Putins Russia and its energy policy

1
Putins Russiaand its energy policy

• Vladimir Milov
• President, Institute of Energy Policy (Moscow)
• http//www.energypolicy.ru
• Paris, CERI, October 11th, 2006

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Whats going on in Putins Russia?
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What makes Russians happy?
Average Urals price in various periods of modern
history, USD/bbl (money of the day)
Source The Wall Street Journal
4
Shift in budget policies sharp rise in size of
the Government
Non-interest spending of the Russian federal
budget as to GDP, 2002-2007
Source Russian federal budget (2007 - draft
budget submitted to State Duma)
5
Can Russia benefit from its oil gas revenues?
Source Vladimir Milov, Can Russia become an Oil
Paradise?,http//www.carnegieendowment.org/publi
cations/index.cfm?faviewid18500
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How much money do we have?
Source Russian Ministries of Finance, Defense,
Transport, and Energy Federal Pension fund
7
Shady nationalization structure of Russian crude
oil output
Today
Tomorrow?
Its important to remember that, despite
temporary relief, structural change in the
Russian oil sector is not over
Source Oil Capital estimate
8
Its not only oil banking sector also falls
under state control
Share of state banks in net assets of top 200
Russian banks, June 2006
Including banks directly controlled by federal
or regional authorities, as well as banks
controlled by state-owned corporations
Source Profile magazine rankings,
http//www.profile.ru
9
Investment fund spending hardly a federal level
project. Moving back to the 1980s?
Distribution of the Russian Investment Fund
expenses as of 20.09.2006
Source Russian media
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Putins Russia and our energy sector
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Net result of the recent 24 months
Average weighted growth of daily crude oil
output, August 2006 as to September 2004
Lukoil, SurgutNG, TNK-BP, Russneft, minors
Rosneft (net of YNG), Tatneft, Bashneft,
Gazprom
Source Oil Capital, CDU TEK
12
Gas Gazproms stagnation continues
Source Riatec, PrimeTASS
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Gas sector on the forefront of supply crisis
Matured fields over 20 decline in 6 years!
Source Gazprom, Institute of Energy Policy
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Gas production on Gazproms mature gas fields
would continue to rapidly decline
Urengoy and Yamburg will decline by 30 by 2010
as compared to 2004!
Source Jonathan Stern, Oxford Institute for
Energy Studies, The future of Russian gas and
Gazprom, 2005
15
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
16
In the monopoly environment and under strong
state protection, Gazprom will not invest in
production development, even if domestic gas
prices in Russia will rise substantially.
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Independent gas producers a stark contrast
Gas production growth rates by Russian
independent gas producers,
Source CDU TEK
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Independent gas producers have enough potential
to respond to the gas supply challenge
Gas production potential by independent gas
producers in the medium term perspective
Source Institute of Energy Policy estimates
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But, independent gas producers in Russia are
facing strong pressure from the monopoly

• Continuing hostile takeovers by Gazprom
• Unfavorable wellhead gas purchase conditions
• Restricted access to trunk gas pipeline system
• Legal restrictions on access to gas exports

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Putins global energy empire
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Russian energy empire as viewed by Russian
children
(Writing on the drawing Together, we shall
conquer the whole world Gerasimova Yekaterina,
13 years old)
In Russia, energy empire is largely viewed as a
geopolitical revenge
22
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)
23
Is there a real perspective for 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
• Theres a tough situation on price negotiations
  for suppliesthrough Altai pipeline
• 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

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Is there a real perspective for Indo-Russian
energy relations?

• Russia and India separated by high mountain
  ranges andturbulent areas (Afghanistan,
  Pakistan) - land pipelines fromRussia not an
  option
• Europe is still a much more favorable market for
  Russian oil,as compared to India oil has to go
  through Suez andBab-el-Mandeb or Malacca straits
• LNG is largely not produced in Russia, and
  limited number of LNGprojects will most likely
  be targeted as East Asian, European, USmarkets

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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
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New projects?

• Shtokman development being delayed
• Yamal-LNG project is blocked
• Pressure on Sakhalin-2 increases
• Sakhalin-3, 4, 5, 7 demonstrate no signs of life
• Baltic gas pipeline overall project cost,
  upstream issues and demand remain questionable

27
Sakhalin-2 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
• Another example was September 2004, when MNR
  threatened to revoke Yuganskneftegaz licenses.
  After takeover, all claims had vanished