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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Azerbaijan: Avoiding the Crisis and Increasingly Optimistic

Excerpt from Caspian Investor by Ilya Kedrov

During the first quarter, Azerbaijani authorities recognized development in both the domestic economy and the oil and gas sector. Successes included a 63 percent increase in domestic investment, growth in natural gas production, the rapid commissioning of two new offshore rigs at the “Oily Rocks” deposit, restoration of oil production at Azeri-Chyrag-Guneshli, the republic’s largest upstream project, and the commissioning of the Bakhar-Govsany-Surakhany gas pipeline, among other positive developments. Despite exploring several directions for gas export, however, Baku’s strategic plan still sees the basic direction as moving to Europe.

Read More: Azerbaijan Raises Export Potential Significantly (free)

A Russian Alternative to the European Energy Charter

Excerpt from Russian Petroleum Investor by Inna Gaiduk and Elena Kirillova


The January gas dispute between Russia and Ukraine has shown that, without an increase in responsibility of transit countries, it is impossible to provide guaranteed deliveries of energy resources. It resulted in damage to the interests of both Russia and several consuming countries. In spite of the fact that Ukraine was the initiator of the gas dispute, Europe has taken an ambiguous position in deciding not to condemn the Ukrainian actions.

In addition, Brussels and Kiev have recently signed a declaration for the modernization of the Ukrainian gas transport system (GTS), removing Russia from the process. Such European behavior obliges Moscow to reflect once again on a diversification of energy deliveries. The visit by deputy prime minister Igor Sechin to China is also a serious signal to Brussels. Russian Prime Minister Vladimir Putin’s decision not to participate in an April conference in Sofia is an additional demonstration of Moscow discontent.Observers had considered the White Stream gas pipeline project proposed several years ago by Ukrainian Prime Minister Yulia Timoshenko at best an abstract possibility. The plan had called for laying a pipeline on the Black Sea floor to Europe. The idea was to move gas from Azerbaijan and Turkmenistan to Ukraine and then on to Europe. Now, Brussels is beginning to consider the pipeline idea as likely. In addition, under the guise of reconstructing the Ukrainian GTS, Western countries are again attempting to find ways of delivering gas to Europe bypassing Russia by utilizing White Stream.

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Shelf Crisis

Excerpt from Russian Petroleum Investor by

There should be a postponement of shelf projects until economic times are better, according to Russian deputy prime minister Igor Sechin. “In the near future, the shelf will not have major promise because it requres serious capital investments and will not pay off quickly given the current situation in the market.” he said. In today’s conditions of global financial crisis, nobody can any longer afford such volume of investments -- not the government, state companies or private traders.

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Iranian Insider: Scrutiny Returns to Oil Revenue Use

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

On February 17, an Iranian National Audit Office report ignited another round in the political fight over oil sale proceeds. However, for the first time, this one clearly indicates that Ahmadinejad officials have been illegally withholding funds. Issued for the Majlis (parliament), the analysis reveals that the government did not return to the treasury $1.058 billion of surplus oil revenues from the 2006-2007 budget. “This is certain to put the current government under renewed pressure,” an editor at the Tehran Times told us on February 20. “Even some of the president’s main supports are criticizing such actions.”

The report also stated that there had been no mention in government documents of the $61 million paid in taxes by the National Iranian Oil Co. (NIOC). In a related matter, “The government purchased a large amount of gasoline and gas oil during the current Iranian year [to end March 20] without parliamentary approval,” said Hamid-Reza Katouzian, head of the Majlis Energy Committee, on February 15. He called on the Majlis Presiding Board to conduct a serious probe into the situation

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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.

Read Related Articles: As Financial Crunch Hits, Accounts Holders Move Funds to State Banks (free)

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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