Russian hydrocarbon sectors

1. Russian hydrocarbon sectors Andrei V Belyi, CEURUS, Tartu

2. structure • Historical and institutional specificities • Reserves, production and exports • Dynamics in oil sector • Oil pipelines • Gas sector: domestic issues • Gas Export dimension State-owned companies • Gazprom and Rosneft: new policy dimensions

3. 1. Historical and institutional specificities Soviet legacies of energy sectors

4. In addition, Russia’s political strategy remains in scope of disputes

5. Regulation of hydrocarbon • No energy-specific regulator • Federal Anti-Monopoly Service (FAS) covering issues of competition, anti-trust and consumer protection (remains very liberal) • Federal Tariff Service (FTS) covering price regulation in natural monopolies; also responsible for monitoring of price • Ministries: (1) Economic development, (2) Energy and (3) Natural Resources • Oil sector was restructured since 1992 • No monopoly on export but a growing concentration on production • Oil pipelines are unbundled from production, private pipelines are possible • Gas sector exempted from restructuring • But legislation is set for a wholesale market, issues with implementation • Gazprom owns MRG, the pipeline operator • Export monopoly, de-jure since 2005

6. 2. Reserves, production and exports Vast reserves allowed an energy intensive economy but access to new fields in Eastern Regions is more difficult hence requires a new approach Source: IEA, 2002 , TEK, 2008 and BBVA, 2008 Arctic Shelf Barents Sea Kamchatka Timan Pichora West Siberia East Siberia Urals Volga Sakhalin N. Caucasus N. Caspian Baku

7. Access to upstream

8. Production Mln tons Mln tons Mln tons Export Russia’s oil and gas production since 2000 Russia is the first world gas producer, But gas consumption close to the EU level Oil Export growth with the production, but half of oil goes for Russian internal market Production Domestic consumption Up to 70% of gas production is consumed Domestically BCM Russia is the world largest oil and gas producer But also a large hydrocarbon consumer How to accommodate domestic demand and export ambitions?

9. Exports historically oriented to Europe (outdated map shows that by 2001 no exports to Asia)

10. 3. Dynamics in oil sector Russian oil companies Approx. Production share in brakets 1992-2000 2001-2003 2003-2010 VSNK (3-5%) Yukos acquires VSNK (20-21%) Rosneft (28%) state-owned Reasons for concentration: • Political: • Concentration of the control over strategic state resources • Easier conditions to conclude profitable concessions • Economic/financial: • Larger profits stimulated by the high world oil prices • Attraction of external capital to invest into the sector • Technical: • Better capability to exploit difficult areas of resources Yukos (12-13%) Rosneft (5-6%) Rosneft (5-6%) TNK-British Petroleum Holding (16-17%) private TNK acquires Sidanko, Onako (12%) Onako (1-2%) Sidanko (8-9%) Slavneft (4%) TNK (9-10%) Gazpromneft (8%) State-owned Sibneft (9-10%) Sibneft (7-8%) Tatneft (6%) regionally owned Gazprom (7-8%) Gazprom (7%) SurgutNG (16-17%) private Tatneft (7-8%) Tatneft (5-6%) SurgutNG (11-12%) SurgutNG (15%) Lukoil (22%) private Lukoil (19%) Lukoil (19%) Slavneft (5-7%) With purchase of TNK-BP (2012), Rosneft can be defined as a new NOC

11. Transition from command to market economy in the 1990s lead to a decrease in production. In 1998 oil production represented 59% of its 1990 level • After 1999: oil sector regained its strength with the economic stabilization and world price increase • In 2004 Largest production subsidiary Yuganskenftegaz was taken over by the state owned company Rosneft from Yukos • Stagnation after 2007 mainly due to inefficient taxation system (Royaltyislinked to world oilprice) • Tax relief since 2009 for greenfields but limited effect • In 2013 production rate reached the level of 1988 but average marginal costs are high • Regulation on access to small fields is stalled Oil Production and export: historical trends 1992: private and state-owned oil companies start operating Russian oil sector Oil production decline after Break-down of the USSR (1991) Due to under-Investments 1995-99: lowest production level Source: Oil & Capital Mln tons Profits decline  unwillingness to change classification to avoid decrease in capitalization

12. Oil products

13. Refineries are concentrated on the western part of Russia Levels of price vary from 0.6 Eur to 1 Eur per l. Yakutia and Far East have the highest levels (low market fragmentation) Source: Russian Energy Agency, 2013

14. Transneft pipelines Specificities: • Telescope down effect: built to supply former satellite countries, the pipeline capacity is small on export points due to the low demand in Eastern Europe. • Different heavy and light oil sorts are commingled in Druzhba pipeline within one flow (so called Urals), Ministry of Energy constantly delayed quality banking • Pro rata regulation is applied: all oil producers get a quota according to the production level World longest oil pipeline network Source: TEK, 2008 Constructed during Soviet era, pipeline sector needs to be reshaped in order to meet world market structure Druzhba Baltic terminals Druzhba Black sea terminals( crude oil oil products Length: 50 000 km Average shipment length: 3000 km Druzhba pipeline: 5500km Página 14

15. Geography of export by pipeline: decrease of Druzhba and increase of terminals Geography of Transneft oil shipments in time Source: TEK, 2008 Oil shipment via Druzhba and Black sea terminals decreases Proportionally to an increased use of Baltic terminals and of the Pacific in future. Effects: decrease of shipment to Baltic branches (LV and LT)

16. Other pipelines Baltic Pipeline System (since 2002): new pipelines owned by Transeft • CPC - Private consortium lead by Shevron (US) • Commercial agreements for access, laws on natural monopolies do not apply AS: Transneft allocates quotas to Kz

17. 5. Russian gas sector: domestic issues EU oriented export, East direction is underdeveloped Russia is the first world gas producer Production Export is monopolized by Gazprom Oil companies and independents sell gas domestically BCM Domestic consumption Russia is the world leading gas consumer: Up to 70% of gas production is consumed Domestically  need to reduce gas flaring

18. Novatek aims at producing 115-120 bcm by 2020 1992-2010 Gazprom would allocate an internal market, but price is uncompetitive  Pressure on exports  Oct 2012 Novatek concludes 10 yrs agreement to supply German costumer EnBV with 2 bcm annually

19. Institutional setting

20. Towards wholesale market?

21. 6. Export dimension Gazprom’s gas deliveries to Europe 2007-2011 Source: T. Vehrs, Gazprom Germania presentation, Tallinn 14.11.2012 Most of gas is delivered under long term contracts, long term upstream investments needed: - Development of upstream: Northern Yamal, South East NadymPurTaz; Far East; Eastern Siberia - Largest investment plans: 40 billion USD till 2020 (mostly transport infrastructure)  need for long term contracts with take-or-pay Gazprom participates in the spot, and increases competition for the European retailers  ground for disputes

22. EU-Russia gas trade issues

23. Gazprom and Baltic States: area of difficulty Most difficulties are with Baltic states, where Gazprom has stakes in distribution EE and LT decided to implement full ownership unbundling  disputes

24. 7. State-owned companies:Gazprom and Rosneft • Both Rosneft and Gazprom are state-owned but dynamic of influence is different • Gazprom is a VIC which is in path to a decentralization (without losing the institutional structure) • Rosneft became a China-type NOC • Financial differences: • Since 2000s oil export revenue is higher (reaching 172 bln USD in 2012) then of gas (58 bln USD for gas) • Rosneft is less dependent on exports • Rosneft was successful in dealing with China • Level of securitization of oil imports from Russia is much less significant