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Russian Think Tank Chief Weighs Competition And Turmoil

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  • Russian Think Tank Chief Weighs Competition And Turmoil

    RUSSIAN THINK TANK CHIEF WEIGHS COMPETITION AND TURMOIL
    By Alexei Chesnokov

    Oil and Gas Industry Latest News
    October 1, 2008
    Russia

    The Fund for National Energy Security (FNES) was created by Konstantin
    Simonov two years ago. Its creation logically followed the work
    of the Center for Political Conjuncture of Russia (CPCR), of which
    Mr. Simonov is also the president.

    The Fund for National Energy Security (FNES) was created by Konstantin
    Simonov two years ago. Its creation logically followed the work of the
    Center for Political Conjuncture of Russia (CPCR), of which Mr. Simonov
    is also the president. The CPCR has conducted research in political
    risk for many years, and this theme was further developed in the
    FNES. The Fund also studies the mutual influence of energy on politics
    and politics on energy in Russia, as well as in the world. The access
    of foreigners to upstream, conflicts between suppliers and buyers,
    export routes, problems resulting from political influence (and it
    is present practically everywhere). This is to subject to analysis
    and research by experts and specialists of the Fund. The FNES is a
    non-governmental organization, which is funded by the sales of its
    own various reports and research.

    Some reviewers call the FNES the mouthpiece of the Kremlin, based
    on the fact that many high officials in governmental structures
    came from that organization. However, Mr. Simonov assures that his
    research is absolutely impartial and says the government appointments
    of FNES personnel are simply a testament to the high professionalism
    of the FNES specialists. "In any case," says Konstantin Vasilievich,
    "these rumors don't bring me any dividends."

    General Director of the Fund for National Energy Security Konstantin
    Simonov, who holds a PhD in political science, answers the questions
    of Oil&Gas Eurasia:

    OGE: What do you think of the current strategy of Russia's Oil&
    Gas industry?

    K. Simonov: The existing strategy forecasts through the year 2020
    and is declarative and unrealistic. It fails to acknowledge the
    forecast of demand for hydrocarbons, property, implementation of new
    technologies, and training of new specialists for the industry. Also,
    the involvement of foreign companies is undetermined, and geopolitical
    questions are not addressed. My colleagues and I are trying to create
    a club of experts, with whom we can discuss the country's energy
    strategy through the year 2030. We would like the new Minister of
    Energy to listen to the specialists' opinions. In order not to plan
    for planning's sake and to implement the country's Energy Strategy,
    the process must be discussed by a wide range of specialists; it must
    pass through expert evaluation.

    OGE: In your opinion, does the crisis in the Caucasus have a hidden
    oil and gas motive?

    K. Simonov: The United States is playing an active game in the Georgia
    region. Why is Vice President Cheney visiting Georgia and Azerbaijan,
    describing Russia as an unreliable transit country and supplier of
    hydrocarbons? The United States does not care about Europe's energy
    security. I think America is concerned about where oil is going to
    go from Central Asia, and in the future, from Iran. Today Iran has
    the largest proven gas reserves after Russia. The United States is
    interested in Iran and created political conflict zones around the
    country. It is an important goal for the United States to prohibit
    Iran from supplying hydrocarbons to China. The U.S. provoked the
    Georgian conflict by promising Saakashvili support. They use Georgia
    as a puppet, and are now looking for an excuse to deploy troops to
    the north of Iran--in Georgia and Azerbaijan. The political tension
    around Iran is not subsiding. After Cheney's visit, I absolutely
    don't dismiss the possibility that Azerbaijan will attack Karabakh
    within six months. There is also a possibility of military action by
    the U.S. against Iran.

    OGE: What can you say about Russia's cooperation with the Central
    Asian republics in the oil and gas sphere?

    K. Simonov: Kazakhstan, Uzbekistan, and Turkmenistan are our neighbors,
    but not partners in the full sense of this word. Russia has not yet
    done enough for them to become such. There are many projects and
    conversations, but in practice little is being done. For instance,
    the Caspian Pipeline Consortium and the Burgas-Aleksandroupolis
    pipeline projects are not developing fast enough.

    Kazakhstan recently agreed to increase their gas supply to China
    by 30%. However, Turkmenistan's reserves are not yet confirmed by
    international audit and so it is possible that agreements with Russia
    and China will not be honored, because there will not be enough gas
    for everyone.

    OGE: What is the fate of major foreign investors in the oil and gas
    industry in Russia? How are the PSA projects (production sharing
    agreement) developing?

    K. Simonov: Today, countries that possess large hydrocarbon reserves
    are tightening regulations concerning foreign companies. This
    process is happening in Kazakhstan, Venezuela, Saudi Arabia,
    the African countries, and Norway and the phenomenon causes a
    backlash. Refining and retail companies are trying to prohibit
    oil producing countries from entering their markets. New laws are
    being adopted in the United States and Germany, the rules of access
    to downstream are tightening. The EC practically excludes Russian
    companies from this sector of economy. The countries that recover
    natural resources understand what riches they posses and do not want
    to share. And the countries that have a sales market, in turn, do not
    let oil producers near it. By the way, there is data that the Russian
    investment in European downstream is 7-8 times less than the European
    investment in the Russian upstream. On the whole, foreigners do not
    feel so bad in the Russian oil and gas industry, especially if you
    compare it with Venezuela. For example, Shell remained a minority
    shareholder in Sakhalin-2 project. Now this company's participation
    in the new projects on the Yamal peninsula together with Gazprom is
    being discussed.

    The German firm BASF is taking part in the Southern Russian field
    development, which is, by the way, one of the last fields with
    uncomplicated conditions of Senoman gas production. ENI participates
    in the joint project with Gazpromneft. Total and StatoilGidro became
    Gazprom's partners in the Shtokman field project. An example of
    a mutually profitable deal is the deal with the German firm BASF,
    which offered Gazprom a share in the German gas company in exchange
    for access to the Southern Russian field.

    Really, the biggest problem for foreigners in Russia is not even the
    law or political will, but the moment when they begin working with
    our companies and see what kind of ineffective system of decision
    making prevails among company officials. The problem of quality
    state-corporate management is not solved here yet.

    OGE: How can you comment on the rivalry between the two major state
    companies Gazprom and Rosneft?

    K. Simonov: Many experts often use the phrase "The Kremlin decided,"
    but we have been trying to explain for a long time that it is
    incorrect. There is no Kremlin. The concept of Kremlin can be
    approached from many sides. There is Putin, there is Sechin,
    there is Medvedev, and there are concrete people and concrete
    interests. Gazprom--Miller's interests and those of Medvedev's, and
    Rosneft's interests and Sechin's interests differ for understandable
    reasons.

    For example, let's take the Shelf--recently adopted amendments to
    the Subsoil Law and the Law on Continental Shelf stipulate that only
    the companies with no less than 51 percent of state-owned shares and
    which have a minimum of five years' experience of shelf development
    may participate in the exploration of the Shelf. We have just two
    such companies--Gazprom and Rosneft. So we need to somehow divide the
    Shelf. These are state companies, but Gazprom has 49 percent private
    shareholders, and Rosneft sold 14 percent of shares to private
    investors. Therefore the relations [between Gazprom and Rosneft]
    are not just those of conflict, but of open conflict. To give you
    an example, Daltransgaz vividly illustrated this when Rosneft sued
    Gazprom in court. Or, for instance, FAS has recently been actively
    attacking Gazprom, seeking to divest it of its monopoly in the market.

    OGE: To what extent does this confrontation damage the state's
    interests?

    K. Simonov: In my opinion, it certainly causes damage, because creates
    uncertainty among investors. While the argument is going on regarding
    sections of the Shelf, nobody is going to invest in its exploration
    projects. Overall, we don't give enough attention to the problem of
    subsoil ownership. One of the main reasons for insufficient investment
    in the development of fields with complicated recovery conditions is
    the companies' uncertainty about the long-term status of their work at
    these subsoil plots. That is why the heads of oil companies are not
    being entirely honest when they say that they are being smothered by
    taxes. Taxes are not the main reason for insufficient investment. A
    series of measures have recently been taken to decrease taxes, and
    next year we will see how much more investments into the industry
    have increased.

    OGE: Some Western politicians are appealing to Europe to abandon buying
    energy carriers in Russia, to find other suppliers. How real is this?

    K. Simonov: According to many European companies' estimates, Europe
    will need additional 140 billion cubic meters of gas by the year
    2015. Who can provide such an amount? Norway is capable of supplying
    30 billion cubic meters at maximum, after that its recovery will
    begin to decrease. North Africa will give a maximum of 50 billion
    cubic meters. Where will the remaining 60 billion cubic meters come
    from? From the liquefied gas market? There is not so much of it there,
    and the demand is very high; a new, extremely powerful consumer is
    entering the market--China. Therefore there is no real alternative
    to Russia. The politicians who talk about this in earnest may be
    called the "Brussels dreamers". This also concerns the plans to
    switch to alternative fuel. In 2005 EC adopted the plan to increase
    the use of alternative types of energy to 5 percent. The plan was
    not realized. Instead, another plan was adopted, to increase the
    share of alternative energy to 20 percent by the year 2020. Now,
    let's wait for the year 2020.

    OGE: In your opinion, which is more correct: to invest large amounts
    into exploration of East Siberia and the Shelf of the northern seas
    or to direct these means into increasing the recovery efficiency of
    already existing wells, which may also produce a huge effect?

    K. Simonov: True, we have huge losses. We have low recovery efficiency,
    and burning of associated petroleum gases, and even loss of electricity
    from the power grid. We are falling way behind in energy supply,
    the world has moved well ahead. Of course, we must deal with all of
    this. But Russia must also develop the Shelf, and be present at the
    liquefied gas market. These two directions do not contradict each
    other and must develop simultaneously. But the saddest thing is
    that we are discussing right now what needs to be developed. Where
    do we invest? In East Siberian exploration and the Shelf, or to
    increase recovery efficiency and the use of associated petroleum
    gases? In reality nothing is being done concerning either one of
    these issues. The Shelf exploration is progressing very slowly with
    huge difficulties, for example, at the Shtokman project. Meanwhile,
    we have seen no improvements recently in recovery efficiency or in
    the use of associated petroleum gases. Something needs to be done.
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