating and marketing companies will transfer to private ownership. Major upcoming events include share issuances by the territorial (TGC) and wholesale (WGC) generating companies, as well as auctions for several marketing companies.  As a result, the energy sector will divide into exclusive and competitive components, while full-scale investment into the competitive portion will start. Major reform initiatives took place at the end of 2006 and the beginning of 2007. In particular, the primary privatization of generating capacities has begun, along with sales of marketing companies.  Page 35

Agreement on Near-Caspian Gas Pipeline Signed
By Irina Denisova

Gurbanguly Berdymukhammedov, the new leader of Turkmenistan, has begun to carry out a more open and active policy on the international scene, designed to make the country a leading regional player while finally bringing it out of isolation. Engineering a rapprochement with Moscow, Berdymukhammedov along with his Russian and Kazakh counterparts signed a declaration to construct the Near-Caspian gas pipeline.  The accord allows Russia to continue the transit of Central Asian gas across its territory. However, it is premature to declare Moscow the victor in the struggle for Caspian hydrocarbons. The US and the European Union still intend to move to weaken European dependence on Russian deliveries of energy resources.  Page 40

News Briefs
Page 46

Corporaterate Briefs
Page 48

Caspian Briefs
Page 54

Conference Calendar
Page 59

Statistics
Page 60

IN THIS ISSUE:

Burgas-Alexandropoulis Takes on BTC
By Inna Gaiduk
The Burgas-Alexandropoulis (BA) pipeline project has been under discussion since 1994. Finally, on March 15, Russia, Bulgaria and Greece signed an intergovernmental agreement on its construction. The pipeline will bypass the troubled Turkish straits. However, the main intrigues involve whose oil will use it and whether it will prove to be competitive with other pipelines designed to bypass Russia, especially the Baku-Tbilisi-Ceyhan (BTC). Russian authorities believe BA will prove BTC unprofitable, but that seems unlikely unless Kazakh oil begins moving away from Baku and to Burgas.  Page 6

Site Development
By Elena Kirillova
The majority of small foreign companies managing to obtain Russian hydrocarbon exploration and investigation licenses, do so for exclusively speculative purposes— either to resell the license or issue shares. There is rarely any work actually conducted on these sites. As a result, the announcement by the small Irish company PetroNeft Resources that it has begun drilling on the Lineynoye deposit and has completed drilling on the Tungolskoye deposit in the Tomsk region deserves a closer look.  Page 12

State Companies to Remain Primary Shelf Players
By Inna Gaiduk
In December of last year, the Russian government discussed associating Gazprom, Rosneft and Zarubezhneft in efforts to develop the Russian shelf and in the creation of a national company for shelf development. But since then the government has not come up with any concrete steps. It is clear that officials will designate all shelf projects as strategic, meaning that foreign companies cannot independently gain access. Nevertheless, foreign companies continue to want entry into shelf projects in any capacity—either as a minority partner or service provider. However, the Ministry of Natural Resources is floating the idea of creating a national shelf company for geological exploration instead of development. If this idea is successful, foreigners could take no part in exploration licenses.  Page 19

Reviving Subsoil Legislation: An Interview with Sergei Fedorov
By Vladimir Baidashin
During a March 6 Moscow press conference, Rosnedra head Anatoly Ledovskikh declared that the “attempt to create a new ‘About Subsoil’ law has not succeeded and was not approved.” As a result, Rosnedra’s parent Ministry of Natural Resources (MNR) is preparing amendments to the existing legislation. To understand current developments in the new law and the suggested revisions to the present statute, Russian Petroleum Investor sat down with Sergei Fedorov, director of the MNR’s department of geology and subsoil management and the leading ministerial authority on the legislation.  Page 32

YUKOS Property Sales Move Forward
By Vladimir Baidashin
As expected, Rosneft and Gazprom purchased the main assets of YUKOS tendered in the initial auctions to sell property of the bankrupt oil company. RN-Razvitiye, a Rosneft affiliated structure, won the first auction selling 1 billion Rosneft common shares (9.44 percent of the total shares) and promissory notes of Yuganskneftegaz for R 3.6 billion . The winner of the second auction for a lot including 20 percent of the shares in Gazprom oil subsidiary Gazprom Neft, gas extraction companies Arcticgaz and Urengoil and shares in 15 smaller companies is a consortium of Italian energy majors Eni and Enel. However, they also represented interests of their Russian partner Gazprom, with the Russian natural gas giant becoming the real victor of the tender.  Page 39

Oilfield Service Needs to Increase Rapidly
By Inna Gaiduk and Elena Kirillova
While reserves of easily extracted oil have disappeared and the extraction rate remains at 2 to 3 percent annually, the Russian government has decided on an unprecedented distribution of sites for search, exploration and extractions ofhydrocarbons. Simultaneously, the responsibilities of subsoil users for observance of license agreement conditions have increased. This has demanded oilfield services, especially drilling services, as never before. What does the market provide? In Russia, analysts speak about the formation of a sellers’ market, with the dearth of service availability dictating any price. Moreover, unprecedented demand not only for services but also for equipment persists. Allocated service enterprises from large majors become objects of acquisition for Western service companies and new holdings, such as Integra. All indications point toward continued increases in the prices of oilfield services.  Page 46

News Briefs
Page 52

Corporate Briefs
Page 55

Caspian Briefs
Page 60

Statistics
Page 65

IN THIS ISSUE:

Shelf Development Spurs Russian Shipyard Moves
By Vladimir Baidashin

According to estimates by the Ministry of Industry and Energy, development of the shelf through 2030 will require as many as 55 oil and gas extraction platforms, at least 85 specialized and more than 140 support vessels. Studies show that modernization of existing and construction of new shipyards in regions with already developed shipbuilding is necessary if Russia is to be competitive in the building of large-capacity vessels and production platforms. The ministry is prepared to offer the Duma several bills in support of Russian shipbuilders and providing domestic producers priority rights to deliver equipment for continental shelf development. Page 5

Major Irkutsk Reserves Announced, but Petromir Estimates Questioned
By Elena Kirillova and Sergei Glazkov

Virtually unknown in the market, the small Moscow-based Petromir has announced amazing estimates for the huge Angaro-Lenskoye deposit in the Irkutsk region. However, suspicions immediately emerged over whether the reserve estimates are genuine. If the resources are there, analysts are convinced only Gazprom would be able to develop them. Meanwhile, Gazprom itself has received a certificate to open the Chikanskoye deposit, also in Irkutsk. With the giant Kovyktinskoye deposit already entering development, these new finds mean that the Irkutsk region may become the source for gas moving to Asian Pacific countries. Page 11

Foreigners Active among Russian Small Producers
By Vladimir Baidashin

Foreign investors are successfully moving ahead among Russian small independent hydrocarbon producers. In 2006, such companies grew quantitatively, increasing their production volume. Further, the consolidation of small oil and gas extraction companies in Russia has led to the emergence of some strong players with expanding appeal. Page 18

Interest Increases for a “Gas OPEC”
By Inna Gaiduk

Shortly after Gazprom and Algerian Sonatrach signed a memorandum of mutual understanding in August of 2006, Europeans started talking about a “gas OPEC,” the necessity of resisting such a Russian initiative and even creation of “energy NATO.” Russia has denied any moves toward creating such a cartel. However, President Vladimir Putin has declared that the idea is interesting and that Russia “shall think about it.” Strengthening the role of gas producers in the energy market is an objective not only desired by Russia but also by the other dominant manufacturers of gas. The first indication of whether such an organization is coming may emerge from an international gas forum meeting on April 9 in Doha, Qatar. Page 22

Transneft President Upbeat: An Interview with Semyon Vainshtok
By Inna Gaiduk

Semyon Vainshtok, president of Transneft, discusses with Russian Petroleum Investor the company’s 2006 results, projects for 2007 and his position on the development of main oil pipelines. According to Vainshtok, 2006 was very productive for the company. Construction began on the East Siberia-Pacific Ocean pipeline and Transneft completed construction of the Baltic Pipeline System expansion ahead of schedule. In 2007, Transneft hopes to initiate the new Kharyaga-Indiga transport route and begin coordination of the Burgas-Alexandropoulis international project. In the recent dispute between Belarus and Russia over oil transit to Europe, Transneft was one of the main players and Vainshtok here assesses the contrasting positions. On other matters, he raises significant questions on the Caspian Pipeline Consortium, considers prospects for the Baku-Novorossiysk pipeline and discusses the underlying political reason for its current operational condition. Page 28

Integra IPO Indicates Demand for Field Services
By Elena Kirillova

Beginning in the first quarter of 2006, the Integra Group emerged as a major player on the Russian M&A market. In 2007, its IPO produced GDRs at the top of their pricing range. The issuance indicated that, despite a high debt load and an inability to complete asset consolidation, investors consider oilfield services a sector with major profitability potential.  Page 33

A Strong Beginning for the 2007 M&A Market
By Elena Kirillova and Inna Gaiduk

Gazprom has begun the year without reducing its rate of mergers and acquisitions and that is even before the highly anticipated availability of YUKOS assets. Gazprom should also decide the future of TNK-BP and its gas assets. Additionally, Gazprom has determined to become seriously involved in electricity generation. Not only does the gas giant expect to obtain a controlling package of Mosenergo in the near future, thereby including its representatives in the management of Unified Energy Systems, Gazprom also is creating a joint venture with the largest player in the coal market—SUEK. Meanwhile, Rosneft and LUKOIL continue to expand foreign- participant joint ventures and operations, while TNK-BP considers its more limited options. Even smaller foreign companies jockey for position on the Russian M&A scene. Page 39

News Briefs
Page 46

Corporate Briefs
Page 48

Caspian Briefs
Page 53

Conference Calendar
Page 57

Statistics
Page 59

IN THIS ISSUE:

Rosneft Declares ONGC a Strategic Partner
By Vladimir Baidashin
Russian oil company Rosneft and Indian Oil and Natural Gas Corp. (ONGC) have agreed to expand cooperation into projects in Russia and other countries.  According to a memorandum signed in New Delhi, the companies will create two working groups, one for developing extraction activities and the second for processing and marketing. They also anticipate creation of a joint venture to implement the projects. Rosneft and ONGC are already cooperating in the Sakhalin-1 offshore project at which oil and gas recovery has begun.  Page 5

Rosprirodnadzor Threatens to Pull Rosneft Priobskoye License
By Elena Kirillova
Rosprirodnadzor is considering initiating procedures to revoke Rosneft’s license for the Priobskoye deposit underdevelopment by its subsidiary Yuganskneftegaz. The deposit is a key asset ofthe company, providing up to 25 percent of all crude oil extractions. The rationale for the move involves Yuganskneftegaz utilizing only a fraction of the extracted associated petroleum gas volume specified in the license agreement.  After the ecological complaints against Sakhalin-2, it is possible that officials would like to save face and show objectivity. Perhaps, they have also seriously decided to stop the practice of flaring off associated gas from oil deposits. On the other hand, there may be a power struggle playing out within Rosprirodnadzor.  Page 11

Northern Taiga Unites Gazprom and Chevron
By Vladimir Baidashin
Gazprom Neft, the oil subsidiary of gas concern Gazprom, and American corporation
Chevron have created the joint venture Northern Taiga Neftegaz. Registered in Noyabrsk (Yamal-Nenets autonomous region, in the north of Western
Siberia), the venture will pursue combined efforts to develop Russian oil fields. Gazprom Neft currently holds a 30 percent equity interest, but that will increase to more than 50 percent in the future. In the initial stages, Chevron will provide most of the project financing.  Page 18

Legislative Initiatives in the Oil and Gas Sector
By Inna Gaiduk
The Ministry of Natural Resources has prepared the legislative and regulatory activity plan for 2007 with 155 documents concerning subsoil use. Among new changes are those relating to sites of internal and territorial seas, along with the continental shelf. The ministry will also develop regulations to expedite the application process for use licenses at opened
sites, determining payment methods for subsoil use and other revisions. However, the new law “About Subsoil” will not receive approval in 2007.  Page 23

2006 in Review: The Russian State Takes Control
By Inna Gaiduk
In 2006, the state considerably strengthened its position in the oil and gas sector.
State-controlled companies have become the leaders in market capitalization and are now considered as the main applicants for remaining YUKOS assets. Gazprom received a controlling share in Sakhalin-2, is poised to enter the development project at the Kovyktinskoye deposit and has rejected foreign company involvement in the Shtokman project. The large private companies, with the exception of LUKOIL, are posting only modest results. The primary approach of the new government strategy is to guarantee that state-controlled companies are present in all large projects conducted on Russian territory and to strengthen their positions in world markets.  Page 35

Russian Companies Claim Discrimination in Western Markets
By Elena Kirillova
During a recent conference of the Russian Union of Industrialists and Entrepreneurs, Foreign Minister Sergei Lavrov commented about the discrimination that Russian companies face from the West. This confirms information by experts that leading Russian corporations in 2006 were unable to conclude transactions abroad worth about $49.4 billion. That sum exceeds all Russian market M&A volume by 16.8 percent. In 2006, Russian oil, natural gas
and metal manufacturing enterprises were the most likely to lose deals due to foreign discrimination, led by LUKOIL, Severstal and Gazprom.  Page 42

Development of Oilfield Services in Russia
By Dmitry Lebedev
Major oilfield services (OFS) companies expect a change is coming. The OFS
industry remains fragmented, offering considerable opportunity for consolidation
and efficiency growth through improving economies of scale. Industry leaders have yet to find an optimal strategic fit from a diversification of their services. Independent industry players are gaining market share and experience by working in more stringent and demanding environments. However, oil producers are examining closely how they will manage their future risks.  There may be a shortage of capacities combined with accelerating costs resulting from the growing leverage of service companies. The OFS industry will be the most interesting to follow over the next five years.  Page 48

Interview: Foreign Investors Affected by YUKOS Backlash
Bruce W. Bean (Professor in Residence, Michigan State Law School) interviews Vladimir Gladyshev (Gladyshev and Partners). Page 55

News Briefs
Page 57

Corporate Briefs
Page 60

Caspian Briefs
Page 65

Statistics
Page 71

IN THIS ISSUE:

An Interview with Vagit Alekperov: LUKOIL Sets Sights on an International Top Three Status
By Vladimir Baidashin
On November 25, 1991, the Russian government decided to create the first Russian vertically integrated oil and gas company—LUKOIL. In 2006, the company had its fifteenth anniversary. LUKOIL began with three extracting and two processing enterprises in Russia. Today the company includes about 300 companies in over 30 countries and is the leading crude oil producer in Russia.  Vagit Alekperov, the president of LUKOIL, sat down with Russian Petroleum Investor for a rare extended interview about company results and prospects for development over the next few years.  Page 5

Rosneft Moves Slowly on Chinese Agreements
By Vladimir Baidashin
In late 2006, State-controlled oil major Rosneft announced agreements with China National Petroleum Corp. to form joint ventures for E&P in Russia. In January of 2007, however, Russian officials rejected Rosneft’s application to begin moving export crude to China on the newly finished Kazakh-Chinese Atasu-Alashankou pipeline. Neither Russian pipeline monopoly Transneft or the Ministry of Industry and Energy has provided rationale for the decision, but experts are suggesting trouble is again looming in relations between the two countries.  Page 10

New Russian Companies Vie for Major Status
By Inna Gaiduk and Elena Kirillova
Several small companies are attempting to join the club of the largest Russian oil and gas enterprises. RussNeft shot up to become a Russian major within four years. Others are now attempting the move. The oil and gas unit of Group Alliance, NRK-Oil—a unit of National Reserve Corp.—and North West Oil Group are also looking forward to a boost in stature.  Page 17

Gazprom to Liquefy Sakhalin Gas?
By Sergei Glazkov
At the end of December, Gazprom joined the Sakhalin-2 project, having bought 50 percent plus one share of the project for $7.45 billion. Sakhalin-2 has an almost completed refinery plant. Having received it, Gazprom can completely change the strategy on production, transportation and marketing of liquefied gas. The government’s gas balance projection to 2015 expects that all natural gas coming from Sakhalin projects will become LNG. If accurate, this will have a heavy impact on Exxon Neftegaz, the operator of Sakhalin-1.  Page 24

Russia Launches Natural Gas Exchange
By Vladimir Baidashin
Russia has begun experimental natural gas exchange trade. Under the provisions of the 5+5 trading formula, Gazprom and its subsidiaries offered 5 billion cubic meters while independent producers made available for sale an additional 5 billion cubic meters. The experiment will last through 2007 and aims at improving the exchange techniques to assure further development of natural gas trade. The Ministry of Industry and Energy proposed a three-sector model for the gas market—long-term contracts, spot market sales and supplies at government-set tariffs. Underlying this model is a gradual rise in prices for all groups of consumers to match European price levels.  Page 31

Gazprom Poised to Take Over Tambeineftegaz and Yamal LNG
By Vladimir Baidashin
The conflict between independent entrepreneur Nikolai Bogachev and Gazprom concerning the Yuzhno-Tambeiskoye gas-condensate field ended, as expected, with Gazprom interests buying out Tambeineftegaz and Yamal LNG. Many experts share the view that the new Gazprom-affiliated owners, once they put the asset in order, will sell it to Gazprom. As soon as Gazprom purchases the prize asset, it will be able to continue negotiations on the involvement of foreign companies—Shell, Repsol and Petro-Canada—in efforts to develop the field.  Page 38

Deals
By Elena Kirillova
Until 2006, the oil sector was the volume leader on transactions in the Russian mergers and acquisitions market.  That title has now moved to activity in the metallurgy sector. However, analysts expect big moves in oil during 2007.  Even lacking large transactions, midsize and small oil companies were active in 2006 and observers expect more of the same in 2007.  Page 44

REBCO Trading Begins — An Interview with Kirill Androsov
By Elena Kirillova
Futures trading in the new Russian export blend crude oil (REBCO) contracts opened on the New York Mercantile Exchange (NYMEX) on October 23, 2006. Trading takes place via the CME Globex electronic platform. The dollardenominated contract, corresponding to 1,000 barrels, envisions physical oil supply on FOB terms at the port of Primorsk. In the light of the creation of the Russian exchange to trade oil products in St. Petersburg, where trade in the REBCO brand will later be transferred, such an early launch of the new product on the New York exchange will help to promote the brand and create demand for it as soon as possible. Russia needs to eliminate the linkage of the Urals price to the Brent price because of the wide spread in Brent’s favor.  Page 51

News Briefs
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Corporate Briefs
Page 64

Caspian Briefs
Page 68

Conference Calendar
Page 68

Statistics
Page 73

IN THIS ISSUE:

New Solutions and Longstanding Problems
By Inna Gaiduk
Newly approved legislative amendments now allow the transfer of rights to develop fields from one company to another within the same corporate structure.  This will simplify license management and help holdings optimize cash flows.  Additionally, the Ministry of Natural Resources has agreed to transfer exploration licenses for formations lying below boundaries set in field agreements.  Page 5

Making an Infrastructure Effective
By Vladimir Baidashin
Governmental commission figures forecast the oil and gas sector through 2015. Projections call for development, production, export and pipeline capacity all to rise significantly. Page 10

Far Eastern Intrigues
By Sergei Glazkov
Russia and South Korea have signed an agreement on annual gas sales, Gazprom has unveiled two options for a gas pipeline to South Korea and is discussing with Kogas the feasibility of liquefied and compressed natural gas supplies under SWAP and SPOT contracts. However, Gazprom does not yet have any Sakhalin Island projects to source the gas.  Page 16

Developing Russia’s Unified Gas Transportation System
By Bogdan Budzulyak
Bogdan Budzulyak, a member of Gazprom’s Management Committee and head of the department for oil transportation, underground storage and use, speaks about prospects and specific features of Russian gas transportation system expansion in the coming decades.  Page 21

Foreign Investors in the Russian Heartland
By Vladimir Baidashin
US Star Energy Corp. plans to acquire new assets in Samara and neighboring regions. In so doing, it is following the efforts of other foreign companies finding investment in small Russian regional oil producers an attractive move.  Page 25

Nord Stream Starts Countdown
By Vladimir Baidashin
The North European Gas Pipeline international project adopted a new name, Nord Stream, and Dutch Gasunie joined as its fourth participant.  Gasunie’s involvement may dampen European Union political pressure on Gazprom.  Page 31

Eastward Expansion Kicks Off
By Andrei Shlyapnikov, Sergei Glazkov, Inna Gaiduk
Following the announcement of the timeframe for the ESPO pipeline construction, interest in blocks located along the route has heightened. The change in the route has also drastically altered the oil pipeline’s resource base.  An opportunity has now emerged to funnel East Siberian oil into ESPO, specifically oil from the Talakanskoye field.  Page 37

Turkmen Sensation
By Irina Denisova
According to President Saparmurat Niyazov, Turkmenistan has discovered the world’s largest natural gas field – Yuzhny Iolotan. Assuming confirmation of the discovery, Ashgabat has new prospects for developing gas production and export, implementing pipeline export projects, as well as new leverage in relations with potential buyers. This is of particular concern to Russian Gazprom.  Page 44

News Briefs
Page 49

Corporate Briefs
Page 52

Conference Calendar
Page 61

Statistics
Page 65