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Europe And Russia - On The Verge Of Mutual Energy Mistake

Konstantin Simonov’s speech presentation at The CISO&G Summit 2010.

Paris, May 20, 2010.

11.Europe & Russia: On the Verge of Mutual Energy Mistake Konstantin Simonov Paris May, 20 2010 2.European Hopes Europe believes in the beginning of an era of cheap hydrocarbons, a competitive gas market, and oversupply for years to come The EU proceeds from the assumption that the only necessity is to provide infrastructure for accepting and distributing hydrocarbons in the EU 3.Main Issues of Gas Diversification Central Asia: Lack of new transport routes leads to China’s increasing domination in the region There has been no way for Nabucco to solve the problem of filling the pipe Iran still remains a country with high political risks Qatar with its LNG has come to the EU because of the plain trap into which it fell in the US as it believed absolutely unreliable forecasts of the American gas market development. For that reason, it has simply been forced to find a market for new LNG quantities at any prices Shale revolution in the EU: much more talk than action here, unlike the US Declining internal conventional gas production remains the key problem Energy efficiency: less progress in the period of an economic crisis and relatively low oil prices 4.European Gas Paradoxes Simultaneous expectations of a cheap gas era and shale revolution However, if you want substantial shale gas production in the EU, gas must be expensive. If gas is cheap, no money will be invested in shale production Confidence in Qatar’s satisfaction with any margin earned according to the “cost-plus” method If Qatari gas costs $90 per 1,000 cubic metres, this does not mean that Qatar will always be happy to sell it at $100. It is not at all certain that Qatar will prioritise the policy of conquering new markets without thinking about higher cost-effectiveness 5.Diversification as Salvation from Russia Europe forces Russia into other markets by itself “ LNG will replace pipeline gas” “ Spot market will replace long-term contracts” “ Ukraine is not our problem” 6.Is This Justified in Medium Term? The EU may be in for 15-20 years of difficulties because Demand for gas may begin to recover Export of gas from Iran may not start in the next 15-20 years Central Asia will find itself politically dependent on China Qatar will seek to make supplies more profitable Internal production of conventional gas will be seriously declining It will be difficult to finance grandiose energy efficiency projects The “shale revolution” will require 15-20 years to move from words to actual projects, which US experience has shown graphically 7.Russia’s “Symmetrical Response” Diversification of supplies: entering Asian markets. This strategy is being implemented for both oil and gas. However, as is the case with Europe’s, its efficiency raises serious doubts Russia is abandoning the logical principle “Western Siberia for the West, Eastern for the East” The “pipeline race” continues that diverts financial resources rather than delivers hydrocarbons to new markets 8.Russia’s “Symmetrical Response” An entire system for redirecting oil from Western Siberia to the east is being created, which looks very strange from an economic point of view. Huge money is invested in infrastructure that is necessary to take oil from a more profitable market to a less profitable market The more so because the cost of export rises significantly given such strange logistics Development of Eastern Siberian fields is behind schedule. Meanwhile, pipelines are being built as a matter of urgency 9.Oil Production in East Siberia Source: NESF 10.East or West? The energy strategy stipulates sharp growth in the share of oil exports in the eastern direction – from 8% in 2008 to 22-25% in 2030 The energy ministry officially proposes to cut oil exports to the west by 20% to 25% by 2030 In 2009 practically all auctions on fields in Eastern Siberia failed. In the Krasnoyarsk region all 16 tenders did not take place. Out of 12 auctions in the Irkutsk region only one was held (on the Ayansky western block). Only one successful auction was carried out in Yakutia that was won by Rosneftegaz state company (the Srednebotuobinskoe deposit) 11.China in Russian Uprstream Source: Rosnedra 12.Upstream Dreams 13.Case: Altai Gas Pipeline Connects Western Siberian fields that have an expensive market. It is by no means gas from Yakutia or other Eastern Siberian regions, but gas from the Yamal-Nenets Autonomous District, i.e. Western Siberia, that the Altai gas pipeline is intended to deliver to China Its length is 2,800 kilometres (Russian territory) A monopolistic consumer who will not invest in the pipe The Turkmen precedent: for a long time they fought for diversification, and now they have got China that refuses to pay more than $120 per 1,000 cubic metres Source: Gazprom 14.China Better Positioned to Solve Gas Problem than EU Counting on Central Asia and Australia Higher chances to start shale gas production than those for the EU Comparison of Initial Conditions for Shale Gas Production in EU and China Parameter EU China Reserves Considerable Technology No, but may be received from the US No, but there is a high potential for industrial espionage. Counting on development of production technologies in Australia Investment Government investment is limited by economic crisis and European currency troubles Substantial investment resources. More profitable to invest in shale gas than US government bonds Environment Serious limitations Environmental concerns are thought to be a limitation on the right to development, environmental issues are ignored Considerable, but distributed irregularly, which creates political problems of a higher role of “shale” countries 15.Necessary Agenda I mplementation of principle “East fo East, West for West” Support of acquisition of Naftogas by Gazprom Refusal from pipeline export of gas to China Refusal from public support of the most unrealistic projects Liberalization of access of foreign companies to shelf and other upstream projects Change of diversification rhetoric RF: V aluable Activities EU: V aluable Activities.

Special report:

Liquefied Natural Gas Outlook: Expectations and Reality

World market has shown interest to liquefied gas. Russia has so far been aside of it. However, producers have announced several large LNG projects. The new study will help investigate this delicate subject and understand what is in store for LNG production and export in the nearest years.

Analytical series “The Fuel and Energy Complex of Russia”:

State regulation in the oil and gas sector in 2011 and prospects for 2012

The year 2011 turned out to be rather contradictory for the oil and gas industry. On one side, preliminary results of basic parameters seem quite satisfactory. On the other side, the depletion of oil production growth potential is becoming more obvious. Prime Minister Vladimir Putin several times mentioned that the oil industry reached its peak. This was described as an ordinary event, although in reality it reflects recognition of strategic mistakes once made.

The Present and Future of Gazprom

Gazprom’s 2010-2011 financial results were phenomenal. An employment contract of Gazprom CEO Alexey Miller, who has been managing the gas giant for 10 years, was prolonged ahead of time for another five years. However, the country’s main company found itself under powerful pressure both on the domestic and external markets.

State management in the oil and gas sector: Last autumn of current political cycle

The main political intrigue of the upcoming election cycle would seem to be over. Vladimir Putin is set to return to the president’s office, while Dmitry Medvedev is to chair the Cabinet. But in reality, everything is just about to begin. Some scenarios of reformatting Russian state authorities are indeed ruled out. Yet, there are many unclear things, including the question of the oil and gas sector management. Changes in the system are unavoidable. There is temptation to fix the rules of the game for the next six years, which adds a special connotation to the upcoming transformation.

Central Asia and Caspian Region: Problems of Development and Transportation of Hydrocarbons

Despite problems related to signing contracts on purchasing gas from the Caspian region countries, the European Commission is fully determined to implement Southern Corridor projects to reduce dependence on Russia. In its turn, Moscow keeps steadily promoting its alternative South Stream project. But the price of the question puts both sides into a difficult position.

Export Strategy of Russia’s Oil and Gas Sector

In 2010 the Russian oil industry set an absolute record in terms of production. An oil pipeline to China has been launched this year expanding our potential of oil supplies to Asia. Diversification of export routes seemed to be quite a reasonable strategy on the background of growing production. However, there are certain factors that should be taken into account.

Rearrangement of Property in the Oil and Gas Sector

Preparations for the elections are accompanied by quite serious changes in the structure of property of oil and gas companies. Liberal experts have formed a firm opinion that the state presence in the sector is growing. In reality there is an opposite process. The matter is that new owners of assets are loyal people.

New Legal and Fiscal Procedures in the Oil and Gas Industry

There are rather contradictory developments in the Russian oil and gas industry. However, this is not surprising: the role this sector is to play in the current and most importantly in the future structure of the Russian economy has not been finally defined yet. Besides, there are active preparations for the introduction of changes in the legislative framework of the Russian oil and gas sector. A new bill on oil is to be soon submitted to the State Duma; the document is to become almost a new oil constitution.

Prospects of Third Legislative Package Implementation, Future of European Gas Market

The European Union remains Russia’s key gas market. Therefore, in Russia they take a close interest in any changes therein. The new EU legislation, as contemplated by its authors, is intended to destroy vertically integrated monopolies in the transport and storage of gas. Gas suppliers with Russia at the helm are expressing increasing concerns about the introduction of the Third Package and insist on additional consultations.

All reports for: 2011 , 2010 , 2009 , 2008 , 2007

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