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The Reality of Russia

Slovnaft. The Reality of Russia. Lisbon, May 2005. THE MOL GROUP. Ray Leonard Sr. Vice President, MOL Plc. Russia has entered a new era. 1980’s: Soviet Empire with 20% of world oil production 1990-1998: Collapse and reorganization as production drops from 12 to 6 MMBO/D

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The Reality of Russia

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  1. Slovnaft The Reality of Russia Lisbon, May 2005 THE MOL GROUP Ray LeonardSr. Vice President, MOL Plc.

  2. Russia has entered a new era • 1980’s: Soviet Empire with 20% of world oil production • 1990-1998: Collapse and reorganization as production drops from 12 to 6 MMBO/D • 1999-2004: Industry revival in Russia with production increase to 9 MMBO/D • 2005-?: State re-asserts control and production stabilizes • 1

  3. Russian Reserves • Two sets of calculations: Russian C1(proven) accurately measures reserves without economic filter while SPE and SEC measure economically recoverable reserves and actual developed reserves • C1 Russian reserves are 119 billion barrels • As development of past five years has taken place, gap between SPE and SEC numbers and C1 is narrowing • Proven reserves are concentrated in West Siberia with about 70% in difficult to produce reservoirs • 2

  4. Exploration Potential • Minimal exploration took place in 1999-2004 period • Lack of guaranteed production rights if discovery is made • Far lower cost to increase production in discovered fields • Fiscal terms not encouraging for upfront capital intensive projects • Large portion of future risked potential of 43 billion barrels is in more costly areas • 3

  5. Infrastructure • Limitation of production increase in 1999-2004 period was pipeline access • With production flat or slightly declining, this is no longer a problem • Combination of export tariff (now $120/ton) and high rail transportation costs have made rail export unattractive economically • 4

  6. Rising Costs (Eskin 2004) • Part of the reason for 1999-2004 boom was ruble devaluation • Ruble appreciation is taking away that benefit • In the coming years, production will shift to tighter reservoirs in West Siberia and frontier areas with high costs • 5

  7. Rising Costs (continued) Eskin 2004 • 6

  8. Investment 2005-2010 • Investment will not increase despite high oil prices during the 2005-10 period • Export tariffs and other taxes remove 90% of value of oil above $25/bbl • Russian investment laws remain unfriendly to long-term high front end cost projects • Limited number of projects for foreign investors to operate • For this period, Russian companies will use available capital to cover rising costs and pay taxes • 7

  9. Future Investment • Shift from mature to frontier regions will require greater investment after 2008 • Under current tax regime, these funds will have to be borrowed • If funds are not available, production will drop • 8

  10. Russian Oil Production and Exports • 9

  11. Conclusions • Current Russian policies have ended period of production growth • With production flat or slightly declining, no new pipelines are needed, although East Siberia line may be built for political reasons, reducing exports to Europe • State has assumed control of industry with limited opportunities for foreign investment • Russia will be able to use industry as cash generator for next five years as lower cost areas are produced • Crisis will come at the end of decade when lack of investment during 2005-10 needed to maintain future level of production by development of new areas becomes apparent, unless current policies are changed • 10

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