Russian oil

1
Russian oil gas sector major slowdown amid
increased state interference

• Vladimir Milov
• Georgetown UniversityOctober 29th, 2007

2
In early 2000s, impressive growth of oil gas
production in Russia had been achieved mainly by
the private sector
Cumulative growth of oil gas production in 2006
as compared to the 1999 level,
3
In the largely privatized oil sector, this was a
result of substantial investments and major
growth in productivity
Investments and average well productivity in the
Russian oil producing sector in 2000-2005
Source Rosstat. Since 2005, Rosstat, due to
change in data aggregation methodology, no longer
published separate data on investments in the
upstream oil production sector
4
However, in 2003-2007 the state had increased
its presence in the oil production sector
Crude oil production in Russia by state and
private companies
5
After that, Russian oil production growth had
de-facto stopped in 2007
Crude oil output growth during 9 months of 2007,
to 9 months of 2006
If not for Sakhalin-1 and Salym projects led by
Exxon and Shell, Russian crude oil output growth
in 2007 would have been brought down to zero.
6
Some suggest that Russian oil industry had
reached a natural plateau. Had it really?

• During the recent 8 years, some major oil fields
  should have been brought on-stream, but werent,
  either due to delays in development, or simply
  not even being auctioned
• The lost production of ex-Yukos subsidiaries
  (Tomskneft and Samaraneftegaz) about 200 kbd as
  compared to mid-2004 level
• The potential of increasing oil well productivity
  is yet far from being expired
• Had these factors made their contribution, crude
  oil production in Russia would have reached
  10,4-10,5 mbd by now, as opposed to current 9,9
  mbd

• Trebsa and Titova, Centralno-Khoreiverskoye
  fields (Timano-Pechora)
• Sakhalin-3
• Vankorskoye (Eastern Siberia)
• Yurubcheno-Takhomskoye (Eastern Siberia)
• Prirazlomnoye (Arctic offshore)

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The actual end of growth in the Russian crude oil
output is not a result of some kind of plateau,
but is a consequence of the wrong state policies,
primarily the re-nationalization of the oil
production sector.
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Whats the price paid for re-nationalization of
oil assets?
Debt to revenue ratio by Russian and
international oil gas companies, end of 2006,
Source companies financial statements
9
In the gas sector, the situation is quite
similar instead of production investments,
Gazprom is more concerned with asset acquisitions
Gazproms investments in upstream gas production
and asset acquisitions in 2003-2007 (USD billion,
money of the day)
Source calculations based on Gazprom data (IFRS
financial reports, Gazprom Databook 2006)
10
In 2007, major Gazproms upstream projects were
delayed after funds were diverted to finance new
acquisitions
Elements of Gazproms investment program for
2007,USD billion under current exchange rates
Source Gazproms press releases
11
At the same time, impressive amounts of money are
required to develop new gas production areas
Gazproms estimates of Yamal Peninsula gas field
development costs(billion USD in current US
dollars)
Source Gazproms Complex program of Yamal
Peninsula gas fields industrial development, 2002
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Besides, Yamal Peninsula gas field development is
an extremely complicated task from a technical
standpoint
Totally greenfield, undeveloped area without
inftarstructure
Very complicated terrain for ensuring the
horizontal steadiness of a pipeline, complicated
crossing of Baydaratskaya bay
Current main region of gas production, distanced
more than 500 km away from Yamal Peninsula
Map OilCapital
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Consequences of underinvestment in upstream gas
production

• Supply cuts to consumers in January-February 2006
  5-6 bcm
• General Scheme of the Gas Industry Development
  to 2030, developed by Gazprom this year,
  envisages domestic gas consumption growth in
  Russia in 2008-2030 at the level of annual
  0,3-0,5
• In 2006, domestic gas consumption in Russia grew
  by 6,7
• Average annual growth of domestic gas consumption
  in Russia in 2002-2006 3
• This is the actual recognition of the substantial
  gas deficit in Russia
• Although this years gas production decline can
  be explained by temporary overproduction (mild
  winter of 2006-2007), severe gas production
  crisis develops
• New projects (Nord Stream, South Stream, Altai)
  wheres the gas going to come from?

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What next?

• The State had came back, but did not bring about
  an effective investment and development model
• State oil gas companies, with the accumulated
  debt burden, can not ensure timely investment in
  new greenfield development
• However, private companies are squeezed out of
  the sector
• It is too early to speak about the successful
  cooperation with European companies (E.ON,
  Total), as these partnerships are still in their
  early stages, and multiple problems exist
• At the same time, Russia totally lacks offshore
  oil gas field development experience
  traditionally, the industries have been focused
  on onshore production for decades
• Russian oil gas sector has entered the stage of
  stagnation and potential production decline,
  which may last for at least 4-5 years
• To end it, privatization and opening of the oil
  gas sector will inevitably be required