Russian Petroleum Investor Issue Archives

Russian Petroleum Investor 2009 Issue Archives
09 Feb 2010

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IN THIS ISSUE:

IN THIS ISSUE:

GECF Takes a Major Step Forward

By Victoria Nezhina

At the center of attention during the Gas Exporting Countries Forum (GECF) session in Algeria were two main trends: the falling natural gas price and the sharp growth of shale gas production. As a result, participants have agreed to prevent a competition between the long-term and short-term gas markets. For the first time, the GECF has accepted a joint program resolution to consolidate the positions of member countries. The resolution also calls for creation of a uniform database about gas market conditions, along with the preparation and acceptance of a global gas model. Another sensation during the Algerian meeting was the bilateral accord between Russia and Qatar. The two are competitors in the European market. However, falling gas prices have forced Russia and Qatar to change their relations and sign a joint statement on cooperation in the stabilization of prices and demand. Page 5

By Inna Gaiduk

Remaining doubts that Russian natural gas is a powerful geopolitical tool disappeared on April 21 when Russia and Ukraine signed two key bilateral agreements. First, starting in April, Gazprom began providing Naftogaz Ukrainy with a discount for gas at a rate of $100 per 1,000 cubic meters. Second, the Russian Black Sea fleet acquires the right to remain in the Crimea for an additional 25 years after the end of the current contract in 2017. Ukrainian President Victor Yanukovich has already calculated that over the next ten years the pricing agreement will provide about $40 billion to the national treasury. Meanwhile, Russian Prime Minister Vladimir Putin emphasized that the main thing is not gas prices and the fleet but relations between the two nations. Page 10

Gazprom Begins Push into the Asian-Pacific Region

By Svetlana Milyaeva

Gazprom continues gradually disclosing details of its Eastern Gas Program. Pipelines, rapidly becoming the primary Russian geopolitical factor in the Far East, will extend from the Irkutsk gas production center, crossing the Sakhalin-Khabarovsk-Vladivostok pipeline. Here also will move gas from the Yakutia gas production center via the Yakutia-Khabarovsk-Vladivostok pipeline. Gazprom plans two spurs to China - in Amur (Blagoveshchensk) and in Primorsk (Dalnerechensk or Ussuriysk). It is possible that the gas pipeline from Vladivostok will go to both North and South Korea. In April, it emerged that CNPC would become a Gazprom Eastern Program partner. It was quite sensational news, given that there had been no discussion of Chinese involvement in Russia-based Gazprom projects. South Korean companies have also declared readiness to invest in the same facilities. Page 17

Modest Expectations for 2010

By Sergei Glazkov

Under the optimistic forecast of Ministry of Natural Resources and Ecology (MNRE) head Yuri Trutnev, Russia will have enough oil for a long time. Even if there are no new discoveries, he says there are reserves sufficient for 25-35 years. But the optimism of the minister is not shared by his subordinate – the director of the Federal Subsoil Use Agency (Rosnedra) Anatoly Ledovskikh. Ledovskikh has harshly criticized what he calls the nonprofessional attitude of MNRE and the Ministry of Finance, as well as the government’s entire system of subsoil geological study. While subsoil users discovered 74 new deposits in 2009, only six have reserves totaling 12 million tons or more. Foreign companies are hardly in a hurry to announce new openings, fearing that the authorities would transfer them to the strategic category. That would allow the state to take the deposits, providing only compensation for study and exploration. Nevertheless, openings of new deposits continue. Page 22

Russian and Foreign Investment Plans, Transactions

By Elena Kirillova

Specific considerations govern the investment approaches chosen by foreign investors in Russia and Russian investors both at home and abroad. First, any significant transactions in the oil and gas sector are under the concerted attention of authorities. They often take place behind closed doors. For example, it is not clear who is buying Kovykta, whether the sale will take place in the near future despite news about the transaction having been under public discussion for months. Second, it is often the case that foreign investors buying into Russian assets are the Russian companies themselves registered offshore. In addition, difficulties for Russian companies on foreign M&A markets force authorities to lobby their interests at the highest political level. Thus, the impression arises that Russian companies buy not what they want abroad, but what authorities allow then to purchase, or whatever they can find in the general market. Page 28

Oil Sector Results Encouraging

By Illya Kedrov

Despite the financial crisis, 2009 was favorable for Russian majors. Not only were they able to increase oil production against a background of recession in other sectors, they also accumulated aggregate profits of $60 billion and among the highest dividends in recent years. Capitalization of companies grew significantly. Experts note that the companies have returned to the precrisis conditions of 2006-2007. Officials also see the positive trends. They have proposed that the state companies direct not less than 25 percent of net profits to dividends. Meanwhile, the Ministry of Finance has initiated discussions about revoking incentives. While the companies intend to direct a major part of net profits to dividends, the economy awaits investments. If Russian majors do not want to invest, the door may open for foreign investors. Toward this end, Prime Minister Vladimir Putin has already given the order to improve  legislation on foreign investments. Page 34

Gazprom Has Major Plans

By Elena Kirillova

According to latest Gazprom forecast made in April, based on an approved 2011-2013 gas balance, the company plans to extract 565.5 billion cubic meters of gas. This is 22 percent more than in 2009 (462.30 billion cubic meters). Despite reduction of production in 2009, the net profit of the company totaled $24.33 billion. It is the highest profit among the largest companies of the world. It would have been more if not for the reduction of gas prices and a reduction in European market demand. In comparison with the pre-crisis year of 2008, Gazprom’s share of the European market year has declined from 21 to 18 percent and among OECD companies from 31 to 28 percent.Nonetheless, Gazprom continues to work successfully on new infrastructural projects directed to Europe. Nord Stream offshore construction began in early April. Austria and Romania have joined the South Stream. In addition, Gazprom and Italian ENI have resolved their disagreements. Page 39

News Briefs Page 44

Corporate Briefs Page 45

Oil Production Page 49

Gas Production Page 55

Oil Refining  Page 61   

Oil Export Page 62

Oil Wells Page 63

Drilling Page 69

Capital Investment Page 71

Subsoil Use Auctions  Page 73  

Subsoil Use Auctions Forthcoming Page 74

Merger and Acquisition Deals Page 77

IN THIS ISSUE

The MNRE Position on Shelf Projects

By Sergei Glazkov

The March 30 meeting of the Russian government’s Maritime Board considered development of the Russian continental shelf. The Ministry of Natural Resources and Ecology (MNRE) again criticized the governmental approach to restrict subsoil use rights on a shelf to state companies. According to the MNRE, if shelf development proceeds only via work of Rosneft and Gazprom, under the most optimistic script, it will take at least 165 years. Only LUKOIL among Russian privately-held companies objects to the restriction. As such, the MNRE proposals appear a lobbying initiative for LUKOIL interests.

Gazprom Eastern Gas Program Taking Shape

By Sergei Glazkov

On March 12, Gazprom and the government of the Republic of Sakha (Yakutia) held a joint meeting dedicated to the formation of the Yakutia gas production center as part of the Eastern Gas Program (EGP). Gazprom CEO Alexey Miller underlined that EGP implementation was among Gazprom’s current strategic priorities.  He particularly stressed the tough deadline set by the government for bringing onstream prioritized facilities in Yakutia: launching the Yakutia-Khabarovsk-Vladivostok gas transportation system (GTS) construction in 2012, while starting oil and gas production from the Chayanda field in 2014 and 2016, respectively. Simultaneously, the top priority gas processing and gas petrochemical facilities are to open in 2016. Both the Sakhalin-Khabarovsk-Vladivostok and Yakutia-Khabarovsk-Vladivostok pipelines will allow exports to the Asian-Pacific region of up to 140 billion cubic meters of gas annually, equivalent to the entire 2009 European export volume. In addition, Gazprom asks for incentives to develop gas production in the east of the country and to transfer to the company several deposits without competition to fill Yakutia-Khabarovsk-Vladivostok. Among these deposits are Srednetyngskoye, Taas-Yuryakh, Sobolokh-Nedzhelinskoye and Verkhnevilyuchanskoye.

PSA: A Competition between Politics and Economics

By Inna Gaiduk

Currently, all three production sharing agreements (PSAs) in Russia have state company participation: Sakhalin-1 -- Rosneft; Sakhalin-2 -- Gazprom; Kharyaginskoye -- Zarubezhneft. Attitudes toward PSAs are hardly unanimous, either among central and regional authorities or with the general public. Indications of such equivocation arise in the approval of cost estimates for the current year.

Refinery and Petrochemical Production: Problems and Prospects

By Elena Kirillova

Russian experts working in petrochemicals and oil refining have for some time expressed concern about the raw material production model for the energy sector, a high level of equipment deterioration, the absence of new refineries and low profitability of operating ones. The Russian Oil Refineries and Petrochemists Association (ORPA) has developed a concept for the Russian oil refining and petrochemical industry until 2020 and has presented the draft to the Ministry of Energy (Minenergo). Officials have not supported the proposal. Rather, Minenergo has retained a raw material production orientation in the ministry’s strategy through 2030. However, large Russian companies, responding to market demand, are attempting their own approach to develop refining and petrochemical capacities. Moreover, some Russian regions have begun forming petrochemical clusters without waiting for a clear position from central government officials.

The Debate over Shale Gas Production

By Ilya Kedrov and Elena Kirillova

The global press has been awash with sensational articles stating that the energy market is standing on a threshold of shale gas replacing conventional natural gas. American and Canadian authorities believe that shale gas has huge potential. Because Russia is the world’s largest exporter of gas, there is the concern that the “shale revolution” may undermine its economy. On March 25, The Duma held a roundtable on development of unconventional shale gas reserves, with deputies, officials and scientific experts participating. The problems of developing shale gas were on the agenda, as were the problems from shale gas resulting in European demands for revised contract provisions from Gazprom.

New Yamal Oil Pipeline

By Inna Gaiduk 

On March 11, a significant step occurred in the strategic development of hydrocarbon deposits in the northern Krasnoyarsk region and the Yamal-Nenets autonomous region (YNAR) – the start of construction on Purpe-Samotlor. This oil pipeline, along with the planned Zapolyarnoye-Purpe, will allow for the creation of a new uniform system of trunk pipelines having a general throughput capacity of 95-120 million tons of oil annually. 

Russian Majors Eye Work Abroad as Foreigners Want into Russia

By Elena Kirillova

Russian authorities have overreached in the attempt to secure strategic assets from foreign investors. It seems even transactions of the largest state companies, Gazprom and Rosneft, are subject to nullification. According to the law on foreign investments, any Russian company with foreign subsidiaries has to receive transaction approval from the governmental commission. Both Gazprom and Rosneft have foreign subsidiaries, and there is no information that they did not coordinate all transactions with this commission. On the other hand, analysts expect discussions on a Rosneft purchase of a 50 percent stake in German Ruhr Oel from Venezuelan PDVSA. In addition, there is considerable foreign interest developing again over investments in Russia.

News Briefs

Corporate Briefs

Oil Production

Gas Production

Oil Refining

Oil Export

Oil Wells

Drilling

Capital Investment

Subsoil Use Auctions

Subsoil Use Auctions Forthcoming

Merger and Acquisition Deals

IN THIS ISSUE

Russian President Sets Oil and Gas Priorities
By Svetlana Milyaeva

Russian President Dmitry Medvedev chaired a major energy meeting in Omsk on February 12 during which he paid special attention to two problems in the oil sector -- the illegal activity of mini-refineries and the weak control over the export of oil and oil products. The president has established a goal of creating a uniform system to account for and control the movement of oil, as well as a uniform list of oil and oil products for customs registration.
Page 5

Commentary: Poland Challenges Dependency on Russian Gas
By Marina Moors
Executive Editor
Russian Petroleum Investor

Just as Gazprom obtained the final Baltic approval for the underwater segment of the Nord Stream natural gas pipeline, two significant meetings signaled continuing unease in increased European dependence on Russian volume. The focus is once again on Poland and the implications are extending well beyond its borders. At the North European Energy Security Forum in Gdansk and the Windsor Energy Group Annual Consultation at Windsor Castle outside London, a new series of alternatives took shape. Russian Petroleum Investor executive editor Marina Moors participated in both events and files this report.
Page 10

European Financial Crisis Impacts Russian Gas Pipeline Projects
By Ilya Kedrov

The last obstacle to Nord Stream has fallen. On February 12, Finland provided its second and final approval for the project. Participating countries will begin construction of the offshore section of the gas pipeline in April. Also in April, Gazprom and French GDF Suez intend to close a transaction bringing GDF into the project, having signed a memorandum on March 1. However, a change in Ukrainian leadership and an expanding financial crisis could bring fundamental changes to Nord Stream, as well as the South Stream gas pipeline project. The new Ukrainian President Victor Yanukovich has offered Russia a one-third position in a consortium to manage the Ukrainian gas transport system along with Ukrainian participation in both Nord Stream and South Stream. However, the main danger facing South Stream is partner Greece teetering on the verge of bankruptcy, with even more important partner Italy also not far from insolvency. That a European market facing expanding budget deficits does not need increasing volumes of Russian gas deliveries is reflected in the decision to delay the first phase of development at Shtokman for three years.
Page 14

Transactions at the Beginning of 2010 Highlight State Companies
By Elena Kirillova

In 2009, state companies led developments in the Russian M&A market. This remained the case at the beginning of 2010. Gazprom announced the possible creation of a new gas company based on companies Sibneftegaz, Nortgaz and Purgaz. For this purpose, the company negotiates with Gazprombank on the purchase of Sibneftegaz shares or their swap for NOVATEK shares belonging to Gazprom. In February, Gazprom closed the purchase of a 50 percent holding in Beltransgaz that should remove transit problems with Belarus. The state company Rosneftegaz may buy TNK-BP affiliate RUSIA Petroleum, owner of the huge Kovykta deposit. The largest Russian state bank -- Sberbank -- plans to sell oil assets which it received as collateral for credits: Dulisma, Taas-Yaryakh, and Aurora Oil. Zarubezhneft and the National Oil Consortium are beginning South American projects within the framework of created joint ventures.
Page 21

MNRE: Good Strategy, Bad Practice
By Sergei Glazkov

The Ministry of Natural Resources and Ecology (MNRE) has created another “landmark” document. This one is the “Development Strategy of the Geological Sector for the Period Until 2030” project. Among other matters, MNRE has proposed the revolutionary idea of introducing an open market turnover of exploration licenses, as well as the transfer of rights by large companies in favor of small and medium size enterprises in the event that blocks no longer hold interest for the large companies. The Federal Subsoil Use Agency (Rosnedra) predicts a significant decline in the replenishment of the mineral raw material base (MRMB) starting in 2010. Despite measures introduced by the ministry to stimulate interest in auctions, results for the first two months of 2010 were not positive. Demand for new blocks of hydrocarbon raw materials, contrary to expectations, has not returned.
Page 27

Russian Shelf Competition: What is the Distinction between a “State” and a “National” Company?
By Elena Kirillova

Rosneft has asked without competition and free of charge for 25 licenses on shelves of eight Russian seas through 2020. Thus far, the Ministry of Natural Resources and Ecology (MNRE) in 2010 is prepared to allocate Rosneft without competition only two licenses for the Sakhalin shelf. In 2009, authorities gave to Gazprom similar licenses for the Sakhalin and Kamchatka shelves. According to Russian law, only two state companies are allowed to work on a shelf -- Gazprom and Rosneft. The MNRE and LUKOIL do not agree with these provisions. LUKOIL wants to receive the designation of a “national company” to balance opportunities for private and state companies.
Page 31

Russia May Soon Close Druzhba
By Victoria Nezhina

About 50 percent of the Baltic Pipeline System-2 (BPS-2) is complete and Transneft intends to commission it in the fourth quarter of 2011 instead of the originally planned third quarter of 2012. From an initial volume of 30 million tons, BPS-2 will eventually pump up to 50 million tons a year. That volume will reduce crude transiting on the Druzhba. Although the older pipeline remains the shortest and most effective transport route for Russian oil to Europe, it has fallen victim to events. Transneft has accelerated the BPS-2 project because of the alternative Odessa-Gdansk project, as well as ongoing conflicts with transit countries. However, Eastern European moves to obtain Caspian oil should forget about Kazakh volume. It will go via other routes –the expanded Caspian Pipeline Consortium, Samsun-Ceyhan and Burgas-Alexandropoulos pipelines.
Page 38

News Briefs
Corporate Briefs
Statistics
Oil Production
Gas Production
Oil Refining
Oil Export
Oil Wells
Drilling
Capital Investment
Licensing
Past Subsoil Use Auctions
Subsoil-Use Auctions Forthcoming
M&A Deals

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