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The role of Russia in global energy supply

Konstantin Simonov’s speech presentation at The Petroleum Engineering Summer School “Exploration and Production of Hydrocarbon Reserves from Unconventional Deposits”.

Dubrovnik, Croatia, June 18, 2010.

2009 – Breaking Point of World Energy?• Global consumption of energy resources was decreased by 1.1% for the first time during last 20 years• Consumption of oil fell by 1.7%• Consumption of gas fell by 2.1%• The beginning of new trend? Era of shale gas? Green energy and renewables? Escalation of competition between fossil fuel producers? Epoch of cheap oil and gas? But Situation is not so Categorial• Main problems and disproportions of world energy are still the same • Disbalance of resources and consumption Four main drivers of increasing of energy consumption in long terms • Increasing of population • The developing of Asian countries. The decline in energy consumption in 2009 was concentrated in OECD countries and the territory of the Former Soviet Union• Renewables: in need of technical revolution and huge amount of investment • Fossil fuel: recourses are huge, but they are most of all in hard-to-reach category Economic Crises may be only a pause but the beginning of new long term trendGreen Trap• Renewables are very expansive. If you want substantial production of green energy in the EU, fossil fuel must be expensive! If fossil fuel is cheap, no money will be invested to green energy• The same situation with shale gas!• Logical contradiction: Brussels is saying that oil and gas will be cheap because of the development of production of renewable. BUT! The development of production of renewables is possible only if oil and gas will be expansive Energy Problems of Europe • Europe believes in diversification and competition between fossil fuel producers. That is why Europe is struggling with traditional suppliers – first of all with Russia• That is why Russia is thinking about new marketsGas Trap of Europe• With the struggle for cutting emissions into the atmosphere, natural gas seems to be the most environmentally friendly traditional energy source and the most efficient one among relatively clean fuels. At the same time, the EU gas production keeps going down, which should result in consecutive growth in importsIs 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 graphicallyRussia: Europe or China? • Russia’s “symmetrical response” for the energy policy of Europe – we are thinking about more serious energy cooperation with China. But the problem is very simple: it will be impossible to increase Russian oil and gas export to China without decline of our supply to Europe• 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• The diversification strategy is effective only amid growing production. In this case one can afford entering new markets retaining the old ones. However, when one’s production declines or at least stagnates, entering new markets means redirection of supplies because of the necessity to cut some deliveries to old markets • Western Siberian deposits were actually launched to cater for the European market. It is indeed more logical to develop new provinces in Eastern Siberia and the Far East to target Asian markets. Yet, currently a system to deliver oil from Western Siberia to the east is being created, which looks rather strange from the economic point of view. Huge resources are being invested in the infrastructure necessary to take oil from a more profitable market • Exports to the east are deliberately subsidized by the state. This includes zero export duties on hydrocarbons from Eastern Siberian fields, Transneft’s tariff policies and prices of oil transportation by railroadProblems in Upstream • In the 1990s and 2000s producers of natural resources were actively raising output by developing deposits with the most easily extractable reserves and by using aggressive means of enlarging oil production. As a result, the sector reached record high results and now it is facing an objective to retain the positions achieved. Production at major fields in Western Siberia is steadily easing back and there are not enough investments in eastern projects• Production at major fields in Western Siberia is steadily easing back • Production in the east is not growing as fast as planned. We rather hear talks about production but upstream projects in Eastern Siberia are carried out very slowlyGas Supply to China: Risky Game• Beijing has voiced ambitious plans for growth in gas consumption to 300 billion cubic metres by 2020. The increase will amount to 10-20% per annum even in crisis times. Import is expected to rise at even faster rates.BUT • The activity of Chinese companies purchasing the fuel does not lag behind either though. A gas pipeline is being built from Central Asia to China with a capacity of up to 40 billion cubic metres a year (scheduled to be launched in December with an initial capacity of some 10 billion cubic metres)• The state companies CNOOC and PetroChina have signed contracts to buy substantial quantities of LNG in the Pacific and the Middle East. The import of liquefied gas must grow to 14 million tonnes in 2012. About 3 million tonnes is already supplied from the North West Shelf in Australia. This year will see the beginning of gas supplies from Qatar (up to 5 million tonnes when a “plateau” is reached), Indonesia (up to 2.6 million tonnes), and Malaysia (up to 3 million tonnes)• Besides, framework contracts have been signed with Exxon and Shell for acquiring 4 million tonnes from the Gorgon project in Australia from 2014 and with Exxon for 2 million tonnes from a plant in Papua New Guinea starting the same year. Thus, about 30 million tonnes of LNG a year has been contracted for in total, which is equivalent to half of today’s consumption in China. • Coal-bed Methane Production? Conclusions• Russia has problems in Upsream but Russian’s main trump card is proved reserves• The increasing of export of oil and gas to China means the decline of Russian export to Europe • U-turn to China is very risky strategy • European strategy of diversification is also very risky• Europe will still depend on import of fossil fuel and refusal from Russia can result in lack of energy resources in EU • We must avoid possible mutual mistake

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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