Russian Oil & Gas Strategy: What does it mean for the global oil markets ?

1. Russian Oil & Gas Strategy: What does it mean for the global oil markets? Tatiana Mitrova, Ph. D. Center for International Energy Markets Studies Energy Research Institute of the RAS 17th MIDDLE EAST PETROLEUM& GAS CONFERENCE 21 April 2009, Dubai, UAE

2. Russia in the world oil & gas balance

3. Russian Oil Production and Export in 1999-2009, bln.t. Production Export Source: Rosstat

4. Short-term effects of the crises • Sharp oil price decline and export duty lag led to upstream losses in 4Q2008, independents were mostly affected • Ruble devaluation, decrease in costs and MET reduction allowed Russian oil companies to generate profits in 2009 even in 40 $/bbl environment as major part of their costs is in Roubles • Optimization of the investment programs started • Considerable decrease in tax burden • Oil and gas companies (especially state-controlled) can count on the support from the government. Moreover, the largest projects could be viewed as infrastructure ones, creating additional employment opportunities (similar to Roosevelt’s New Deal) • Legislative changes as of 01/01/2009 are a substantial but still insufficient relief for oil companies Export customs duty Source: Ministry of Natural Resources and Ecology of RF Source: Rosstat

5. New incentives needed Source: Rosneft

6. Regulatory Changes

7. Short-term oil production trend Source: CDU TEK, Troika.

8. Prospects of Russian oil production, mln. t Source: ERI RAS “Crises scenario”

9. ROMANIA BALTIC PIPELINE SYSTEM (BPS-II) Leningrad region Constantsa Estonia BULGARIA Novgorod region GREECE Alexandrupolis Burgas BLACK SEA Pskov region Latvia Tver’ region AEGEAN SEA MOSCOW Smolensk region Lithuania Belarus Kaluga region Tula region Bryansk region Major oil export projects: additional flexibility Baltic Pipeline System-2 Caspian Pipeline Consortium Burgas-Alexandroupolis

10. Eastern Siberia development and ESPO • High geological risks • The government’s plans on petroleum licensing in the region lag far behind plans • Delays in infrastructure development • High capital and operational costs • High uncertainty of ESPO tariff • Construction of the first phase of the ESPO pipeline to Skovorodino is well advanced and will likely be completed as planned in late 2009 • Transneft and China have also finalized the details of construction of a branch from ESPO to China. . • The challenge to fill the pipeline • Transneft proposal for a single network pipeline rate of some $4.4/bbl starting in 2010 to effectively equalize costs of exporting crude to the East or West

11. Prospects of Russian gas production, bcm Source: ERI RAS “Crises scenario”.

12. Yamal – the main growth driver • Gazprom became extremely focused on Yamal project and spent some $4 bln. last year on Bovanenkovskoye field. This year the figure is to spike to $6.5 bln. • Last year Gazprom began laying the Ukhta-Bovanenkovskoye gas pipeline, completed half of the Baidaratskaya Bay 72 km long crossing, drilled the first production well and did much infrastructural work • It is planned to produce the first 7.9 bcm in 2011. According to the General Scheme of Gas sector the Yamal output was slated to spike to 135-175 in 2020, thus offsetting falling production in NPT

13. Shtokman project • Phase one - 23.7 bcm annual output • The Shtokman Development Company has approved the project`s first $800 mln. budget for 2008-2009 and will make a final investment decision this year • In June 2008 construction of the first semi-submersible drilling platform started at the Vyborg Shipbuilding Plant • The decision will hinge upon oil and gas price forecasts and the government`s willingness to provide support for the project • With a slowing economy in the intended European and US markets, Shtokman project could now be less a priority

14. Gas production in Eastern Siberia and Far East • Refuse from Altai project in General Gas Scheme • In the medium-term China will receive gas from Central Asia • Most attractive markets – Japan and S.Korea – are LNG-focused • Sakhalin transforms in a major gas-producing region with “Sachalin-2” starting LNG supply in several weeks Source: General Scheme of Gas Sector Development until 2030.

15. Market-oriented flexible approach in gas production Source: General Scheme of Gas Sector Development until 2030.

16. Yamal- Yamburg Yamal- Ukhta Vidyaevo- Volkhov SRTO- Torjok Nord Stream Yamal-Europe Pochinki- Izobilnoe CAC CAC-3 South Stream Blue Stream II New Gas Pipelines

17. Russia and OPEC • Broad cooperation with OPEC is one of Russia’s political priorities • On October 22, 2008 there was held an unprecedented meeting of President of Russia Dmitry Medvedev and Secretary General of OPEC Abdullah Salem Al-Badri • In September, December 2008 and March 2009 Russian delegation, headed by Vice Prime minister Igor Sechin who is in charge of fuel and energy sector, was present at OPEC oil ministers meeting. Russia affirmed its intention to cooperate with OPEC with possibility to become an observer without joining the Organization • Russian government took the lead to arrange a regular energy dialog between Russia and OPEC, aimed at contributing to long-term stability of oil market to the benefit of oil market participants

18. Russian proposals • To reduce the role of traders in favor of direct contracts between oil producers and consumers • To develop new oil trading system with switching to long-term supply contracts; setting new trading floors in the producing countries; increasing the number of markers in the oil market • To set up inventories in producing countries • To coordinate investment process in gas industry in order to avoid oversupply • To coordinate tax policy (harmonizing the fiscal burden on oil-producing companies) • To increase the role of producers by involving significant non-OPEC producers in the effort to stabilize markets – such as Kazakhstan, Azerbaijan, Norway, and Brazil