State Share in the Form of Natural Gas

Excerpt from the current issue of Russian Petroleum Investor by Inna Gaiduk and Elena Kirillova

Before his visit to Japan, Russian Prime Minister Vladimir Putin visited the Primorye territory. At a meeting with the governor Sergey Darkin, he announced the signing of a government decree providing that the share received by Russia from the production sharing agreements (PSAs) for the Sakhalin 1 and Sakhalin 2 projects should be received in the form of natural gas. That gas, he said, would supply Primorye, particularly Vladivostok. To make this arrangement effective, local and regional authorities must make the necessary decisions regarding low-pressure gas networks to ensure their smooth operation.

Earlier, deputy prime minister Igor Sechin reported that at its April 11 meeting the government considered the realization of gas projects in the Far East. In particular, discussion involved the idea of granting to Gazprom the right to be the authorized organization for royalties and shares in the Sakhalin-1 and Sakhalin-2 projects.

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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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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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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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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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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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Caspian Sea Status Remains Uncertain

Five years after meeting in Turkmenistan, the leaders of the five near-Caspian states—Azerbaijan, Kazakhstan, Russia, Turkmenistan and Iran—gathered during the second summit in Tehran to continue discussions on the legal status of Caspian Sea.

In the summit’s Final Declaration, the parties only mention unobjectionable positions on the future status of the Caspian Sea. The positions on which the heads of state disagreed are not included and become subjects for their future discussions. The countries are on record as stating that the Caspian Sea is a region exclusively under their jurisdiction and that they are committed to work for its prosperity and peace. “We spoke very frankly, in detail and in an interested fashion. We did not reach agreement all the time on everything, but it is very clear that we desire to find a consensual arrangement,” Russian President Vladimir Putin said at the joint press conference following the summit.

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Companies to Design and Lay Nord Stream Pipeline

Nord Stream AG has chosen Snamprogetti (Italy) to perform the detailed engineering on the major gas pipeline between Russia and Europe. The Italian company won the assignment following an international tender. The contract includes developing a detailed pipeline execution and preparation plan, hydraulic and temperature analysis, analysis of pipeline length and stability, service platform and underwater cable crossing projects, as well as determining onshore pipeline connection locations.

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West Kamchatka Emerging as Next Major Offshore Project

Rosneft president Sergey Bogdanchikov contends that the development of the West Kamchatka shelf in the Sea of Okhotsk will be on the scale of the Sakhalin-1 and Sakhalin-2 projects, with the likelihood of surpassing both. Rosneft is developing the promising sites with the Korean National Oil Corp. (KNOC). Estimates put the potential resources of the entire West Kamchatka shelf at 3.8 billion tons of hydrocarbons. Recoverable reserves at the license sites could be 800 million tons. According to Bogdanchikov, development requires approximately $24 billion. Drilling of the first exploration wells will take place in 2008.



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