PostG8 activities of Gazprom and Transneft

1
Post-G8 activities ofGazprom and Transneft

• Vladimir Milov
• President, Institute of Energy Policy (Moscow)
• http//www.energypolicy.ru
• Paris, IEA, October 12th, 2006

2
Gazproms activities
3
Sakhalin-2 situation

• PSA as such is not under attack
• Again, this is a case of Government using
  regulatory powersin arbitrary manner in order to
  provide competitive advantage toaffiliated
  companies (Gazprom)
• Another example was September 2004, when MNR
  threatened torevoke Yuganskneftegaz licenses.
  After takeover, all claims hadvanished
• In particular Sakhalin-2 case, Gazprom-Shell
  negotiationsapparently had stuck, so Gazprom was
  forced to use theGovernments asymmetric support

4
Are environmental issues really a concern?

• Projects pursued by Russian state energy
  companies (Gazprom, Transneft) are associated
  with bigger concerns East Siberian oil
  pipeline, Baltic and Altai gas pipelines
• Other approach could have been negotiations and
  joint efforts with the investor in order to
  improve environmental record of the project, not
  the termination of environmental permit
• The fact that the environmental claims occur at
  the same time when Gazprom is seeking project
  entry on favorable conditions (same as with
  Yuganskneftegaz license withdrawal threats in
  2004) does not raise the reputation of the
  Russian authorities

5
Development of South Russkoye and Zapolyarnoye
(neokom) gas fields

• The swap scheme just doesnt work out
• Key problem issues
• Fair access to governance of Western Siberian
  JVsfor IOCs (operational, investment, marketing
  solutions). As its clear after Rosnefts IPO,
  Russian Governmentand state corporations do not
  really wish to give awaycontrol with equity
• Sustainability of wellhead purchase prices by
  Gazprom
• Access to pipeline
• Blocked access to exports

6
The new Russian law on gas exports

• Nothing new, but
• Gazprom had been enjoying a de-juro export
  monopoly for14 years. Why now?
• Apparently the law was targeted to block LNG
  exports fromSouth Tambey field, a private
  project. The draft law was introducedon the same
  day as Gazprom had publicly announced
  thatTambeyneftegaz is a problem asset
• It appears that Gazproms lobbyist capabilities
  are now farstronger than those of Yukos years
  ago
• The law actually puts Gazprom in a legally
  vulnerable position,as competition regulators
  may now consider legal claims againstmonopolized
  gas supplies from Russia

7
Whats the trouble with Altai pipeline?

• Pipelines from Western Siberia to Altai feature
  small capacity, not enough to ensure gas supplies
  to China in preliminarily agreed volumes
• Besides, Omsk, Novosibirsk and Altai regions
  consume large part of gas currently transported
  through these pipelines
• Therefore, it would be not enough just to build a
  short route to chinese border to ensure supplies
  a new, large-scale pipeline from Western
  Siberia is required

Surgut-Omsk-Novosibirsk pipeline capacity 5 bcm
Novosibirsk-Barnaul-Biysk pipeline capacity 1,7
bcm
Map Tomsktransgaz
8
Sino-Russian energy relations

• Most Chinese energy demand is located in South
  Eastern areas -land pipelines from Russia no
  solution
• Chinese net gas imports will not grow
  significantly (IEA forecasts60 bcm by 2030),
  most of it will be satisfied through LNG
• Sakhalin-2 LNG is already contracted with other
  countries
• Price negotiations on supplies through Altai
  pipeline prove to benot less tough than Kovykta
• Russian authorities are reluctant to Chinese
  access to significantupstream assets
• Oil supplies under 2001 agreement (0.6 mbd from
  2010)remain the only solid option

9
Shtokman field development

• Continuing bargaining inside Gazprom on where the
  gas would go as LNG or via pipeline through
  NEGP (presumably as Putin had announced in Paris
  in September 2006)
• How the project will be financed? (If Gazprom
  holds 50 equity share, equity financing of the
  project appears highly questionable)
• Will a PSA be allowed?
• Its not politics, its clumsiness

10
The North European gas pipeline
Map Wintershall

• As we had predicted, Gazprom had substantially
  raised cost estimate of the project in April
  (from USD 5bn to USD 10.5 bn, even without the
  reconsideration of the marine part costs so far)
• Resource base of the project remains questionable

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Transnefts activities
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Eastern Siberia oil pipeline project
Map Transneft

• After Putins order to move the pipeline way up
  North (April 2006) no revised feasibility study
  had been available yet
• In August 2006, Sberbank had signed a RUR 65bn
  (USD 2.4bn) credit line agreement with Transneft
  to finance the pipeline construction

13
Black Sea rim
Map BAPLINE

• Further economics of Burgas-Alexandropolis is
  questionablehot money leads to careless
  investment decisions
• Russian authorities appear to be quite jealous of
  the plans ofENI/Calik Energy to build the
  Samsun-Ceyhan oil pipeline

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The issue of upstream underinvestment and
possible gas shortages in Russia
15
Physical shortages of gas supplies to Russian
power stations during Jan.-Feb.2006
Source Russian Unified Energy Systems
16
Where Gazprom had been investing in the previous
years?
Cumulative capital investment by Gazprom in
2000-2006, USD bn (money of the day)
Source Institute of Energy Policy, Gazprom data.
- Gazprom estimate
17
New planned non-gas acquisitions...

• 50 equity share in TNK-BP (USD 20-25bn)
• Acquisition of a control equity share in
  Mosenergo (USD 2.1bn)
• What else?...

18
Can Gazprom convert extra revenues into
investments?
Gazproms revenues, expenses and profits,
31.12.2005 to 31.12.2000
In 2001-2005, Gazproms inefficiency and growth
of expenses had largely eroded the investment
opportunities provided by strong growth of
revenues
Source Gazprom data IFRS financial reports
19
The need to urge Russian Government to return to
gas sector restructuring is inevitable.Gazprom
can not sustain necessary gas supplies to Russian
and European customers
20
Is Europe that dependent on Russian gas?
Share of gas imports from Russia in primary
energy consumption, 2005
Source BP Statistical Review of World Energy
2006 (primary energy consumption), Gazprom (gas
imports by relevant countries)