Russian Energy Outlook Implications for Strategic Investments

1
Russian Energy Outlook Implications for
Strategic Investments

• Vladimir MilovThe New York Energy Forum
• New York City, May 15th, 2008

2
Basic current trends

• Crude oil output stagnation, with a clear decline
  perspective
• Natural gas output stagnation, development of new
  fields delayed
• Power sector reform ending up with but a
  redistribution of ownership in power generation,
  mostly in favor of Gazprom

3
Russian crude oil output stagnation
Average daily Russian crude oil output, million
barrels per day
4
In 2007, oil production growth brought down to
zero
Crude oil output growth in 2007 as compared to
2006,
5
Share of the state in crude oil output grows
Crude oil output in Russia by state-affiliated
and private companies,
6
Worst results are shown by companies affected by
current and potential ownership redistribution

• Slavneft, Surgutneftegaz, Gazprom Neft
  demonstrate 5-7 output decline this year
• Surgutneftegaz accumulates about 20 billion in
  cash and financial investments, not investing
  these funds in development of the upstream
  segment
• Slavneft and Gazprom Neft are clearly affected by
  mismanagement from Gazproms side
• Gazprom, with its lack of experience in the oil
  industry, obviously failed to successfully enter
  the oil sector

7
Is private sector investing enough? (The case of
TNK-BP)
TNK-BPs use of cash for investment and financing
activities in the first half of 2007 (latest
public financial statements available), billion
Source TNK-BP
8
At the same time oil production at Samotlor field
Crude oil production at Samotlor field (around
43 of TNK-BPs total production), million tons
per year
Source TNK-BP, Institute of Energy Policy
projections
9
Gas Gazproms production back to 2003 level
Gas production by Gazprom, bcm/year
10
Gazprom after commencement of the South Russkoye
field, daily production slightly went up
Average daily winter gas production by Gazprom,
bcf/day
11
but whats left after South Russkoye had been
launched?
Potential of new gas output in the current gas
production area, that would be relatively easy to
launch in the coming years, bcm/year
Thats it?
Source presentation by Gazproms deputy CEO
A.Ananenkov, Moscow, June 14th, 2007
12
At the same time, gas demand is growing
underground gas storages dried out in early 2008
Peak daily gas outtake from UGS, mcm/day
Gas outtake from UGS, bcm(October-March)
Source Gazprom
13
Bovanenkovo field key hope for the near future?

• Key facts
• Expected gas production 115 bcmpa (further
  up to 140 bcmpa)
• Railroad length 540 km
• Swamps occupy 50-60 of the area across the
  railroad route
• Railroad capacity 30 million tons of cargo per
  year, total cargo required for delivery to site
  80 million tons
• Ukhta-Bovanenkovo gas pipeline length 1100 km
• Total estimated investments for Ukhta-Bovanenkovo
  pipeline construction (full capacity) USD 45 bn
  (2002)

14
Bovanenkovo investments 2008

• Total investments allocated for Bovanenkovo field
  development 2008 4,3 billion
• Upstream development 2,3 billion
• Gas transportation system 1,2 billion
• Railroad Obskaya-Bovanenkovo 0,8 billion
• At this pace, field will probably not be able to
  provide large scale gas supplies before 2015
• Railroad construction apparently stalled after
  270 of 540 km reported as built
• Cause for delay ongoing construction of
  technically complicated 4-km long bridge across
  Yuribey river

15
Face control access to strategic oil gas
fields

• Federal law of April 29th 57-FZ on restrictions
  for foreign investments in strategic sectors of
  the economy finally adopted
• The law includes federal level subsoil
  allotments in the list of assets requiring
  Government approval to be acquired by foreigners
• What is meant by federal level subsoil
  allotments is totally unclear
• Foreign investors are obliged to obtain
  individual permits for investment in any specific
  case of acquiring control in strategic fields

16
Will new upstream partnerships with foreign
investors be successful?

• So far, only the Gazprom-Wintershall partnership
  had delivered some results
• Gazprom and E.ON had failed to reach an upstream
  deal in Russia
• Gas production at Enineftegaz (ex-Yukos assets
  bought by Italian-led consortium) were shut down
  in October 2007 due to lack of access to
  Gazproms gas pipelines, and are not supposed to
  be resumed until 2010
• The future of Shtokman consortium is very unclear

17
Power reform market liberalization delayed,
power generation ends up in Gazproms hands
Generation capacity ownership structure Russia
(Europe Urals, excluding Siberia and the Far
East)

• The state and Gazprom would control about half of
  the power generation (most competitive baseload
  and peakload stations) at the new power market
• Some other owners (Norilsk Nickel, E.ON, Enel)
  may yet further resell control to Gazprom

18
Conclusions

• Russian energy sector passes through dramatic
  stage of ownership redistribution
• Until that ends, favorable investment climate can
  hardly be expected
• The state adds up the heat by playing on the side
  of affiliated companies, thus destroying the
  institutional environment, and introducing
  restrictions for foreign investors
• New partnerships with foreigners largely do not
  work yet
• Production stagnation (and potential decline) is
  the only result that can be expected under such
  conditions