NDPI Differentiation; ESPO

Excerpts from Russian Petroleum Investor

NDPI Differentiation: The First Results of Tax Reform
By Denis Borisov,Analyst of Investment & Financial Company Solid
In January 2007, a process began of differentiating the mineral extraction tax (NDPI). This has consisted of an introduction of a zero or lowered NDPI rate for taxpayers working on deposits in Eastern Siberia, as well as for exhausted and super viscous (bituminous) oil deposits. Starting in 2009, amendments to the Tax Code will provide a further decrease in the NDPI. The tax-free cut off price for the tax calculation will increase from $9 to $15 for barrel. In addition, there will be an opportunity of applying lower NDPI rates without the obligatory requirement of putting equipment for preferential deposits in commercial accounting units. For the tax payers working on remote deposits – new deposits on the continental shelf or above the Arctic Circle – tax vacations will result. Experts also believe that additional NDPI differentiation may result from the geological deterioration of developed deposits and the high sector rates of inflation.

First Segment of ESPO Commissioned
By Michael Barkov, Vice President of Transneft
On October 4, Transneft commissioned the first reverse segment on the main East Siberia-Pacific Ocean (ESPO) oil pipeline. The line extends 1,105 kilometers from the Talakan deposit in the Republic of Sakha (Yakutia) to the city of Taishet in the Irkutsk region. A year before the commissioning of the first ESPO stage, Transneft has created the necessary infrastructure to provide for the acceptance of oil from Eastern Siberia and Sakha (Yakutia) to the Russian pipeline system. Until that time, oil will move west, that is, in reverse direction. Transneft has already received applications from oil companies exceeding the 30 million ton capacity of the ESPO first stage.

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Russia Nearing Creation of a Gas OPEC, Kalmykia Remains Optimistic on Hydrocarbon Potential

Excerpts from Russian Petroleum Investor

Russia Nearing Creation of a Gas OPEC
by Inna Gaiduk
On October 21, Russia, Iran and Qatar declared creation of a “big gas troika” and indicated that the Gas Exporting Countries Forum (GECF) will soon become a permanently operating organization. The charter is subject to approval by the members in a December 23 Moscow meeting. In the interim, Gazprom has become more active in two directions. First, it is strengthening its presence and assets in those countries likely to become part of the future gas cartel. Second, it is beginning to form a pool of potential buyers and, simultaneously, strategic partners in the countries of the Asian-Pacific region. Both approaches are to offset the possibility of Europe taking a pro-American position and attempting to reduce the Russian presence in the European market.

Kalmykia Remains Optimistic on Hydrocarbon Potential
By Elena Kirillova
In 2007, the president of Kalmykia Kirsan Ilyumzhinov promised to transform the republic into “a second Kuwait” with annual crude oil production increasing to 5 million tons by 2020 (currently, it is almost 200,000 tons a year). However, few geologists share that conviction. Only foreign majors can handle the complex development and investment requirements. Nonetheless, Kalmykian authorities continue to express the opinion that discoveries of large deposits are not far off. Despite an abundance of investors searching for oil in the republic, nothing significant has yet emerged.

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Global Crisis Reaches Russian Oil and Gas Companies

Excerpt from Russian Petroleum Investor by By Svetlana Milyaeva

The global financial crisis has finally hit the real sector of the Russian economy, including hydrocarbons. The largest Russian banks have raised annual interest rates on ruble credits for oil and gas corporations. Second echelon banks have increased interest on loans to 18 percent and rates continue to grow. As a result, almost all participants in the oil and gas sector have already reduced programs of short-term loans, and many of them plan to revise 2009 investment programs.

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Gazprom Develops in South America

Excerpt from Russian Petroleum Investor

Recently, Gazprom signed a memorandum with Venezuelan state-owned company Petroleos de Venezuela (PDVSA) to develop the shelf deposit Blanquilla Este y Tortuga. The project is the third phase ofanother large-scale project – Delta Caribe Oriental – costing a total of$20 billion (each phase has its own participants). The third phase shouldlaunch in 2016. Gazprom has a 15 percent holding in the project. PDVSA holds 60 percent, while Eni (Italy) and Petronas (Malaysia) each have 10 percent and Energias de Portugal holds 5 percent, according to a Gazprom manager. The cost of this phase amounts to $6.41 billion.

If the reserves are sufficient, a second stage will begin to construct capacities for liquefying gas, develop the deposit and sell gas both domestically and for export. This stage would create its own venture in which the participants would hold the same ownership positions as in the initial stage. The companies would retain the same stakes in all subsequent stages of the project.

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Why Indonesia Left OPEC

Excerpt from Russian Petroleum Investor by Inna Gaiduk, Editor-in-Chief

Recently, Indonesian President Susilo Bambang Yudhoyono declared that his country had pulled out of OPEC. The president said that Indonesia would concentrate on increasing oil production on its own. Daily production has currently declined to below 1 million barrels (136,425 tons). Increasing the extraction volume could take 1-3 years. In the mid 1990s, Indonesia daily production reached between 1.5 and 1.6 million barrels. By April of this year, that had declined to 860,000 barrels.

Indonesia imports about a third of its oil and production has slumped 49 percent from a peak in 1977, partly as disputes with ExxonMobil (US) delayed field developments and deterred investments. The nation, a member of OPEC since 1962, has considered leaving for the past three years as it failed to meet output targets stipulated within the producer group. “It was long overdue for Indonesia to step out because as a net importer it didn’t make sense to stay on,’’ said Anthony Nunan, assistant general manager for risk management at Mitsubishi Corp. in Tokyo. “And since they could not even make the quota, there was not much to gain anyway.”

The withdrawal from OPEC will help the nation save 2 million euros ($2.8 million) in membership fees a year, according to Indonesian Energy Minister Purnomo Yusgiantoro. Indonesia’s plan to leave OPEC became more pressing as crude prices in New York reached $147.27 a barrel on July 11.

OPEC includes 13 countries overseeing two-thirds of all oil global reserves. Indonesia was the only country of the Asian-Pacific region in the organization.

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Gazprom Neft Targets Kazakhstan and Turkmenistan

Excerpt from Caspian Investor by Elena Kirillova

Gazprom Neft expects to increase its resource base in Russia, while also beginning development of foreign projects. According to the company’s deputy general director for exploration and production Boris Zilbermints, Gazprom Neft has already offered to several leading world oil and gas holdings – Chevron(US), Eni (Italy) and Royal Dutch/Shell (Netherlands/UK) – a number of its Russian assets in exchange for participation in their projects abroad.
Zilbermints noted that Kazakhstan and Turkmenistan are a priority of the company. Now Gazprom Neft delivers oil products to Kazakhstan in bulk, but in the future is planning to reach the end user. Independently, the company does not want to build gas stations. “We shall consider possible purchases,” he said. Zilbermints noted that in close proximity to Kazakhstan is the Omsk refinery from which Gazprom Neft could deliver oil products. He did not specify investment requirements for the project.

Currently in Central Asia Gazprom Neft has its own network of gas stations only in Kyrgyzstan. Having refocused on the purchase of gas stations, the company could be counting on acquiring a share in Mangistaumunaigaz, which owns a large network of Kazakh gas stations. KazMunayGaz (KMG), the Kazakh state oil and gas company, is purchasing 51 percent of Mangistaumunaigaz shares; Gazprom Neft has applied for the remaining 49 percent. The company is not going to limit cooperation to KMG. Zilbermints added that Gazprom Neft is ready for joint development of deposits in both Kazakh and Russian territory.

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LUKOIL to Reduce Prices for Some of its Motor Fuels

Excerpt from current edition of Russian Petroleum Investor


The LUKOIL Group of refineries in Russia reduced prices for motor gasoline, diesel and jet fuel in August 2008. Among other things, in the second half of August, the company’s plants reduced prices for AI-92 by 12 percent, AI-80 by 5 percent, diesel fuel by 5 percent and jet fuel by 5 percent, on average.

As reported earlier, in the first half of August, LUKOIL’s refineries reduced prices on average for diesel fuel by 7 percent, for fuel oil by 8 percent and for jet fuel by 4 percent. LUKOIL expects such pricing in the future will lead to considerable retail price decreases at company filling stations in a number of Russian regions. According to LUKOIL, expectations call for further reductions
in diesel fuel and motor gasoline prices in September.

In Russia, the LUKOIL Group includes four refineries located in Ukhta, Perm, Nizhny Novgorod and Volgograd, as well as two mini refineries in Urai and Kogalym (Western Siberia). In 2007, LUKOIL’s Russian refineries (including mini refineries) produced 11.4 million tons of diesel fuel, 10.6 million tons of fuel oil, 4.9 million tons of gasoline and 2.5 million tons of jet fuel.



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Russia Cuts Oil Exports to the Czech Republic

Excerpt from Russian Petroleum Investor by Inna Gaiduk, Editor

Russia has further reduced its oil deliveries to the Czech Republic, bringing total July cutbacks to 50 percent, senior Czech officials said, a disruption that is again calling into question Russia’s reliability as an energy supplier to Central and Eastern Europe. Supplies were reduced about 40 percent early in the month. A further cut later reduced the flow to half its pre-July level, officials said.

Russia’s oil pipeline monopoly, Transneft, has declined to give any indication of when full operations will resume through the Druzhba pipeline. The Czech Republic is unique among the countries of Eastern and Central Europe in its ability to cope with cutbacks of oil from Russia because it diversified its sources during the early 1990s. However, it still relies on Russia for much of its natural gas.

Transneft cut supplies in early July, a day after US Secretary of State Condoleezza Rice signed an accord with her Czech counterpart to deploy part of an antiballistic missile shield on Czech territory. Russia denied then that the decision to cut supplies from a contracted July volume of 500,000 tons to 300,000 tons had been in retaliation for the signing. Mikhail Barkov, Transneft vice president, said there were “technical and commercial reasons,” adding that two Russian producer companies, Bashneft and Tatneft, considered it more profitable to process the crude oil in Russia before exporting it.

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Georgian Conflict Obliges Export Route Reality Check

Excerpt from Caspian Investor by Dr. Kent Moors, Contributing Editor

Within days of military action commencing, all oil pipelines and seaport terminal export facilities closed in Georgia. The separatist regions of South Ossetia and Abkhazia remain resolved to leave Georgia guaranteeing ongoing domestic unrest. That means threats of pipeline and port closures will continue, substantially increasing the risk equation in moving hydrocarbons out of the Caspian basin. The vulnerability of the Baku-Tbilisi-Ceyhan (BTC), Baku-Supsa and Baku-Tbilisi-Erzurum pipelines, as well as the ports of Batumi, Poti and Kulevi, will certainly prompt a serious reappraisal of export security.

A number of observers now suggest that the events assure a reorientation of oil flow directions, or at least a more balanced risk exposure.

This is exactly what Washington does not want to hear. The ongoing “pipeline war,” in which the US and the European Union pursue pipeline projects by-passing Russia while Moscow responds with new export projects of its own, has been briefly interrupted by hostilities of a more heated variety. Yet, the longer-term implications are more sobering for the West.

BTC had been the one major accomplishment of Washington and Brussels, a primary export venue from the rapidly developing Caspian basin beyond the touch of Moscow. Apparently, that is not the case any longer. The argument that Moscow’s intent all along was to put pressure on the BTC through this military exercise has nothing substantive behind it. In the end, however, that makes little difference. The military rationale for the incursion is not the issue here. Events have accomplished Moscow’s “energy full court press,” as one observer put it to us.

Tbilisi now faces the real damage, some probably irreversible. Georgia’s image as a secure energy route is shattered. Throughout BTC construction, considerable attention emerged over pipeline safety concerns in Turkey or Azerbaijan. There was hardly a mention of the Georgian segment in discussions on the subject. Over the past decade, Europe in deliberations over each new possible pipeline route has relied upon Georgia as a preferable connection to the Caspian. All of that assurance is now gone. An immediate withdrawal of Russian tanks from Georgia does not make the South Ossetian and Abkhazian situations more secure. Oil and gas companies now must factor in a new level of uncertainty. From the standpoint of export flows, whether the threat comes from regional militias, separatists or national armies makes little difference. Georgia is now unstable and that increases the risk of transporting hydrocarbons across it.

The wider implications are only beginning to appear. As one commentator put it on August 12, “The biggest casualty of the showdown has been the West's naive belief that Georgia provides a secure alternative energy corridor that avoids either Russia or charter ‘axis of evil’ member Iran.” Over the last decade, Western companies have pumped $5 billion into developing the Batumi, Poti and Kulevi Black Sea ports, along with the Baku-Supsa oil pipeline and the BTE. However, the real crown jewel of Western investment success has been the 1,760-kilometer, 1 million barrel a day BTC pipeline. All are now clear targets in a new security environment.

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Kazakhstan Toughens Position in the Oil and Gas Sector

Excerpt from Caspian Investor by Svetlana Milyaeva

First quarter results have not caused any optimism among Kazakh authorities.The global financial crisis has hit Kazakhstan, lowering rates of economic growth and reducing incomes by 3 percent. According to President Nursultan Nazarbayev, “there is a hole in the budget,” that is necessary to fix. Moreover,the continuing rise in oil products prices on the domestic market resulting fromthe lack of such products has caused the next rise in inflation. Astana has received another postponement in Kashagan development from the foreign partners of the consortium, the third delay in the initiation of production. The response has not been long in coming. The Kazakh government has startedtalking about rigid sanctions for the failure in production terms at Kashagan,has introduced export duties on oil and a ban on oil products export, has promised to toughen requirements to subsoil users regarding transparency of purchasing procedures, and has suggested a change in import custom duties forforeign producers in the oil and gas sector.

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Determining the Russian Offshore External Borders

Excerpt from Russian Petroleum Investor by Vladimir Baidashin

The question of fixing the Russian continental shelf external border arose after the Russian institute VNIIOkeanologiya using the icebreaker Russia conducted geological-geophysical research in 2007. The research zone encompassed the adjoining of the underwater Lomonosov Ridge with Laptev and East Siberian Sea shelves, substantiating the external border of the Russian continental shelf. During the work, arctic explorers in a bathyscaphe lowered to the ocean bottom near the North Pole, took ground samples and put there a Russian flag.

In September 2007, the Ministry of Natural Resources (MNR) reported that, “Preliminary analysis of data obtained for a model of the earth’s crust allows confirmation that the structure of the Lomonosov ridge corresponds to world analogues of a continental crust and therefore is a part of the adjoining continental shelf of the Russian Federation.”

For 2008-2009, plans call for preparation of geological substantiation for the Russian application defining its continental shelf external border and carrying out of negotiations with Denmark, Canada and the US on delimitation of the continental shelf in Arctic regions. Then, in 2011, Russia plans to send the United Nations (UN) an expanded application for establishing an external border in the Arctic regions in connection with acknowledgement of the continental nature of the Lomonosov Ridge and Mendeleyev’s Elevation with their belonging to the extensions of Eastern Siberia. The Ministry of Foreign Affairs remarks that, from the legal point of view, Russia from the very beginning operated within the limits of the Convention on the Law of the Sea.

By estimations of experts, the increase in the area of the Russian continental shelf in Arctic regions outside a 200-mile zone can total 1.2 million square kilometers. Estimates of hydrocarbon resources in the territory are approximately 4.9 billion tons of conditional fuel.

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The Russian Ruble at the Iranian Oil Exchange

Exerpt from Russian Petroleum Investor

Earlier this year, a special oil exchange opened on the Iranian island of Kish in the Persian Gulf to trade oil, oil products and natural gas. In the opinion of experts, the Iranian experience in creating the exchange is especially interesting to Russia because, first, it begins exchange trade in oil and oil products; secondly, it is possible that in the near future there will be a new Iranian- Russian gas exchange.

Iran is the second country in the region on oil production after Saudi Arabia, extracting nearly 22 million tons of oil a year. However, because of rigid state regulation, it cannot take an appropriate place in the global market, despite a convenient geographical location. According to the Minister of Oil Gholam- Hossein Nozari, the purpose of creating an oil exchange is transformation of Iran from an oil-producing country to an important player in the global market of oil and oil products. “Our purpose is to make oil and oil products trade more transparent, to strengthen competition and to attract solid investors, to become a part of the global market not only in the sphere of oil extraction but also in the sphere of oil trade,” Nozari declared.

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Kazakhstan Introduces Major Changes in Subsoil Use Legislation

Kazakhstan Introduces Major Changes in Subsoil Use Legislation

Excerpt from Caspian Investor by Inna Gaiduk

Kazakh authorities have not limited themselves only to a victory in restructuring Kashagan ownership. At the beginning of February, Prime Minister Karim Masimov suggested to terminate contracts in which subsoil development companies have not executed obligations, with the deposits returning to the state. Experts have regarded this action as an attempt to return most of large production companies’ shares to state ownership, clearly reflecting the recent Russian approach. First, the Ministry of Finance suggested imposing taxation on mineral extraction, already applied for years in Russia. Then the Ministry of Energy and Mineral Resources lobbied for tax amendments introducing oil export customs duties by January 1, 2009, another analogy to the Russian legislation.

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The Complexities of Realizing the Shtokman Project

Excerpt from Russian Petroleum Investor

Both Total (France) and StatoilHydro (Norway) have no guarantee that they can put Shtokman reserves on their books, although Gazprom assures them there will be no problem. The participating companies intend to enter into discussions about the accepted role of each company in development of the first phase of Shtokman, specifying the realization of the project as well as the model of project finance. In addition, the discussions will consider the reserves balance at the deposit, the license for which belongs to Gazprom 100 percent owned affiliate Sevmorneftegaz. Is it possible for the foreign companies to put on their books reserves that are, in fact, virtual amounts? Gazprom remains the real owner of the reserves. In addition, Total and StatoilHydro will be compelled to discuss this issue not only with Gazprom, but also with the US Securities and Exchange Commission (SEC).

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Gazprom Agrees to Buy Central Asian Gas at European Prices

Excerpt from Caspian Investor by Kent F. Moors, Ph.D., Contributing Editor

Gazprom announced an historic decision on March 11. The Russian natural gas giant has agreed to purchase Central Asian gas at “European prices” beginning in 2009. If the decision holds
up, it stands to place considerable control of Central Asian gas throughput to Europe in Russian hands, as well as create a significant problem for the Western-supported Trans-Caspian Gas Pipeline designed to bypass Russia. One thing appears certain, however. This agreement once implemented will fundamentally change the regional gas export dynamics.

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Expected 2008 Changes in Subsoil Use Legislation

Excerpt from Russian Petroleum Investor by Inna Gaiduk

The Ministry of Natural Resources expects that the government will approve amendments to the "About Subsoil" law that will considerably expand opportunities to distribute licenses by competitions, including investment. In addition, the package of amendments presented to the government includes revisions toughening the performance requirements under license agreement conditions and also regulates the modification procedures for operating licenses. There is also a second block of amendments to the law that concern restrictions of foreign participation in development of strategic deposits, but currently that package is undergoing interdepartmental coordination. By the end of 2008, the government plans to consider amendments defining the calculation of the size of harm caused to the state by subsoil users, changes to the procedures on conducting tenders and auctions for subsoil use rights and also revisions to the definition of the bases as well as the manner of change and specifications for subsoil blocks.

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Enel Plans a Vertically Integrated Power Company in Russia

Excerpt from Russian Petroleum Investor by Sergei Chernyshov and Andrei Shlyapnikov

Having carried out in 2007 unprecedented purchase transactions of Russian natural gas production and electricity generating assets, the Italian company Enel has declared plans to use these assets as a foundation for a vertically integrated power company. This is a very bold move for a foreign enterprise during a period of scale transformations in the Russian energy sector. Enel's success will depend on negotiations with Gazprom, along with its own generosity and flexibility. To other foreign companies, such as E.ON, Fortum, RWE, Gaz de France and others, that have or are planning to purchase electrical power assets in Russia, the Enel example will indicate what is possible in the Russian market.

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Russia Moves to Control Caspian Gas Pipeline Directions to Europe

Excerpt from Caspian Investor by Elena Kirillova and Inna Gaiduk

Russia is intensifying efforts to connect key Caspian regional players to its new natural gas pipeline projects. These serve to render so-called "anti-Russian" pipelines less likely. Such pipelines include Nabucco (the Trans-Caspian gas main from Turkmenistan to Europe) and the South-Caucasian gas main (the Baku-Tbilisi-Erzerum pipeline, extending from Azerbaijan to Turkey and then on to Southern Europe). On November 22, the head of Gazprom Alexei Miller and the CEO of Italian Eni Paolo Scaroni signed an addendum to the June 23 Memorandum of Mutual Understanding concerning the construction of the South Stream gas pipeline across the Black Sea floor. Recently, the Russian government approved the Near-Caspian gas pipeline.

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Agreement on Near-Caspian Pipeline Reached

Excerpt from Caspian Investor

Recently in Moscow, the governments of Russia, Kazakhstan and Turkmenistan signed an agreement to construct the Near-Caspian (also called the Pre-Caspian) gas pipeline. The signing took place in the Kremlin following talks between Russian President Vladimir Putin and Kazakh President Nursultan Nazarbayev. Turkmen President Gurbanguly Berdymukhammedov was apprised by telephone during these discussions. The pipeline should be brought into operation no later than the end of 2010, according to Victor Khristenko, Russian Minister of Industry and Energy.

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Tehran Again Attacks Petrodollar System

Excerpt from Caspian Investor by Kent F. Moors, Ph.D.



Sources in both Tehran and Europe are telling Caspian Investor that Iran is renewing its attack on dollar-denominated oil trade. The move is hardly new. Tehran is introducing its own oil exchange and new benchmark sour crude rate, neither of which is to designate sales in dollars. Current Iranian requirements prevent any purchase of its oil or natural gas with dollars, and some of these restrictions have begun to affect a few secondary trades and swaps in oil contracts through Dubai.



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Gazprom Sets Price for Natural Gas Sales

Gazprom will sell natural gas to Belarus for $119 per 1,000 cubic meters in the first quarter of 2008, a source at the Russian gas giant said recently. The source noted that Gazprom buys a large amount of gas from Central Asian states. Despite an earlier agreement on the purchase of Turkmen gas for $100 per 1,000 cubic meters, Turkmenistan later announced that it would sell gas at $130 per 1,000 cubic meters in the first half of 2008, he said. “Nevertheless, Russian gas will be sold to Belarus for $119 in the first quarter of 2008,” he insisted.

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Dutch Propose Developing Yamal and Kara Shelf Gas Fields

by Vladimir Baidashin for Russian Petroleum Investor

Dutch companies led by Royal Dutch Shell (Netherlands/UK) have suggested to Russian authorities a joint development of natural gas deposits on the Yamal peninsula and the Kara Sea
shelf. The proposal includes provision of unique extraction technologies, pipeline construction, hydrocarbon processing and even the creation of artificial islands for extracting and processing facilities. A joint working group will emerge to study the offer and make conclusions, after which the parties will create project-specific joint ventures. Gazprom has estimated that developing Yamal gas deposits would require about $160 billion.

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Federal Program to Focus on Offshore Equipment

The Russian government is actively engaged in the revival of domestic shipbuilding, primarily for construction of platforms and other equipment to develop the offshore shelf. Russia wants to ensure the complete preeminence of domestic providers, basing all equipmentproduction with Russian manufacturers. With this purpose in mind, the government has approved the federal target offshore technology development program for 2009-2016, proposed by the Ministry of Industry and Energy. Cost of the program amounts to about $5.6 billion. In addition to providing a strategic direction in shipbuilding, the government is also prioritizing production of technologies for shelf development. By 2015, Russia plans to invest $15-$20 billion in construction of 30-35 drilling platforms for work on the shelf, as well as ice-class liquefied gas tankers.

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