RPI-may15-fin (1)

EU ANTITRUST ATTACK MAY MAKE GAZPROM CONSIDER CONCESSIONS

Russia’s state-run Gazprom, until re-cently seen as the Kremlin’s danger-ous energy weapon by the resource-dependent West, may have to put up with a new, less heroic role as the gas giant is struggling to avoid financial and reputational losses in its battle with the European Union’s antitrust authorities. However, the increased competition in the company’s key European markets, as well as growing pressure from Turk-men and Azeri gas producers, may help Gazprom improve the quality of it man-agement. Gazprom’s critics, dissatisfied with its performance, have long urged the gas firm to revise its outdated pricing practices and stop politically motivated investments.

Gas Strategy6 Gazprom staunchly defends itself against EU accusations9 Map – Turkish Stream

Projects12 China, Russia now linked by energy14 Table – Russian-Chinese oil and gas cooperation15 Map - Altai gas pipeline17 Argentina invites Russia to develop tight oil reserves21 Table - Hard to extract oil reserves in Russia23 Map - Vaca Muerta

Transactions25 Russia, China call on Lukoil, Sinopec to make peace27 Table - Caspian Investment Resources’ oil fields and blocks30 Total may sell PSA stake34 Table - Kharyaga PSA project production35 Map - Kharyaga field37 April M&A: Russians sell assets, foreign companies lose interest38-39 Table - Domestic M&A transactions, Apr’1541 Table - Foreign M&A transactions, Apr’15

Briefs43 Regional45 Corporate

Statistics46 February’15

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Table of Contents

POLITICAL AND BUSINESS INTELLIGENCE FOR ENERGY INVESTORS IN THE FSU

VOLUME XXIV, ISSUE 5, MAY 2015

GAS POLITICS

By Denis Dyomkin

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In This Issue:

Gazprom defends itself against EU accusations

Europe does not seem keen on dialogue with Gazprom, ignoring an April 13 conference in Berlin on energy security in Europe. Gazprom spoke of its new vector, moving from a European strategy to a Eurasian strategy, as a new Eurasian gas mega-market begins to emerge. Gazprom talked of its position on the charges that the EC has brought against the company - abuse of its dominant position and violation of the EU antimonopoly legislation. Gazprom justified its behaviour by talking of who defines the price for Russian gas to Europe, and also noted that local European companies - and not Gazprom - are the ones that are earning a considerable profit.

China, Russia now linked by energy

The May visit to Moscow by Chinese leader Xi Jinping was expected to be the moment when the two countries signed a gas contract for the Western or Altai gas route. But that didn’t happen, and those who remember the torturous negotiations over the Power of Siberia pipeline, believe that the gas contract could still be far off from being signed. Nevertheless, an agreement on the gas pipeline, which is the most important part of the future contract, has been signed.

Russia, China call on Lukoil, Sinopec to make peace

Russia’s №2 oil producer Lukoil and China’s Sinopec have been involved in a dispute over an uncompleted $1.2 billion Kazakh deal for over a year. The two companies in April last year signed a deal on Lukoil’s sale of its 50-percent stake in Caspian Investment Resources, which develops several hydrocarbon-production projects in Kazakhstan, to another venture shareholder Sinopec. The deal was expected to be completed by the end of 2014. However, in February of this year, Lukoil commenced arbitration proceedings in London over the Chinese company’s refusal to proceed with the purchase.

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RUSSIAN PETROLEUM INVESTOR

The European Commission in April said that some of Gazprom’s business practices in Central and Eastern European gas markets constituted an abuse of the company’s dominant market position and were in breach of EU antitrust rules. The state-ment added pressure to Europe’s already strained relationships with Moscow, which is accused by the West of stirring the deadly crisis in Ukraine.

Gazprom has denied the accusations of over-charging buyers in Eastern Europe and hindering competition.

2 Russian Petroleum Investor • © Thomson Reuters 2015

RUSSIAN PETROLEUM INVESTOR VOLUME XXIV, ISSUE 5, MAY 2015

(continued from p.1)

Europe is the largest market for Gazprom, which provides about a third of the region’s gas needs with some countries totally dependent on Russian fuel. Moscow has always denied that it uses gas as a diplomatic weapon, although Gazprom has more than once threatened to cut off supplies to neighboring countries.

However, now it is Brussels that is dismissing Russia’s accusations of using Europe’s antitrust legislation as a tool of geopolitical pressure on the Russian gas group.

“Our preliminary review alleges that Gazprom is abusing its dominant position,” EU Competition Commissioner Margrethe Vestager said quoting the EC statement of objections to Gazprom.

The EC said that Gazprom overcharged Latvia, Lithuania, Estonia, Poland and Bulgaria, and restricted these countries’ gas re-exports. In these markets, the Russian company’s share ranges from 50 to 100 percent.

Gazprom used its dominance in the former Soviet client states to “systematically” hike prices by as much as 40 percent over the norm, according to the commissioner.

The Russian company controls 15 percent of the world’s gas reserves and generates eight percent of Russia’s GDP.

DECISIVE BATTLEVestager quit as Danish economy minister for the post of EU antitrust chief in the summer of 2014 and has declared war on two European market monsters: Google and Gazprom.

“The Commission considers these measures prevent the free trade of gas within the European Economic Area (EEA),” the antitrust watchdog said in a statement published on April 22.

Some experts, who disagree with the EC claims, argue that if Gazprom did not restrict re-exports of its gas in its contracts with European buyers, EU gas traders would have long ago pushed the Russian gas giant out of certain markets, such as Ukraine. In fact, this is already happening: reverse gas supplies are currently flowing to Ukraine from some EU countries. They are, de jure, European gas, but in reality it is Russian gas, resold by European firms to Ukrainian state gas company Naftogaz. These reverse gas supplies are only pos-sible through non-Gazprom pipelines.

To support the claim that Gazprom pursues unfair pricing policy in Bulgaria, Estonia, Latvia, Lithu-ania and Poland, the EC said that the firm charged prices to wholesalers that are significantly higher than Gazprom’s costs or benchmark prices.

“These unfair prices result partly from Gazprom’s price formulae that index gas prices in supply contracts to a basket of oil product prices and have unduly favoured Gazprom over its customers,” the commission said.

Linking gas prices to oil and oil product prices has been a key pricing policy of the European gas market since the 1970s.

The Eastern European countries mentioned by the EC all use gas transport infrastructure that was built back in Soviet times. Brussels believes that Gazprom was leveraging its dominant market posi-tion by making gas supplies to Bulgaria and Po-land conditional on obtaining unrelated commit-ments from wholesalers concerning gas transport infrastructure.

“For example, gas supplies were made dependent on investments in a pipeline project promoted by Gazprom or accepting Gazprom reinforcing its con-trol over a pipeline,” the statement said.

In addition to the five countries, the EC investiga-tion also, starting in September 2012, looked into the gas markets of the Czech Republic, Slovakia and Hungary. Vestager said that the investigation was not politically motivated as it began before Russia’s annexation of Ukraine’s Crimea peninsula, which sparked Western sanctions on Russian com-panies and individuals.

The 2014 Crimea annexation, followed by bloody fighting in Eastern Ukraine, have brought into question the political order established after the collapse of the Soviet Union and the future bal-ance of the energy market. The market position of the Russian gas giant, which has been Europe’s major supplier since the Soviet times, no longer seems unshakable.

In the past decade, the EU has sought to improve its energy safety by easing its dependence on Gazprom. Having realized the risks associated with Russia’s assertive “gas diplomacy,” Europe, sup-ported by the United States, has stepped up efforts to diversify its energy sources.

The efforts intensified after Russia-Ukraine gas pricing disputes led to complete halts of gas flows in the second half of the 2000s.

EC: “These unfair prices result partly from Gazprom’s price formu-lae that index gas prices in supply con-tracts to a basket of oil product pric-es and have unduly fa-voured Gaz-prom over its customers.”

GAS POLITICS


Russian Petroleum Investor • © Thomson Reuters 2015 3



In September 2011, EC representatives searched the offices of 20 companies including Gazprom’s subsidiaries and its major customers in ten EU countries. The companies under investigation included Gazprom Germania in Berlin, E.ON and RWE in Essen, OMV in Vienna, RWE in Prague, Czech company Vemex, Polish state companies PGNiG and Gaz System, E.ON’s subsidiary in Hungary, and Bulgarian state firms Bulgargaz and Overgas. In addition, European officials searched Lithuanian, Latvian and Estonian national gas companies, controlled by Gazprom and Germany’s E.ON.

The commission said that the searches were con-ducted on suspicion of the companies’ violating EU antitrust laws through price fixing arrangements and market position abuse. A year later, the EC launched an investigation into the antitrust prac-tices of Gazprom (See “Gazprom vs EC”, Russian Petroleum Investor, October’12).

President Vladimir Putin responded to the moves by signing a decree stating that in case of claims by foreign states or international organizations, Russian strategic companies (including Gazprom) should not disclose performance information or make contract changes concerning pricing poli-cies in foreign countries. Putin and other Russian officials believe that the EU investigation is aimed at reducing gas prices for European consumers amid the economic downturn and to partially shift the financial burden to Gazprom. Putin suggested that the EU should remove middlemen in the gas trade and reduce taxes which account for some 60 percent of gas prices.

GAS POLICY US and EU sanctions have been quite painful for an already stumbling Russian economy, which is in need of urgent reforms.

The Western sanctions significantly contributed to Russia’s economic problems: the government estimated losses at $27 billion or more. There are no clear prospects for easing sanctions: the infor-mal leader of the European community, German Chancellor Angela Merkel, who was one of the few Western heads of states who visited Moscow for Word War II victory celebrations, made it clear that the fragile truce in Eastern Ukraine was not as reassuring as seen by the Kremlin.

The new economic reality of falling oil prices is a

cold shower for Gazprom, the flagship of Rus-sia’s resource-based economy and a global major, which once had the world’s third biggest market capitalization of $360 billion.

The world’s largest gas producer has given up the hope, cherished by head Alexei Miller, to reach a market value of $1 trillion and has started adapt-ing contracts with European buyers to the changed market conditions. Austria’s OMV in February an-nounced that it received a gas price discount worth tens of millions of euros.

Gazprom has previously revised its gas prices for other European clients and partially returned extra payments.

In its third quarter 2014 report, the Russian com-pany warned that a further decline in oil prices could have an adverse effect on its operational results, cash flows, financial position and planned capital expenditures.

Gazprom’s legal battle with the EC could result in fines of up to 10 percent of the company’s annual income.

The EC investigation has inspired Ukraine, the main transit country for Russian gas, to hold its own antitrust inspection. The Ukrainian govern-ment, whose economy remains on the verge of collapse after last year’s pro-Western revolution and the bloodshed in the eastern regions, accused Gazprom of damaging the Ukrainian economy through “discriminatory practices.” Kiev hopes that the EU antitrust watchdog will help gas transit go through Ukraine to Hungary, Poland, Bulgaria and Turkey. Naftogaz and its subsidiary Ukrtransgaz, operator of the Ukrainian gas pipeline system, said that they have received transit business proposals from European traders.

“WE DESERVE NOT TO BE PENALISED”Gazprom, backed by the Kremlin and Russia’s foreign ministry, rejected accusations of antitrust violations. The gas giant argued that it has already made significant concessions. However, if it refuses to further compromise, it risks being pulled into a costly litigation with possible substantial fines.

The EU wants Gazprom to calculate more of its contracts using European spot gas prices, rather than the formula it has historically used for most of its contracts based on the price of oil. Around 16 percent of its contracts were based on spot gas as

GAS POLITICS


The EC inves-tigation has inspired Ukraine, the main transit country for Rus-sian gas, to hold its own antitrust inspection.




of the end of 2014. Wider use of spot prices would level gas prices in different EU countries. Spot gas prices are also often lower than oil prices.

A Gazprom source, who did not want to be named, told Reuters that the company was considering linking an increasing number of contracts to spot prices. This would be a very significant concession.

“We are working on it,” the source said.

The EC has given Gazprom 12 weeks to respond to EU antitrust charges, which run to hundreds of pages.

“We will work with the documents and the Com-mission,” Gazprom spokesman Sergei Kupriyanov said.

European officials suggested that Gazprom used the security services to give itself an unfair advan-tage in last year’s gas talks with Ukraine and the EU.

Gunther Oettinger, Europe’s Commissioner for the Digital Economy, who led the negotiations, said that Russia had listened in during the talks.

“When the gas talks were going on, I am sure Gazprom knew everything,” Oettinger said on May 7. Gazprom declined to comment.

Gazprom may ask for an extension before it ex-plains why it does not consider itself to be guilty of the EU antitrust charges. The Gazprom source told Reuters that the firm will argue that it does not deserve to be fined as it has already changed its behaviour by introducing more competitive pric-ing, selling assets to comply with EU regulations and allowing its gas to be resold by consumers.

“We deserve not to be penalised but to be com-mended because Gazprom, together with its part-ner BASF, created competition on the European market,” Alexander Medvedev, Gazprom’s deputy head told a conference call in early May.

The Gazprom official said the Kremlin could soon be involved in a discussion on how to respond. A Kremlin spokesman did not immediately respond to a request for a comment.

The EC said that it was going to carefully consider Russia’s arguments.

“We will look carefully at all of Gazprom’s argu-ments before taking any decision. Gazprom can also request an oral hearing to present its posi-tion. All roads are open at this stage,” Vestager told a news conference in April.

GAS POLITICS


Analysts believe that Gazprom may try to reach an out-of-court settlement.

“I think that an agreement will be reached,” Sber-bank CIB analyst Valery Nesterov told Reuters. If the case does come to trial, and Gazprom is proven guilty, it could be fined up to 2 billion euros ($2.3 billion), Nesterov added.

An amicable agreement would suit both sides, said Mario Marinello of the Bruegel think tank.

“In general, both sides are interested in an agree-ment that would solve the problems without bring-ing the matter to a lengthy legal battle,” he told Reuters.

TRIGGER FOR REFORMS? International agency Fitch Ratings suggested that EC objections to Gazprom’s business practices may accelerate the trend towards market-based pricing in eastern Europe, which will be more in line with practices used in north-western Europe, although the process is likely to take years to complete.

“The most likely outcome is further reduction of oil-linked pricing in eastern Europe, which repre-sents less than 30 percent of Gazprom’s European gas sales,” Fitch said on April 28.

Gazprom’s plunging sales to Europe and the sharp reduction of Russian gas purchases by Ukraine has made the gas giant seek new markets and push the construction of a pipeline to China. However, despite the fact that both Gazprom and Europe are eager to reduce their mutual gas dependence, eastern Europe will still rely on Russia for most of its gas in the foreseeable future, the agency said.

The EC said that it could consider reasonable com-promises with its key partner.

“Gazprom is a huge, highly professional company which is extremely important for Europe. The Euro-pean Commission has no problems with Gazprom as a company, but the European Commission does have a problem with Gazprom’s individual com-mercial practices in the European gas market. They will be discussed,” Vestager said.

Some of Gazprom’s practices may have to be revised.

“While Gazprom in the past could do everything it wanted, roughly speaking, now it has to be more cautious,” said an expert familiar with the interna-tional gas trade.

“THE EURO PEAN COMMISSION HAS NO PROBLEMS WITH GAZPROM AS A COMPANY, BUT THE EUROPEAN COMMISSION DOES HAVE A PROBLEM WITH GAZPROM’S INDIVIDUAL COM MERCIAL PRACTICES”




GAS POLITICS


If the European regulator proves Gazprom’s anti-trust violations, the company will have to monitor its outgoings more strictly amid falling revenues. High potential costs have already made Gazprom shelve a number of its earlier planned ambitious projects, including the launch of the Arctic Shtok-man field, the construction of a liquefied natural gas (LNG) plant in Vladivostok and entry onto the European electricity market. In addition, Moscow has cancelled its long-planned multi-billion dollar South Stream project to build a gas pipeline to Europe under the Black Sea, although it still wants to build an alternative pipeline to Turkey.

Experts have long criticised Gazprom’s growing investment programme and suggested that the company should replace its veteran CEO with a more effective manager with experience in private business. Rumours of the possible resignation of Miller, who has been leading the company since 2001, have sent Gazprom’s shares up in the past as investors are skeptical about the quality of corpo-rate governance at the state-controlled firm.

Neverthess, Gazprom decided to pay lavish 2014 dividends as if the company had had a successful year. The dividends were set at 90 percent of the company’s net profit, calculated according to Rus-sian accounting standards, even though the firm’s income plunged 86 percent last year because of the rouble’s weakness, the fall in global oil prices and its dispute with Ukraine.

Gazprom on May 19 further downgraded its 2015 gas output forecast to 450 billion cubic metres (bcm) from the earlier expected 471 bcm and an original forecast of 485 bcm. All three forecasts, however, are higher than last year’s production of 444 bcm, which was the lowest annual output since Gazprom was founded in 1989.

A possible punishment from the alleged EU antitrust violations is a major headache for the Russian gas giant.

“Potential implications for Gazprom include large, but probably still manageable fines and changes to its contracts to allow off-takers more discretion in re-selling gas to other countries,” Fitch said.

Gas producers from Central Asia and the South Caucasus are also snapping at Gazprom’s heels, trying to press it out of its traditional markets. The European Union, seeking to reduce its depen-dence on Russian energy supplies, expects to start importing gas from Turkmenistan by 2019, EC

Vice President Maros Sefcovic told Reuters in an interview.

In March, Turkmen officials said that Ashgabat was in “active negotiations” on the supply of 10 bcm to 30 bcm of gas per year to European consumers. In comparison, Turkmenistan annually exports 30 bcm to 35 bcm of gas to China. Turkmenistan, with the world’s fourth-largest reserves of natural gas, is keen to diversify exports away from Russia which will cut its imports to 4 bcm this year from 11 bcm in 2014.

During his visit to Ashgabat in May, the EU commissioner met with the country’s president Kurbanguly Berdymukhamedov and then with the energy ministers of Turkmenistan, Turkey and Azerbaijan. Soon after that, the Turkmen leader went to Austria, where he discussed gas coopera-tion with his Austrian counterpart Heinz Fischer.

One project, aimed at delivering Turkmen gas to Europe across the Caspian Sea through the South-ern Corridor Project, which includes Azerbaijan and Turkey, has been stalled for years due to political, environmental and financial uncertainties. How-ever, Sefcovic said that the parties have reached a “political decision that Turkmenistan will become part of this project” to provide gas to Europe.

Last year, Turkmenistan and Turkey signed a framework agreement to supply gas to the pro-posed Trans-Anatolian natural gas pipeline project (TANAP), which will take gas from Azerbaijan’s Shah Deniz II field in the Caspian Sea. To connect to TANAP, Turkmenistan needs to build its own, 300-km link under the Caspian Sea, a disputed area between Russia, Kazakhstan, Turkmenistan, Iran and Azerbaijan.

Amid worsening long-term risks, Gazprom may have to look more closely at its investment pro-gramme and revaluate its politically motivated projects.

However, so far, the gas group continues to build up its spending plans. Gazprom may increase its 2015 investment programme by at least $4 billion to strengthen the firm’s business partnerships in Asia, Miller said in April. The Kremlin has proclaimed the Eastern markets a priority against the background of the political tensions with the West. Gazprom’s investment programme was originally planned at $16.2 billion in 2015, mainly to be spent on the de-velopment of gas production projects on the Yamal peninsula in the northern part of West Siberia.

REUTERS/Yves Herman



Europe does not seem keen on dia-logue with Gazprom, ignoring an April 13 conference in Berlin on energy security in Europe. At the conference, Gazprom spoke of its new vector, moving from a European strategy to a Eurasian strategy, as a new Eurasian gas mega-market begins to emerge. Gazprom talked also of its position on the charges that the EC has brought against the company - abuse of its dominant position and violation of the EU antimonopoly legislation. Gaz-prom justified its behaviour by talking of who defines the price for Russian gas to Europe, and also noted that local European companies - and not Gazprom - are the ones that are earn-ing a considerable profit. Gazprom, it says, face huge risks on the European market: price, demand, regulatory and transit risks, as well as new production and transportation capacity risks in the region.

On April 13, Berlin hosted a conference of the Valdai Club with the promising title “ Europe and Eurasia: Towards the New Model of Energy Secu-rity.” The conference was planned to feature the chief European official in charge of energy, Maros Sefcovic, who is vice president of the European Commission (EC) for the Energy Union and Peter Ramsauer, Chairman of the Bundestag’s Commit-tee on Economy and Energy. But, instead, both officials chose to ignore the event.

Instead, the representatives of businesses that work closely with Russia, Total, Shell and E.ON and which are all affected by the sanctions against Moscow had a chance to speak about their posi-

tions on European energy security. The businesses complained about the deterioration of current working conditions with Russia but said that Eu-rope has to be work with Russia in the end. Sadly, the business world and does really not affect the position of those who are in power in the European Union.

Why does Brussels avoid the meeting? As it turned out, the Commission was preparing to accuse Rus-sia of abuse of its dominant position and violat-ing EU antitrust laws (See. Article in this issue of “The European Union starts legal action against Gazprom”).

In the 1960s, the US tried to block the construction of a gas pipeline from Western Siberia to Europe, but the coldest of cold wars did not stop Europe from gaining access to cheap gas from the former Soviet Union. Today, efforts to block Russian projects are succeeding and old Europe is turning away from Russia.

NEW STRATEGY - TO THE EASTThe main event at the Berlin conference was a 40-minute speech by Gazprom head Alexei Miller, in which he listed all of Russia’s complaints against the energy policy of the European Union and announced a new strategy for the company . The new motion vector for Gazprom, he said, is a shift from a European to a Eurasian market strat-egy, saying that a new Eurasian gas mega-market is beginning to form

Gazprom has started constructing gas transmis-sion capacities in Siberia, Miller said, which will not only provide for Russian gas exports to China but also connect the gas transmission system of the East and the West. Another crucial point is that these two markets will have a single power-ful large-scale resource base – Western Siberia. In addition, it is important for Gazprom that the company will likely execute the Eurasian strategy with new strategic partners.

Secondly, the head of Gazprom said that such

GAS STRATEGY

GAZPROM DEFENDS ITSELF AGAINST EU ACCUSATIONS

By Ilya Kedrov

Additional reporting by Olesya Astakhova



TIMING OF TURKISH STREAM COMMISSIONING

On May 7, during negotiations between Gazprom CEO Alexei Miller and Turkish Energy and Natural Resources Minister Taner Yildiz, the commissioning of the first stage of Turkish Stream in December 2016 was agreed. Gas from the first line, 15.75 billion cubic meters in total, will go to the Turkish market.On April 30, Gazprom deputy chairman Alexander Medvedev said during a conference call that the fourth and last line of Turkish Stream will be built by 2020. «The work is on schedule both on the marine part and the

offshore part. We are preparing an intergovernmental agreement between Russia and Turkey on the project, preparing a work plan for surveys in the sea and in the Turkish sections,» Medvedev said, adding that in «2020 - the last, fourth thread.»Thw Turkish Stream pipeline is set to go along the Black Sea seabed via the route chosen for South Stream. This section will be 660 kilometers long. Another 250 kilometers of the pipeline will go in the direction of the European part of Turkey. The capacity of the new pipeline will be around 63 billion

cubic meters. Approximately 47 billion cubic meters will be supplied to a new gas hub on the Turkish-Greek border.On December 1, 2014, Gazprom and the Turkish company Botas signed a memorandum of understanding on construction of a gas pipeline from Russia to Turkey through the Black Sea. Gazprom, with the assistance of Italian company Saipem, will build the offshore section of the pipeline. Consumers and transit countries will have to build infrastructure to receive Russian gas on EU territory.


GAS STRATEGY


talks traditionally touch on issues such as whether oil and oil derivatives will still affect gas prices, what the role of spot markets will be and whether they will grow or weaken. In the short term, he said, it will be the Asian market that will serve as the pricing factor for the European market.

Europe, according to Miller, has given up on the energy security model that has worked in the last ten years, which was based on “interlocking and interdependence” with elements of diversification. This gave Gazprom, through assets swap with European partners, the opportunity to participate in the entire chain: from gas production to its final sale to European consumers. This also allowed the Russian company to diversify risks and to ensure the sustainability and profitability of multi-billion dollar projects.

Now, the European Union is moving to a model of total diversification of suppliers, routes and products, Miller said. “Time will show whether it is good or not, but we surely see some very grave risks posed by this model,” he said, “I should mention it at once that this diversification-based model of energy security is a cornerstone of the European Energy Union project.”

The Gazprom head said that the company will strictly follow the new rules of the European gas market: “We will stick to the models and rules of the European market. Moreover, speaking of the European Energy Union project, we think that it contains many interesting ideas and provisions. I think that the objectives and goals outlined there are our common objectives.”

WHY GERMANY ENJOYS THE LOWEST PRICES?Alexei Miller also touched on the issue of fair prices. “Fair gas prices, unfair gas prices, the issue is serious. In particular, Gazprom is accused of set-ting different gas prices for consumers in different countries … Gazprom is being accused of setting extremely low prices for some consumers and extremely high prices for others,” said Miller. “We should be thinking and moving towards an equal price.”

At the same time, he stressed that gas prices in each particular country are determined by the energy balance of each specific country and the role of gas in this energy balance. These prices, he said, also depend on the contribution made by the country’s companies in creating the security chain within the previous energy security model pursued over the last ten years.

Miller said that the lowest prices for long-term gas supply contracts are for German consumers. “Is it accidental? No, it is not. We know how important gas is for the German market. In our pricing activi-ties in the German market we have always based it on the German market itself, being aware of the role of gas in the German industry and economy,” he said.

The transition to a single EU price, according to Miller’s forecast, would mean that in Germany the price will be much higher than the current low-est price. Supposing the European Commission decides that the prices should be equal, that equal price will not be the lowest one at which we sup-ply gas to the EU, he said, adding that the cut-off price would most likely be the highest one..

The consumer needs to know how and by whom the price for Russian gas in Europe is formed, he said, and what considerable profits local European companies make.

“Let us look at the transparency of electricity prices. Everyone in this audience today knows well that the price at which Gazprom supplies gas to the EU market accounts for only 45 to 50 per cent of the price for end consumers. Up to 30 per cent is made up of taxes and levies and the remaining part is the interest margin of companies working on the country’s domestic market, said Miller. Con-sumers should be aware of how the end price is formed and the price of gas supplied from Russia,



GAS STRATEGY

(continued from p.7)GAZPROM DEFENDS ITSELF AGAINST EU ACCUSATIONS

Gazprom’s price is less than half of the end price for the end consumer. A consumer should know what subsidies are granted on renewables and what factor determines the growth in power prices. As you know, it is not the gas price factor. An open discussion should be held for everyone, including market players, he said.

GAZPROM TAKES ON ALL THE RISKSMiller said that there must be an open and honest conversation, not a one-sided relationship. Gaz-prom takes on big risks in the European market, he said. “Currently we see that all the risks are being intentionally transferred to a supplier on a unilat-eral basis. These include price risks, demand risks, regulatory and transit risks. But the main thing I would like to dwell on is the risks of constructing production capacities and transmission capaci-ties,” he said.

“It is common knowledge that presently Gazprom, as a supplier, has certain difficulties seeking take-or-pay penalties … it should be understood that take-or-pay penalties are actually capacity pay-ments. So, we make advances, we do not levy take-or-pay penalties, and so we put off the withdrawal for future periods, and so on,” continued Miller. “Gazprom has built production and transmission capacities exceeding the take-or-pay volumes. The created volumes provide for supplying annual contracted amounts of gas to our consumers in Eu-rope. A question arises then: who pays for it? The answer is: Gazprom does, because we continuously bear the costs of operating these capacities.”

Their current volumes are colossal, he added. To-day Gazprom has production capacity of up to 617 billion cubic meters of gas. The company produced 444 billion cubic meters of gas in 2014. What does that mean? It means that we can easily just double the volume of Russian gas export, Gazprom’s export to Europe. What does it mean for Gazprom? It is certainly a risk. Gazprom hasn’t heard about such a demand or, what is most important, any statements that Europe would rely on Russian gas. But then it is only reasonable … to use the excess capacities to supply gas to other markets, particu-larly, to the Asian market. Europe should give us

a clear answer, whether it needs these production capacities and resource base, or not?” said Miller.

THE WEAKEST LINKThe Ukrainian gas transportation system is the weakest link in relations between Gazprom and the EU. “It’s important to understand that 90 per cent of Russian gas transits to Europe are via Ukraine,” said Miller, “This precise transit amount was actu-ally a nice gift to Ukraine made by the USSR back in the early 1990s. When a gift becomes a manipu-lation tool, this can not last for long.”

The Turkish Stream project is not the first project to bypass Ukraine. Yamal - Europe was a pioneer-ing pipeline, which was built with Polish partners. Blue Stream went to Turkey with Italian partners. South Stream was cancelled in much the same way as the Yamal – Europe-2 project. We were forced to give it up in early 2000s, Miller said. Instead we’ve delivered an absolutely marvelous and success-ful project – Nord Stream. Some people suggest now that maybe it’s worth going back to the South Stream project. History is repeating itself as back in the day, when we were building the Nord Stream pipeline, there were also suggestions to go back to the Yamal – Europe-2 project and stop the Nord Stream project, he said.

“We pursue a clear and simple approach to the Turkish Stream project. We made a decision to construct a gas trunkline to be laid to Turkey across the Black Sea as well as build gas trans-mission facilities up to the borders of Turkey and Greece, up to the EU border. And we will build these facilities. All the risks, particularly, the temporary risks related to the construction of new gas transmission facilities from the Turkish-Greece border are laid on the shoulders of the European Union and the European Commission. The dead-lines are very tight – these facilities are expected to be created before the end of 2019. In order to get this done on time, we should start construc-tion immediately. Unfortunately, we have not been able to initiate the process so far. We stated that if we start now, we’ll meet the deadlines and the required facilities will be built. Otherwise, it will not be possible. As we say in Russia, ‘forewarned is forearmed,’” said the head of Gazprom.

“We’ve been asked whether Gazprom plans to invest in new gas transmission facilities on the

ITALIAN SAIPEM IS READY TO WORK ON TURKISH STREAM

Italian company Saipem is ready to work on the new Turkish Stream gas pipeline project, once the client, that is, Russia’s Gazprom, requests it, said Saipem CEO Umberto Vergine during an April 27 conference-call with analysts, as quoted by Italian media .Saipem was hired for pipeline construction for the South Stream project. Russia eventually rejected it but the contract with the company for laying a pipeline under the Black Sea has not been terminated. Gazprom is currently waiting to receive the necessary permits to carry out such work.«We are in contact with the customer to go to work on the Turkish Stream. We’re ready to start when we are prompted,» said Vergine. The Saipem CEO said that his strategy is to «move forward in accordance with the contract.»



Turkish-Greece border. Well, in my opinion, the initiation of the Turkish Stream project is a real blessing for the entire European gas market. As we all know well, there is a lack of transborder gas transmission facilities in Europe, and the ap-pearance of the Turkish Stream project has kicked off other transborder projects, namely East Ring and a project for constructing a gas pipeline from Greece to Baumgarten via Serbia, as well as other projects from Greece to Baumgarten via Italy … if we receive any proposals to participate in this or that project, we’ll think it over and may enter a project if it’s profitable for us. If such a situation is to occur, it’s very important to stress that Gazprom will carry on its businesses under the rules of the European market and [we] will strictly adhere to the Third Energy Package.”

“And as for complying with European law – Gaz-

prom’s experts know the Third Energy Package provisions no worse than our European partners. We do understand how Gazprom is able to run its business on the European market under Third Energy Package terms and conditions. Under this document, we may use various models and op-tions. It’s not true that we had to give up on the South Stream project because we were not able to comply with the Third Energy Package and European law. Our aim was to keep our status quo on gas transits via Ukraine and there are no other aims in cancelling the South Stream project,” said the head of Gazprom.

According to Miller, “if some people think that by blocking the Turkish Stream project they will hit their target, well, I’m afraid they are wrong. In fact, they are deeply mistaken, because firstly, we can shift gas volumes to other markets and, secondly,

GAS STRATEGY

(continued from p.8)GAZPROM DEFENDS ITSELF AGAINST EU ACCUSATIONS

TURKISH STREAM

Gas Hub




we can take a little break and wait. This is our competitive advantage, I mean our ability to wait, and we will wait if we are forced to do so.”

GAZPROM EXPECTS EXPORTS TO EUROPE TO GROWGazprom expects to increase gas exports to Eu-rope and Turkey in 2015 to the level of 2013 and even exceed it, due to low prices and increased demand in Europe, said Miller at a press confer-ence in Berlin.

In a disastrous 2014, Gazprom cut gas exports to non-CIS countries to 147 billion cubic meters from 162 billion in 2013, but expects to recover its posi-tion in the market this year because lower prices fuel prices in Europe has encouraged consumers to actively fill gas storages. “We forecast that ship-ments of our gas exports to Europe will increase in 2015. We feel it is absolutely possible to reach the level of 2013, and even exceede it,” said Miller, whose speech was broadcast on state TV channel Russia 24. Gazprom increased exports to Europe by 11% in the second quarter and the price of gas, which is tied to oil quotations, with a 6-9 months time lag, will fall in the third quarter below the level in the second quarter. However, according to company estimates, the cost of Russian gas in Eu-rope will increase in the fourth quarter compared to the third quarter.

Russian gas exports to non-CIS countries in April 2015 increased by 8 percent year-on-year to 13.9 billion cubic meters, according to calculations by the Agency for Gas Information (AGI) using operational data from European gas transmission operators. It is the most successful April in the last four years. In the last decade, exports were higher only in April 2011 - 14.2 billion cubic meters.

In April 2015, it was colder in Europe than in April 2014. Gas off-take from underground storage also lasted for a longer time. The pumping of gas into storages is half of the volumes recorded at the same time last year. All this creates a basis for further supply growth in the coming months of spring and summer. At the same time, exports fell by 28% in January, in February by 22%. In March, a limit on the supply of gas to Europe was lifted, and exports grew by a mere 0.7%. In the first 4 months, exports declined by 11% to 49.6 billion cubic meters.

AFTER BERLINOn April 18, it was reported that Greece might receive 5 billion euros as an advance payment for Turkish Stream gas pipeline construction as part of a bilateral agreement to be signed with Russia. On April 21, Greece announced the signing of an agreement with Russia on the gas pipeline in the near future. In turn, Gazprom CEO Alexei Miller said that the Greek government supported Russia’s proposal for the creation of a gas transportation capacity close to the border with Turkey.

Russia knows that the Greek government may submit to pressure from Brussels and suspend the gas pipeline project. That has already taken place in Bulgaria, which originally planned to help build the South Stream gas pipeline. Another hard-to-forecast factor is the gas price, which defines transportation conditions. If it falls, the transit country will have to reduce its claims for tariffs.

Everything became clearer when Secretary of State John Kerry made a counter-offer to Greece. Greek foreign minister Nikos Kotzias went on a 5-day visit to Washington at the end of April, the Associ-ated Press reported where he met with Kerry. He said that he would send the US Special Envoy for Energy Affairs Amos Hochstein to Athens with a counter offer. This can be only one offer - to build a regasification terminal in Greece, although this could result in Turkey building its own LNG plant

GAS STRATEGY


Russian President Vladimir Putin (L) listens to Gazprom

Chief Executive Officer Alexei Miller.

REUTERS/Alexei Nikolsky/RIA Novosti/Kremlin



EU: “Ukraine has been one of the leading countries in gas tran-sit between Russia and the EU for several de-cades and will remain so for the foreseeable future.”


and selling the same LNG, produced from Russian gas, at exorbitant prices to Greece.

The pipeline is naturally more of a hot topic in Tur-key. On April 24, Russian President Vladimir Putin took part in commemorative events in Yerevan dedicated to the 100th anniversary of the Arme-nian Genocide in the Ottoman Empire. His visit had many analysts predicting the collapse of Turkish Stream.

When presidential press secretary Dmitry Peskov, was asked whether he Kremlin feared that the visit to Armenia could damage the prospects of the pipeline Turkish Stream, he said: “We have a very strong partnership, a relationship of advanced partnership with the Turkish Republic, which are under a very solid base of economic mutually ben-eficial cooperation. We have the same positions on many global issues.”

At the same time, the press secretary stressed that “at the same time, Armenia is our neighbor, a country with which we have a myriad of different threads.” Peskov said that the two countries were talking about the prospects of further integration, and joining the Eurasian Customs Union.

Andrei Volodin, director of the Center for Eastern Studies in the Foreign Ministry’s diplomatic acad-emy, said that after the parties have stated their positions, the Turkish Stream pipeline, will still go on.

“Our country and Turkey both have a very prag-matic look at what is happening. It is an unpleas-ant anniversary for all, including Turkey ... I think, the question will be settled fast enough,” he said.

Vladimir Sotnikov, senior research fellow at the Center of International Security said that he does not think it will effect projects with Turkey. “We have our own national interests, and they corre-spond to the fact that, despite the controversy … Turkey is our strategic partner with whom we are actively developing economic relations.”

“Recent contacts between our officials with Turk-ish officials indicate that we may have differences on some issues, but Turkey is our trusted partner, and we can rely on Turkish support in our projects, which are related to hydrocarbons,” he said.

At the same time, the Turkish Foreign Ministry condemned Russia’s position on the Armenian Genocide: “We condemn and reject that Russia’s president treated the events of 1915 as genocide,

despite our calls to refrain from doing so. Such policy statements have no legal force.”

On May 7, in the course of negotiations between Miller and Turkey’s Energy and Natural Resources Minister Taner Yildiz, the two sides agreed on commissioning Turkish Stream in December 2016. “Today, very constructive and important negotia-tions took place. The agreement on the beginning of the commissioning and delivery of gas through Turkish Stream in December 2016 was reached. Gazprom will base the schedule of its work on the Turkish Stream project on the agreements reached today,” said Miller (See Inset 1. “Timing of Turkish Stream commissioning”).

SEFCOVIČCCONTINUES TO SURPRISEOn May 5, during an expert conference on EU energy security, organized by the European Court of Auditors in Brussels, Maros Sefcovic, the vice president of the European Commission for the Energy Union, said that Ukraine is and will be one of the main transmitters of gas to the EU. “Ukraine has been one of the leading countries in gas transit between Russia and the EU for several decades and will remain so for the foreseeable future. In 2013, half of Russian gas imported to the EU has gone through Ukraine. Maybe, to a lesser extent, but Ukraine also plays an important mediating role in our oil purchases. Therefore, it is in the common interest of Kiev and Brussels to provide Ukraine [with] a modern and functional energy infrastruc-ture,” said Sefcovic.

It seems that Brussels has no doubt that it can prevent Russia and Turkey - two non-EU countries, - from completing Turkish Stream and force Russia to use Ukrainian transit even after 2019. After all, Russia has given huge gas discounts to Kiev and refuses to take penalties for its failure to comply with the take-or-pay contract.

Sefcovic also urged Kiev to continue the energy reform developed for it by the West. Western coun-tries will continue to support Kiev, said Sefcovic as Ukraine continues to implement a plan for reform. He called on Kiev to complete the liberalization of its energy market and privatization of enterprises and to continue the course of economic reforms. He also spoke of the need to continue reforms, in particular, on the implementation of the Third Energy Package.

GAS STRATEGY




PROJECTS

The May visit to Moscow by Chinese leader Xi Jinping was expected to be the moment when the two countries signed a gas contract for the West-ern or Altai gas route. But that didn’t happen, and those who remember the torturous negotiations over the Power of Siberia pipeline, believe that the gas contract could still be far off from being signed. Nevertheless, an agree-ment on the gas pipeline, which is the most important part of the future contract, has been signed. It defined, among other things, the volume of gas supply – 30 billion cubic meters, con-tract implementation terms – 30 years – and the location of the gas delivery point on the Russian-Chinese border. Jinping and Russian President Vladi-mir Putin’s negotiations saw them sign up to 32 agreements and a number of multibillion deals, including projects in energy power and deep space explora-tions.

On May 8, Chinese President Xi Jinping paid an official visit to Moscow where he held negotiations with Russian President Vladimir Putin. The day af-ter his arrival, he attended the Victory Day parade, part of the events marking victory over the Nazis in World War II.

“Today China is our strategic and key partner,” said Putin after the talks although the two countries are not at such a level economically — foreign trade volume between the two countries is only $95 billion. Petrochemicals, oil and coal make up more than 70 percent of Russian exports to China. Russia delivered 28.5 million tons of oil to China, said Putin during talks in 2014, 40% more than the previous year.

“We roughly rank No. 8 or 9 for China by foreign trade volume. It is China that is the first partner

for Russia,” said Andrei Ostrovsky, vice director of the Far East Institute of the Russian Academy of Sciences in an interview with Vzglyad newspaper. “And it is even worse in terms of the volume of investments. One billion dollars of direct invest-ments came from China to Russia last year. Against $240-250 million that went from Russia to China.”

COMMON ECONOMIC SPACE IN EURASIAAfter negotiations, both leaders made a joint statement about the two countries’ wide-ranging partnership and strategic interaction. Probably the most intriguing statement made by Putin and Jin-ping was that Russia and China intend to create a Common Economic Space. It will be created within the integration of the Silk Road Economic Belt and the Eurasian economic union.

“The joint statement signed with chairman Xi Jin-ping is about this particular possibility of integra-tion of these cooperative models. In fact, it means reaching a new level of partnership and actually implies a common economic space on the Eurasian continent,” Putin said.

It is expected that the Common Economic Space will become the next stage of integration after a free trade zone.

A common economic space and a free trade zone will remake the trade routes of Eurasia. It is not something that will happen soon but the founda-tion process has already begun.

The idea of a new Silk road, that will connect China to European countries and strengthen coopera-tion with Asia and Africa was first put forward by Jinping in 2013. This, he said, would create a trade corridor for direct deliveries of goods from the East to the West on favorable terms. The Silk Road Economic Belt would see the development of hundreds of infrastructure projects, a railroad, highways, power-engineering projects and indus-trial parks. Construction is about to begin on some of these in Kazakhstan, Kyrgyzstan, Tajikistan, Pakistan and other countries neighboring China.

All of this will definitely affect the energy indus-try, require new energy resources and increase demand for them in Eurasia.

CHINA, RUSSIA NOW LINKED BY ENERGY

By Sergei Glazkov



RUSSIA AND CHINA ON VERGE OF INVESTMENT BOOMThirty two agreements and multibillion deals were signed after negotiations between Putin and Jinping, including projects related to energy power and deep space exploration.

The agreements concern high-speed railroad construction, crediting Russian banks, joint invest-ments, interaction in the energy industry, deep-ening of innovational cooperation and industrial partnership.

The agreements are the highest achievement in bilateral relations over the last 15 years and Kirill Dmitriyev, chief executive officer of the Russian Direct Investment Fund, predicts an investment boom in the wake of the deals. China currently, has an 18% share of investments in Russia. Dmitriyev predicts this share will grow to 25% this year and to 40% next year.

“This is exceptional cooperation of great impor-tance between two great powers,” said Deputy Prime Minister Dmitry Rogozin, who pointed to a Russian-Chinese heavy lift class helicopter, which will use a Russian rather than a Ukrainian engine, and the joint development of a long-range passen-ger plane as two of the more significant deals.

Rogozin also spoke of how China is interested in deliveries of Russian space rocket engines that will allow the country to further expand its explora-tion of space. He also noted that Russia will work in the nuclear sphere with China and will show China a floating nuclear power plant, that is being built in St. Petersburg and which is 70% ready.

PROJECTS

(continued from p.12)CHINA, RUSSIA NOW LINKED BY ENERGY

Moscow is interested in building floating thermal power plants for China in serial production with at least six power units. There is also talk of Rosatom building power units in nuclear power plants in China and in other countries.

Russia could also deliver a hundred Sukhoi Super-jet 100 to China in the next three years. “It is really significant,” said Rogozin, adding that a big order will help the plane become profitable.

China will also finance, to the sum of 300 billion rubles, the first section of the high-speed railway (HSR) Moscow-Kazan. The railway has an esti-mated budget of 1 trillion rubles, said Transport Minister Maxim Sokolov. The railway was previ-ously scheduled to open before the FIFA World Cup in 2018 but now Sokolov says it won’t happen before 2020, saying that “it is impossible to imple-ment the project earlier.” The government also has future plans with China to build a HSR line to Yekaterinburg.

The Moscow-Kazan HSR will eventually become part of a high speed railway to Beijing, which will cost 7 trillion rubles. This will happen in the next decade said Vladimir Yakunin, head of Russian Railways, assuring sceptical journalists that the high-speed train will reach the Chinese capital in their lifetime.

AGREEMENT ON THE ALTAI GAS PIPELINERussian and Chinese leaders concentrated on the economy during negotiations, in particular discussing cooperation prospects in the key sphere of energy power. Putin and Jinping said that

CHINESE-RUSSIAN GAS PIPELINES AT A GLANCE

The cooperation agreement on Russian natural gas supply through the Power of Siberia gas pipeline, also known as the eastern route, was signed on October 13, 2014. Russian President Vladimir Putin and Zhang Gaoli, Deputy Prime Minister of China’s State Council marked the welding of the first link of the gas pipeline on Sept. 1. CNPC got approval from the Chinese government for the preliminary project for the Chinese section of Power of

Siberia. Construction began in 2015.Power of Siberia’s prescheduled capacity is 61 billion cubic meters though the agreement has been signed only for 38 billion cubic meters so far. The Kovykta field in Irkutsk region will provide up to 35 billion cubic meters of gas a year. The Chayandinskoye field in Yakutia, which has 1.2 trillion cubic meters of gas of categories C1+C2, can provide around 25 billion cubic meters of gas. The first part of Power of Siberia is

planned to be put into operation in the fourth quarter of 2017. It is the longest stretch of the gas pipeline Yakutia-Khabarovsk-Vladivostok. In the second stage, the main gas pipeline will connect Irkutsk region to Yakutia. Gazprom plans to bring the whole gas pipeline into service in 2018-2020.The second gas pipeline, Altai, or the western route, supplies China from the traditional fields of Western Siberia. It is set to supply gas from the Yamal-Nenets

Autonomous district, through the Altai region, to the northwest of China. This will see Gazprom ultimately send gas from Western Siberia fields to both Europe and China. If necessary, it will be able to switch from concentrating on Europe to concentrating on Asia.Russia and China signed 17 documents at the APEC summit on November 9, 2014, including a memorandum and a framework agreement between Gazprom and CNPC on gas supply via the Altai pipeline. The document lists

the basic conditions of gas supply to China, 30 billion cubic meters over 30 years, and further steps such as the signing of the sale and purchase contract and the intergovernmental agreement.Gazprom head Alexei Miller and CNPC Vice-President Wang Dongjin signed the agreement on gas supply through the western route on May 8, 2015, in the Kremlin, in the presence of Russian President Vladimir Putin and Chinese President Xi Jinping.



TRANSPORTATION


strengthening the “comprehensive fuel and energy partnership” was among the most important direc-tions of cooperation, including the exploration and development of energy fields and also the buildup of investment co-operation and accelerated pro-motion of large investment projects.

The involvement of Chinese companies in gas production in the Arctic and on the Sakhalin shelf is supported by the Russian president. He said that the development of the Vankor oil and gas field, in the freezing north of the eastern Siberian region of Krasnoyarsk, is being studied by Chinese partners.

The biggest, and most awaited deal, is the Altai gas pipeline. Gazprom CEO Alexei Miller and CNPC vice-president Wang Dongjin signed an agreement, on basic conditions of gas supplies via the western route in the Kremlin, in the pres-ence of Putin and Jinping. The project will bring gas supplies to the west of China from the fields of Western Siberia. The sides signed a framework agreement last November.

Miller told Vesti new channel immediatly after

the signing, “The final version of these extremely important key articles is defined. These are the volume of gas supply – 30 billion cubic meters, the terms of the contract implementation – 30 years, the period of supply volume build-up [and] mini-mum annual and daily contract quantities. The key parameters of gas quality specification have also been determined”.

“And a very important article – the Kanas Pass will become the delivery point of Russian gas to Chi-nese partners on the Western route,” Miller said.

The Kanas mountain pass links up to the Ukok pla-teau, a remote corner of the Altai Mountain where the Ukok Quiet Zone national park, a UNESCO World Heritage Site, is located. The plateau is a sacred place for the indigenous people of Altai. In 1993, the preserved mummy of а 16-year-old girl was found and she was promptly dubbed the Altai Princess. Ecologists have warned about the destruction of the plateau if the construction of the pipeline goes ahead.

(See “Kazakhstan, Mongolia vie for gas pipeline

JOINT OIL AND GAS PROJECTS, CONTRACTS AND AGREEMENTS BETWEEN RUSSIA AND CHINA

Project Project description

Oil contract for the oil pipeline Eastern Siberia - Pacific Ocean (ESPO)

Since 2011, Russia has delivered 15 million tons per year via ESPO on the basis of a contract with China signed in 2009 for 20 years. Rosneft and Transneft simultaneously obtained credits from Chinese banks for $15 billion and $10 billion respectively.

Long-term 25-year agreement of Rosneft and CNPC on oil supply to the People’s Republic of China

A $275 billion agreement on 365 million tons of oil. Rosneft receives an advance $60 billion payment.

10-year memorandum of Rosneft and Sinopec on oil supply to China

Rosneft and Sinopec agreed on the delivery of 100 million tons of oil to China within 10 years on a pre-paid basis for $85 billion. Rosneft and CNPC also coordinated the schedule for the launch of the Tianjin oil refinery in Tianjin and its oil supply.

Gas contract and gas pipeline “Power of Siberia”

A $400 billion contract for 30 years. The agreement signed is for 38 billion cubic meters of gas a year. Scheduled pumping to China along the east route may increase up to 61 billion cubic meters of gas. Cost of pipeline - $55 billion, at least $20 billion to be paid for by China

Altai gas pipeline 30 billion cubic meters of gas to be pumped to China via the first gas pipeline to China; second and third line to appear in the future.

Novatek and CNPC agree on cooperation in the Yamal-LNG project and sign a memorandum on project financing.

Agreement on acquisition of 20% of Yamal-LNG by CNPC. Novatek and CNPC agree on the annual delivery of 3 million tons of LNG within 15 years with a possibility of prolongation. Novatek, CNPC and a Chinese financial consortium signed a memorandum on Yamal LNG project financing.

Vancor project The field’s reserves of January 1, 2014 amount to 500 million tons of oil and condensate and 182 billion cubic meters of gas. In the first quarter of 2014, Rosneft brought the Vankor field to its oil rate-plateau – 444 thousand barrels/days, or 22 million tons per year.

publicly available source



role”, Russian Petroleum Investor, September’ 14).

An important strategic document has been signed, said Miller. “This new agreement on strategic partnership is optimized by Gazprom and CNPC for the next five years. The main top-priority projects have been defined for five years,” he said.

The Gazprom chief said that there was also negotiations on an increase in gas supply to China through the western route and delivery to China from Russia’s Far East.

“We do understand that it is actually the first line of the western route as the strategic agree-ment, which has just been signed, that deter-mines the direction of our collaboration … we mean that there are plans for both second and third gas pipelines” Miller said.

Nevertheless, it should be noted, that the con-tract itself has not been signed. Considering how long the contract on Power of Siberia took to be signed, the deal is still far from being complete. The Chinese are well known hard bargainers although Russia also knows where its interests lie.

CHINA BEGINS CONSTRUCTION OF POWER OF SIBERIAGazprom has already started construction of Power of Siberia with a gas trunkline from Yakutia to the west of China. “The work on Chi-nese territory is about to start,” Putin said.

The intergovernmental cooperation agreement between Russia and China on Russian natu-ral gas supply through the eastern route was signed in Moscow in October 2014. On March 20 this year, Miller assured the head of the Ya-kutia Republic that Gazprom intends to finish Power of Siberia on time. Miller has previously given such a reassurance. In Tomsk on Febru-ary 12, at a meeting devoted to the progress of implementation of gas supply investment proj-ects via the eastern route, Miller said that the company would fulfill all obligations. “Work on the Chayanda and Power of Siberia projects is in full swing. All Gazprom’s obligations to start gas supplies to China will be performed in full and in due time,” he said, according to Gaz-prom’s press service. (See “Moscow Pins Hopes

on China at Xi’s May Visit”, Russian Petroleum Investor, April ’15).

Also in February, Gazprom and CNPC decided on the location of the underwater crossing of the Amur River. Technical requirements for engineer-ing surveys to perform detailed design have also been approved. (to See “Russia pushes ahead with new export routes”, Russian Petroleum Investor, March ’15).

TRANSPORTATION


ALTAI GAS PIPELINE

RUSSIA

Astana

KAZAKHSTAN

MONGOLIA

CHINA

Altai gas pipelineActual gas pipelinesActual pumping stationsProjected pumping stations

Omsk

GornoaltaiskBiysk

Barnaul

Novosibirsk

Krasnoyarsk

Novokuznetsk

Kemerovo

Tomsk

Tyumen

Tobolsk

Surgut

Nadym Novy Urengoi

Nizhnevartovsk

Aleksanrovskoye

Vertikos

Parabel

Chazhemto

Volodino

Yamal-Nenets autonomous district

Khanty-Mansiysk autonomous district

Krasnoyarsk territory

Tyumen region

Omsk region

Tomsk region

Kemerovo region

Novosibirsk region

Altai territory

Altai republicTyva republic

Khakassia republic



Also, rumors that spread in March about a possible delay in the construction of Power of Siberia and a switching to the development of the Altai route have proved unfounded.

ALTERNATIVE TO EUROPEGazprom is ready to increase gas supply volumes to China to 100 billion cubic meters a year in the short term, Gazprom head Miller said at a plenary session of the St. Petersburg international gas forum last October.

Не then said in Beijing on November 9 that gas supply volumes from Russia to China in the medium-term could exceed the volumes delivered to Europe. “Taking into account, the strengthening of deliveries via the western route, in the medium-term perspective, supply volumes to China could exceed the current volumes of export to Europe,” Miller said.

In total, Gazprom could deliver about 200 billion cubic meters to China. Not just through the Power of Siberia and Altai but also via the gas pipeline from Sakhalin (Sakhalin-Khabarovsk-Vladivostok), particularly from the Southern Kirinsky field and other fields on the island’s shelf. In total, it would be more than the gas supplied to Europe, which was 147 billion cubic meters in 2014.

Russia would not like to lose the European market

but as Gazprom is being pushed out of Europe, it has no recourse but to look for an alternative. China with its high rate of growth is not the worst option. Andrey Ostrovsky, deputy director of the Institute of the Far East, said that both sides will benefit as a result of the concluded agreements. China receives a new sales markets and Russia further develops trade and economic relations with an economic powerhouse. The two countries’ relationships have improved since the signing of a treaty of peace and friendship in 2001, said Ostrovsky, “now the rela-tions are developing in a perfect manner.”

The agreements, signed in May, will help sharply increase investment, creating a basis for devel-opment of infrastructure, especially for the new Silk Road project and for the high-speed railroad Moscow - Kazan. He also pointed to the Northern Sea Route and the development of the Arctic out of more than 30 enacted projects. “With the aid of China and a recently created Asian Infrastructure Investment Bank, Russia will be able to develop infrastructure in the Far East. It is a very favourable course of events for Russia, taking into account western sanctions,” said Ostrovsky.

Ostrovskye doesn’t rule out attempts to block the development of Russian-Chinese relations. “These agreements rankle with many in Europe and even in our country. There are supporters of cooperation with China and there are also opponents. We have plenty of them in our country,” Ostrovsky said.

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PROJECTS

Argentina has invited Russian energy companies to participate in the devel-opment of the huge Vaca Muerta huge shale oil and gas field as the Latin American country seeks to attract the investment and technology needed to shake up in its energy industry. How-ever, the US and EU sanctions, which ban Western companies from finan-cial or technological cooperation with Russian energy firms in shale projects, may limit Russia’s abilities in Argen-tina. Russia, which has been using ad-vanced thermal technology to extract high-viscosity oils since Soviet times, currently widely relies on the imported equipment.

Russia, seeking to broaden ties with South Ameri-ca amid US and EU sanctions, signed a number of cooperation agreements with Argentina during the visit of the country’s president Cristina Fernandez to Moscow in late April. In a scheme similar to the one offered by Russia to Greece earlier in April, Moscow agreed to provide financial assistance to Argentina in exchange for participation in big projects.

Russian state development bank VEB will lend $1.2 billion to the Chihuido I hydro power station proj-ect in Argentina, with the participation of Russia’s state electricity holding firm InterRAO. A similar agreement was reached with Russia’s Rosatom on the construction of a sixth nuclear power unit in Argentina.

In the hydrocarbon sphere, Fernandez invited Rus-sian companies to participate in the development of the large shale oil and gas field, Vaca Muerta (Dead Cow). The timing does not seem very favour-able as US and EU sanctions, imposed on Moscow over its role in the Ukrainian crisis last year, ban Western companies from financial or technologi-cal cooperation with Russian energy firms in shale

projects. Argentina apparently hopes that Russia - possibly with the help of another South American oil rich state Venezuela – can bring in the technol-ogy and experience necessary to develop the tight reserves.

Buenos Aires also hopes that Russian state oil firm Rosneft will buy Argentina-made facilities to produce liquefied natural gas (LNG), the country’s industry minister Debora Giorgi said during the Argentinean – Russian business forum in Moscow on April 22.

REVIVED TALKSThe Vaca Muerta field has been talked about in Russian-Argentinean discussions for several years. During the July 2014 visit of Russian president Vladimir Putin to Argentina, Fernandez said that the Russian delegation might visit the field, lo-cated in the Patagonian province of Neuquen. “We are talking of Russia as one of the largest produc-ers of oil and gas in the world. However, we, the Argentines, also have something, and others seem to have noticed it,” she said then. Putin refrained from making statements on Russia’s potential interest in the field during his visit to Buenos Aires.

Sergio Affronti, vice-president of Argentina’s state oil and gas company YPF, in September 2014 vis-ited Moscow, where he met with Gazprom’s deputy chairman Alexander Medvedev to discuss possible cooperation and prepare some “confidential agree-ments,” including those on the exploration and production of unconventional gas reserves. Yamil Quispe, senior coordinator of Argentina’s presi-dential administration, said then that Buenos Aires had invited Russian companies to take part in the development of the country’s largest shale de-posit, Vaca Muerta. According to Quispe, the meet-ing between Affronti and Medvedev was planned to be followed by talks with Russian energy majors Gazprom, Rosneft, Lukoil and Gazprom Neft. How-ever, the end of 2014 and the beginning of 2015 was not the best time for Russian companies to get involved in large-scale overseas projects, espe-cially those needing large invetsment and the use of technology for hard-to-extract reserves.

ARGENTINA INVITES RUSSIA TO DEVELOP TIGHT OIL RESERVESBy Sergei Glazkov



PROJECTS

(continued from p.18)ARGENTINA INVITES RUSSIA TO DEVELOP TIGHT OIL RESERVES

Last October, Russia Gazprombank’s executives visited Argentina to assess the country’s oil and gas projects to consider their financing. Earlier this year, the Russian side made a decision to start drilling exploratory wells for the preparation of a feasibility study. In early April, Gazprom opened an office in Buenos Aires for the implementation of its joint projects with YPF. The projects are expected to focus on exploration of new hydrocarbon depos-its and the liquefaction of natural gas. Gazprom’s executives said that the gas giant had a “firm in-tention” to participate in the development of Vaca Muerta. “Gazprom will open its office in Buenos Aires … and then start exploration works at the Vaca Muerta deposit,” Argentinean media quoted a senior Argentinean diplomat as saying.

In 2013, Gazprom won an international tender to supply 15 LNG cargoes, with a total volume of 1 million tonnes, to Argentina in 2014 and 2015. On April 23, Gazprom’s CEO Alexei Miller and YPF head Miguel Galuccio signed a memorandum of cooperation, defining the main directions of the two companies future cooperation, which is expected to cover the exploration, production and transportation of hydrocarbons in Argentina and in third countries, Gazprom said in a statement.

VACA VIVA RATHER THAN VACA MUERTA Argentina, the world’s second largest holder of shale gas reserves after China and No. 4 in shale oil, hopes to not only use the reserves to fully cover its own needs in hydrocarbons for decades, but also to become a net energy exporter. Vaca Muerta is the country’s largest shale field which is seen as holding 16.2 to 22.5 billion barrels of shale oil reserves and 308 trillion cubic feet of shale gas. Vaca Muerta could help Argentina increase its oil output to over 1.8 million barrels per day by 2035 compared to 550,000 barrels per day produced in 2014, said consulting firm Accenture.

“I shall no longer call it Vaca Muerta, I shall call it Vaca Viva (Living Cow),” Fernandez said last year.

YPF operates in 3 million net acres in the forma-tion, while U.S. companies Apache, ExxonMobil and Americas Petrogas also have rights to explore in some 6.8 million acres together with YPF.

Other companies with a slice of the formation in-clude France’s Total, Canada’s Madalena Ventures

and Azabache, Royal Dutch Shell, the local affili-ate of Brazil’s Petrobras, Argentina’s Tecpetrol and Pan American Energy, controlled by Britain’s BP.

In May 2014, ExxonMobil announced that the field’s exploratory well had a flow rate of 770 barrels per day. The deposit currently produces 24,000 barrels of oil equivalent per day.

Over the past three years, the project’s investment has totaled $3.7 billion but that is no way near enough. If Argentina manages to attract additional investment to Vaca Muerta, the country could tri-ple its oil output in the next 20 years and achieve self-sufficiency in oil supply by 2020 to 2025.

However, the recent decline in global oil prices may complicate the task of attracting investment. According to YPF calculations, the WTI crude oil price should stay in the range of $80 to $100 per barrel for the Vaca Muerta project to be viable. In early May, the crude grade traded at around $60 per barrel.

Oil analysts have speculated that the large-scale development of Vaca Muerta would require a huge investment of $140 billion to $200 billion. However, investing such funds in Argentina would pose significant risks for potential investors. In July 2014, Latin America’s third-largest economy defaulted on its debt - for the second time in 13 years. The default added pressure on investors, already shocked by the state’s 2012 seizure of a majority stake in YPF from Repsol after the Span-ish company made significant discoveries of shale gas at Vaca Muerta.

Argentina’s state policy of regulating prices and export duties in the energy sector is another big obstacle for foreign investment. As a result, the country’s own oil and gas production is falling, while demand is growing.

Argentina’s government, which spends up to $10 billion on energy imports per year, is looking for a way out. Under the current law, adopted in 1967, regional governments are in charge of granting licenses to foreign companies and setting their taxes and benefits. In October 2014, the govern-ment approved a bill aimed at creating a national regulatory framework to encourage investors in the shale sector. The federal government believes that the new law will improve the country’s business environment for foreign energy companies. “The law is expected to trigger investment,” Miguel Angel Pichette, the head of the pro-government

Oil analysts have speculated that the large-scale development of Vaca Muerta would require a huge investment of $140 billion to $200 billion.



PROJECTS


coalition in the senate, said during a debate. “We should not use different rules when it comes to royalties. We must create a regulatory framework that will generate billions of dollars.”

The reform, presented as a way to unify invest-ment standards across Argentina’s 10 hydrocar-bon producing provinces, envisages extending the drilling concession periods by a decade, to 35 years for unconventional reserves and to 25 years for traditional hydrocarbons. If a company meets its investment obligations, it will be able to extend the concession for another 10 years. With each extension, provinces can increase royalty by 3 percent, but not to over 18 percent. The bill also provides for the reduction of the minimum size of the investment, at which a company is exempted from a number of duties on imports and capital, from $1 billion to $250 million.

Energy shortages in Argentina will amount to $7 billion this year.

SHALE TECHNOLOGIESHydrocarbon producers worldwide use a number of technologies for the extraction of heavy oil and natural bitumen reserves. The most efficient of them include technologies called cyclic steam stimulation (CSS), steam-assisted gravity drain-age (SAGD), cold heavy oil production with sand (CHOPS), as well as the extraction of solvents in vapor state, or vapor extraction (VAPEX), and sol-vent aided process (SAP). There is also a method, using a combination of in-situ combustion with production from a horizontal well, called toe to heel air injection (THAI), and a new technique, called catalytic upgrading process in-situ (CAPRI), based on THAI and involving the use of oxidation catalysts. Apart from those methods, the tradition-al technologies for tight hydrocarbon extraction include using multi-branched horizontal wells and hydraulic fracturing.

In Russia, the production of heavy high-viscosity oil is mostly performed by thermal methods similar to SAGD (at the Yarega and Ashalchinsky deposits in the Komi region), as well as by the injection of heat carrying agents, including steam (CSS), into a formation. These technologies appeared in Russia earlier than in the West, where they were devel-oped and improved. Venezuela, which actively produces heavy oils and natural bitumen, also

uses thermal methods such as SAGD, CSS and multi-branched horizontal wells.

Hydraulic fracturing has been used in Russia since the Soviet times in the middle of the last century. Today, about 9,000 hydraulic fracturing opera-tions are performed at Russian oil and gas projects every year. This number makes Russia the larg-est user of hydraulic fracturing services provided by oil and gas field servicing companies in the former Soviet Union and Europe and №2 globally, behind the United States (See Chart 3 “Fracking operations by Russian companies in 2011-2013”). Horizontal drilling is another traditional technol-ogy widely used at Russian hydrocarbon projects (See Chart 2 “Horizontal drilling in 2014”).

Today, Russia’s most technically challenging projects hire western companies – including global field servicing majors Schlumberger, Halliburton and Baker Hughes – to perform these services. According to Russia’s energy ministry, Western servicing companies account for about half of the technology used in hard-to-recover oil projects and more than 80 per cent of the technology used offshore.

US and EU sanctions, imposed on Russia last year for its role in the Ukrainian crisis, blocked the ex-ports of a wide range of goods, services and tech-nology to Russian hydrocarbon projects developing the Arctic and deepwater and shale deposits. Many analysts believe that without western participa-tion, Russia will have no choice but to suspend the projects.

VACA MUERTA AT A GLANCEVaca Muerta, Spanish for dead cow, is a huge geologic formation of Jurassic and Cretaceous age, located at the Neuquen basin in Argentina. It is best known as the host rock for major deposits of tight oil (shale oil) and shale gas. The deposit was discovered by the Spanish-Argentinean joint venture Repsol-YPF in 2010. The deposit contains 16.2 billion barrels of shale oil and 308 trillion cubic feet of shale gas, according to the US Energy Information Administration (EIA). Other estimates suggest bigger oil reserves of up to 22.5

billion barrels. It is enough to satisfy Argentina’s current energy demand for over 150 years, and could make the country a net oil exporter again.Argentina’s state energy company YPF has the licence to work at Vaca Muerta, which has a total area of 12,000 square kilometres. The company produces more than 20,000 barrels of oil equivalent from the field per day. In February 2014, YPF and Malaysia’s state oil and gas firm Petronas signed a memorandum of understanding on the joint development of Vaca Muerta. The project’s

initial stage was estimated to cost $550 million, $475 million to be invested by Petronas. The stage envisages the drilling of more than 30 horizontal and vertical wells using hydraulic fracturing technology. In 2012, YPF signed a similar memorandum with US Chevron. Long term investment in the project could reach $16 billion.China National Offshore Oil Corporation (CNOOC) in 2010 acquired a 50-percent share of Argentinean energy company Bridas Corp. The deal says that CNOOC can invest in the development of Vaca Muerte.



PROJECTS


Russia hopes that the development of new depos-its with harder-to-extract reserves in remote and underdeveloped regions could help the country compensate for falling production in the traditional oil producing provinces of West Siberia.

The bulk of Russia’s shale oil, or around 67 percent of the country’s total tight oil reserves, is con-centrated at the Bazhenov, Achimov and Abalak deposits in West Siberia’s Khanty-Mansiysk region. According to a US energy department estimate, an estimated 75 billion barrels of technically recover-able shale oil resources may lie in the Bazhenov formation, more than in the entire United States, the world’s leading shale oil producer. The national subsoil agency Rosnedra estimated in 2012 that Bazhenov formation may hold between 25 billion tonnes (182 billion barrels) and 50 billion tonnes of recoverable reserves.

The formation is spread across most of the region’s territory at a depth of 2,500 to 3,000 metres, or below conventional oil layers. According to energy ministry estimates, Bazhenov could provide be-tween 800,000 barrels per day and 2 million bar-rels per day of oil output by 2020, or up to nearly one-fifth of the country’s current total production of around 10.6 million barrels per day. At pres-ent, tight oil reserves account for no more than 400,000 barrels per day, or around 4 percent of Russia’s total oil output.

The Bazhenov formation has about 50 oil and gas

deposits with more than 140 oil bearing reservoirs in the Khanty-Mansiysk region alone, according to the Shpilman Research and Analytical Center for Rational Subsoil Use. The center said that 136 wells operated at 22 Bazhenov’s fields in the re-gion in 2013, with 70 percent of the wells located at the Salym, Galyanovsky, Mid-Nazymsky, Ai-Pimsky and West-Sakhalinsky fields. Since the launch of development, Bazhenov’s cumulative oil produc-tion has amounted to just 6.5 million tonnes.

Russian oil producers involved in the Bazhenov development include Surgutneftegas, Lukoil, Ros-neft and Gazprom Neft, most of which have formed alliances with foreign oil majors for the tight oil projects. Rosneft established a joint venture with ExxonMobil, while Gazprom Neft and Lukoil had ventures with Shell and France’s Total, respec-tively. All three alliances were suspended last year following the introduction of Western sanctions against Russia.

Gazprom’s oil arm Gazprom Neft is involved in the development of four tight oil projects, mainly at the Bazhenov formation. In 2013, the company received a gushing oil flow of 80 cubic metres per day from the Bazhenov-Abalak reservoir at the Palyanovsky field of the Krasnoleninsky deposit. The company plans to drill four directional wells at the field this year. In January 2014, Salym Petroleum Develop-ment, a joint venture of Gazprom Neft and Shell, started drilling its first horizontal appraisal well at the Upper Salym field of the Bazhenov formation. The venture plans to use multi-stage hydraulic fracturing technology to drill a total of five such wells at the field in 2014 and 2015. Another joint venture of the two companies, Khanty-Mansiysk Oil and Gas Union, plans to start new projects for the exploration and development of shale oil reserves in the Khanty-Mansiysk region.

In January this year, Gazprom Neft said that it had found oil at the Bazhenov formation’s Priobskoye field and planned to drill four horizontal wells to find the most efficient ways to produce unconven-tional oil at the field. The firm plans to start drilling the wells in 2016.

While techniques such as hydraulic fracking and horizontal drilling are associated with shale, they are also widely used to maximise production from more conventional oilfields, where oil reservoirs are held in harder-to-access rock formations.

ROSNEFT’S PROJECTS IN VENEZUELA

Rosneft and PDVSA are currently involved in five Venezuelan joint oil production projects, with total oil reserves estimated at more than 20.5 billion tonnes.Rosneft owns stakes in three new fields in the La Faja region: Carabobo-2 (North) and Carabobo-4 (West): JV Petrovictoria, in which PDVSA’s subsidiary owns 60 percent and Rosneft holds 40 percent; Junin-6: JV PetroMiranda, CVP owns 60 percent and National Oil Consortium (NOC) holds 40 percent. NOC is 80-percent owned by Rosneft

and 20-percent owned by Gazprom Neft. Rosneft has dismissed reports about its alleged purchase of Gazprom Neft’s share in NOC; Integrated Project, which is involved in production of extra-viscous oil from the Cerro Negro deposit and processing crude into lighter synthetic oil aimed for exports: JV PetroMonagas, owned by CVP (83.3 percent) and Rosneft (16.67 percent). Rosneft plans to increase its PetroMonagas stake to 40 percent. The deal is expected to be completed in two to three months.

Rosneft is also involved in two projects to develop mature fields in Venezuela:

Boqueron: JV Boqueron , owned by CVP (60 percent), Rosneft (26.67 percent) and Austria’s OMV (13.33 percent);

Petroperija: JV Petroperija, owned by CVP (60 percent) and Rosneft (40 percent).

In July 2014, Rosneft and PDVSA signed a cooperation agreement to implement offshore projects at the Rio-Caribe and Mejillones blocks (Phase II of the Mariscal Sucre Project).




Lukoil uses thermal methods, such as SAGD and CSS, to increase recovery of high-viscosity oil at the Komi region’s Yaregsky and Usinsky deposits. The fields’ total oil output is more than 3 million tonnes per year.

High-viscosity oil and bitumen make up a large share of oil reserves in Russia’s Tatarstan region, where the government introduced zero mineral extraction tax and preferential export duty to encourage heavy oil producers. The region’s largest oil producer, Tatneft, has been using the in-situ combustion technique, as well as the steam and gas stimulation method and the high-frequency heatup of vertical wells at its Mordovo- Karmalsky field since 1978. In 2006, the company launched a pilot project to test modified SAGD technology at the Ashalchinsky field, which produced 41,500 tonnes of oil in 2011. Tatneft is going to build a plant to process 300,000 tonnes of extra-viscous oil per year at the field.

Gazprom, invited by Argentina to develop its shale oil reserves, also has experience in extracting tight oil (bitumen) from gas bearing reservoirs at the Orenburg gas condensate field, where the com-pany has tested technology based on the injection of solvents into the reservoirs. The field is believed to have 2.68 billion tonnes of tight oil reserves.

RUSSIA’S HF EQUIPMENT — OWNED AND BORROWEDUntil 2013, hydraulic fracturing operations were performed at Russian hydrocarbon fields mainly by foreign contractors and exclusively with the use of imported equipment. The only Russian-made component sometimes used for the operations was a pump developed by the Avtomatika design cen-tre. The pump has been used to perform more than 5,000 hydraulic fracturing operations in Russia and Kazakhstan since 1996. In October 2013, the St. Petersburg-based RFK consortium completed tests of Russia’s first hydraulic fracturing complex.

Until recently, high oil prices allowed Russian companies to attract foreign oil field servicing firms to conduct advanced technology operations. The bulk of the country’s hydraulic fracturing operations were performed by Trican Well Service, CalFrac, Halliburton, Schlumberger, Weatherford and CatConeft.

Some Russian companies purchased their own hydraulic fracturing systems, also called frac fleet. Among these companies are Surgutneftegas, Newco Well Service (Nizhnevartovsk), LUKOIL, Tatneft, MeKaMineft, Purnefteotdacha and Burgaz (never used). Katobneft and Kalfrakservisis share one frac fleet.

PROJECTS

ARGENTINA INVITES RUSSIA TO DEVELOP TIGHT OIL RESERVES

HARD-TO-EXTRACT OIL RESERVES IN RUSSIA

Formation Location Composition and structure Capacity / depth, m Age

Domanik formation Eastern part of the East European platform within the Timan-Pechora and Volga-Ural oil and gas

basins

Dark bituminous shale oil, interbedded with dark

bituminous limestones

15-70/Timan-Pechora – 1800-

4500; Volga-Urals – 500-1350

Upper Devonian

Bazhenov formation More than one million square km in West Siberia

Bituminous argillites. Local areas with sand-aleurolite layers of high permeability

10-32/600-3800 Tithonian-Berriasian layer at the boundary between

the Cretaceous and Jurassic periods (about 145 million

years ago)Kuonam formation East Siberia Malmrocks interbedded

with high content of organic matter

30-70/0-500 Early Cambrian

Extra-viscous oil Volga-Urals region Terrigenous deposits 15-30/50-400 and below Upper PermianSource: World Energy Council




In 2001, Russia established a Novy Urengoi-based oil field service company, Neftegaztekhnologia, to deal with the development of hydrocarbon produc-tion intensification technologies, based on already existing methods, including hydraulic fracturing. The firm’s main customers are Gazprom, Rosneft, NOVATEK and Lukoil.

In 2010, Russian companies used a total of 74 frac fleets, including 14 fleets of C.A.T. Oil, 12 fleets of Trican Well Service, 12 fleets of Surgutneftegas, seven fleets of Schlumberger, two fleets of Tatneft and others.

VENEZUELA CAN HELPAnother of Russia’s South American partners, Venezuela, also has vast reserves of extra-heavy oil and bitumen, the bulk of which are located in the Junin and Carabobo areas of the Orinoco Belt. In 2009, the U.S. Geological Survey increased Orinoco Belt’s estimated reserves to 513 billion barrels of “technically recoverable” oil, up from the earlier estimated 100 billion to 270 billion barrels.

Venezuela’s extra-heavy oil production projects in

the Orinoco Belt currently provide about 30 million tonnes of oil per year, or about 16 percent of the world’s total unconventional oil output. Venezuela is expected to more than triple its extra-heavy oil production in the period from 2011 to 2035, ac-cording to the International Energy Agency (IEA).

Venezuelan projects use vertical and multi-branch horizontal wells, as well as thermal methods (such as SAGD and CSS) for shale oil extraction. The oil produced at the projects is supplied by a pipeline to the Mexican Gulf Coast, where it is mainly pro-cessed into synthetic crude oil for further exports.

Rosneft is involved in a number of major Venezu-elan tight oil projects, such as Junin-6, Carabobo-2 and Carabobo-4, which the Russian company implements jointly with Venezuela’s state oil firm PDVSis (See Inset 2 “Rosneft projects in Venezu-ela”). The experience may be of use at future Rus-sian projects in Argentina.

GOVERNMENT MULLS MORE BENEFITS FOR SHALE OIL PRODUCERSRussia’s ministry of natural resources has sug-gested encouraging oil companies to develop hard-to-extract reserves by easing the procedure for issuing licences for such fields. “For deposits containing reserves of hard-to-extract and uncon-ventional hydrocarbons, the licenses should be issued based on the application of an interested party without tenders and collection of all types of payments,” minister Sergei Donskoi said at a meeting of the presidential council for economic modernization and innovative development on April 17. He added that the only obligation to be undertaken by subsoil users should be the deposit launch in accordance with a preliminary schedule agreed with the ministry.

Because of the restrictions imposed by the sanc-tions, Russia’s tight oil production is predicted to decline to 26 million tonnes by 2020 from 29 mil-lion tonnes produced in 2014. According to Rus-sia’s Energy Strategy to 2035, the country plans to boost output to 40 million tonnes by 2025 and further increase it to 80 million tonnes by 2039.

Russian experts believe that Donskoi’s proposal is Russia’s attempt to trigger a shale oil revolu-

PROJECTS


HORIZONTAL DRILLING IN 2014

Company Horizontal drilling volumes, ‘000m

LUKOIL 980.3

Rosneft 1,606.1

Gazprom Neft 1,250.1

Surgutneftegas 315.3

Tatneft 163.0

Bashneft 115.8

Slavneft 938.0

RussNeft 48.3

Oil companies, total 5,416.8

Other producers, total 270.3

PSA operators, total 55.3

Total 5,767.4




tion similar to that recently seen in the United States. Valery Nesterov of Sberbank Investment Research believes that the natural ministry’s plan might help increase the number of smaller firms involved in the shale oil production, as tenders and fees do not pose a major problem for bigger companies.

Elena Korzun, the head of Russia’s Association of Small Oil and Gas Companies (Assoneft) told Kommersant newspaper that the ministry’s proposals could be interesting to small companies, especially in combina-tion with the provision of a special tax regime (reduced mineral extraction tax) for the development of hard-to-extract reserves. However, to realize this opportunity, the companies would need help in financing, for example by subsidizing interest rates on loans, she said.

However, these incen-tives might not help until smaller compa-nies get access to the technology necessary to tackle tight oil reserves.

PROJECTS


VACA MUERTA FIELD LOCATION




NEW TIGHT OIL LEGISLATION Major oil producers have long been hoping the government would replace the mineral extraction tax by a tax on financial result (TFR) for difficult fields. The companies argue that the measure would help to significantly expand the number of reclaimed fields by launching projects currently sus-pended due to their poor profitability prospects.

At a June 2014 meeting of the govern-ment’s energy commission, Russia’s president Vladimir Putin dismissed the earlier proposed tax idea, saying that it would be hard to prevent manipula-tion (See “Taxation Reform Nixed By Putin, Sechin”, Russian Petroleum Investor, June’14). The finance ministry also opposes the idea.

Despite the criticism, prime minister Dmitry Medvedev in mid-March ap-proved the TFR introduction at pilot projects, in principle, and asked the finance ministry to accelerate work on the draft law on the new taxation regime. Also in mid-March, the energy ministry submitted proposals to the government on TFR introduction at 12 pilot projects and later increased the number to 16.

The 12 projects includes four fields developed by Rosneft (Khasryeiskoye, Nadeiyuskoye, Bakhilovskoye and Verkhne-Kolik-Eganskoye), five Lukoil fields (Krasnoleninskoye, Lazarevs-koye, Imilorsko-Istochnoye, Nivagal-skoye and Las-Eganskoye) and three Gazprom Neft deposits (Vyngayakh-inskoye, Ety-Purovskoye and Valyn-toiskoye). Energy minister Alexander Novak later told reporters that the list was expanded with Surgutneftegas’ deposits, including the Shpilman field.

PROJECTS


Rosneft Surgutneftegaz LUKOIL Gazprom Neft Tatneft0

1000

2000

3000

4000

5000

6000

7000

8000

9000

Fracking operations by Russian companies in 2011-2013

201320122011

FRACKING OPERATIONS BY RUSSIAN COMPANIES IN 2011-2013

Workers show sand samples at a pilot factory, where state-controlled energy company YPF is refining sand used in fracking, a process by which shale oil and gas

is extracted, in Buenos Aires. The cost of drilling wells in Argentina’s vast but barely-tapped Vaca Muerta shale oil and gas formation will fall at least 10 percent by the

end of 2016, Miguel Galuccio, chief executive officer of state energy company said.

REUTERS/Enrique Marcarian



RUSSIA, CHINA CALL ON LUKOIL, SINOPEC TO MAKE PEACE

TRANSACTIONS

By Victoria Nezhina

Russia’s №2 oil producer Lukoil and China’s Sinopec have been involved in a dispute over an uncompleted $1.2 billion Kazakh deal for over a year. The two companies in April last year signed a deal on Lukoil’s sale of its 50-percent stake in Caspian Investment Resourc-es, which develops several hydrocar-bon-production projects in Kazakh-stan, to another venture shareholder Sinopec. The deal was expected to be completed by the end of 2014. How-ever, in February of this year, Lukoil commenced arbitration proceedings in London over the Chinese company’s refusal to proceed with the purchase. Lukoil, which has invested more than $958 million in the Kazakh venture, estimated the damage from the failed deal at $358 million. The Russian-Chinese intergovernmental commission urged the two companies to settle the dispute in out-of-court negotiations. However, Lukoil has yet to withdrawn its arbitration claim.

The Russian-Chinese intergovernmental commis-sion requested that Lukoil and China’s Sinopec settle their dispute over an uncompleted $1.2 billion sale of Kazakhstan’s Caspian Investment Resources in out-of-court negotiations, according to Lukoil’s president Vagit Alekperov.

“We have filed documents to the arbitration court, but there was a meeting of the intergovernmental commission during the visit of [Russian deputy prime minister Arkady] Dvorkovich [to Beijing], and two co-chairmen ordered that Sinopec and us should continue the discussion in order to avoid the continuation of the arbitration proceedings,” Alekperov said. He added that the two companies

were holding negotiations on the issue, although Lukoil has not withdrawn its arbitration claim.

Lukoil said that it was going to quit its Kazakh-stan’s joint venture with Sinopec, Caspian Invest-ment Resources, in April 2014. The Chinese com-pany agreed to pay $1.2 billion to buy the Russian partner’s 50-percent stake. “The transaction has been accomplished in order to optimize Lukoil’s portfolio of foreign hydrocarbon assets,” the Rus-sian company then said. The transaction, which required the approval of Kazakh authorities, was expected to be completed by the end of 2014.

In February 2015, Lukoil said that Sinopec had refused to complete the deal. The Russian firm commenced arbitration proceedings in London against the Chinese company’s decision to breach the deal, which inflicted a damage of $358 million on Lukoil, the Russian company said in its first quarter financial report. The global oil price has almost halved from above $100 per barrel in April last year, when the deal was agreed.

Caspian Investment Resources owns shares in four Kazakh hydrocarbon projects: North Buzachi (50/50 co-owned with China’s CNPC), Karakuduk (100 percent), Arman (100 percent) and KazakhOil-Aktobe (50/50 co-owned with Kazakhstan’s Ka-zMunaiGas). The fields, which have total reserves of approximately 160 million tonnes, are located mainly in the western part of Kazakhstan, which supplies oil to Europe via Russia. Lukoil joined the projects in 2005 and has invested more than $958 million in them since then, according to the website of Lukoil’s subsidiary Lukoil Overseas. The company’s share of production through the Kazakh venture was around 30,000 barrels per day in 2013.

FROM NELSON RESOURCES TO CASPIAN INVESTMENT RESOURCESKazakhstan’s former state oil and gas company KazakhOil, the predecessor of KazMunaiGas, re-ceived licences for hydrocarbon production at the Alibekmola and Kozhasai oil and gas condensate fields on October 19, 1998. The company signed a




production contract with the government in August 1999 and a month later created a special company, KazakhOil-Aktobe, to implement the project. To arrange financing for the project, KazakhOil in July 2000 sold a 50-percent share to Nelson Gold Corporation, which was called Nelson Trade and Finance, when it was established in Bermuda on March 31, 1993. The company, which changed its name in June 1995, is involved in the development of gold deposits in Tajikistan. In 2000, it sold 44 percent of its Tajik gold mining assets and refo-cused on oil and gas production.

By then, the shareholders of the Toronto-traded Nelson Gold Corporation included two of Ka-zakhstan’s major financial and industrial groups - Central Asia Industrial Holdings (a shareholder of several major Kazakh companies, including the country’s largest bank, Kazkommertsbank) and Energy Investments International (a major oil to banks conglomerate, reportedly controlled by Timur Kulibayev, the son-in-law of the country’s president). The companies together with Switzer-land’s Cott Holdings and Center Finance Corpora-tion controlled a total of 66.1 percent in Nelson Gold Corporation, which was eventually renamed Nelson Resources Limited. The company was the first alliance of local private capital and foreign business in the Kazakh oil and gas industry

In 2003, KazakhOil-Aktobe’s oil production stood at 418,500 tonnes, or 3.139 million barrels.

In 2004, Nelson Resources acquired shares in two hydrocarbon projects in the Mangistau region: a 50-percent share in the Buzachi Operating joint venture, developing the North Buzachi field, and a 60-percent stake in Chapparal Resources, an owner of 60 percent in the Karakudukmunai joint venture developing the Karakuduk field. The pur-chases allowed Nelson to increase its hydrocarbon reserves to 269.6 million barrels, or 37 million tonnes.

Also in 2004, Nelson Resources acquired an option to buy at least 25 percent in the South Zhambai and South Zaburunye offshore projects, owned by KazMunaiGas’ subsidiary Zhambai. The deposits’ total reserves are estimated at more than 600 mil-lion tonnes of oil equivalent.

On October 13, 2005, Lukoil agreed to pay $2 bil-lion to acquire Nelson Resources. To finance the deal, the Russian company secured a 6-months

$2 billion loan, which was the company’s largest credit facility. On December 2, 2005, sharehold-ers of Nelson Resources approved the company’s merger with Caspian Resources Investments Lim-ited, a 100-percent subsidiary of Lukoil Overseas. The merger resulted in the cancellation of Nelson’s shares.

LUKOIL THINKS BETTERAt the beginning of the 2000s, when stock mar-kets were gripped by “oil and gas fever”, almost any company could buy a Russian or a Kazakh un-explored hydrocarbon field, hold an initial public offering (IPO) and then sell the shares quickly as part of a “promising oil and gas producer.” Lukoil’s purchase of Nelson Resources looked like one of those commonplace deals.

However, the Russian company soon realized that the price it had paid for the Kazakh firm was not fair. Nelson Gold Corporation received 50-percent of KazakhOil Aktobe in consideration of future investments. In a KazakhOil statement issued after the deal, the company said that “in exchange for a 50-percent stake in KazakhOil-Aktobe, Nel-son Gold Corporation undertakes the obligation

LUKOIL ENTERS AND QUITS KAZAKH CASPIAN OFFSHORE PROJECTS

Kazakhstan signed a production sharing agreement (PSA) to develop the Zhambai Caspian offshore project in December 2001. The project includes the South Zhambai and South Zaburunye fields located in the shallow and transitional waters in the frozen area of the northeastern Caspian Sea. The project covers a total area of more than 2,000 square kilometres.South Zaburunye is estimated to hold total geological oil reserves of 50 million barrels of oil equivalent, while the South Zhambai reserves are seen at 14 billion barrels of oil equivalent.Kazakhstan’s state oil and gas firm KazMunaiGas was the sole PSA participant with 100 percent ownership of Zhambai LLC,

especially created to develop the Zhambai project. From 2002 to 2006, Zhambai LLC held a detailed seismic survey on the oilfields, where the company discovered three promising hydrocarbons bearing structures: Edil, Kosarna and Karabulak.In November 2006, KazMunaiGas agreed to sell a 25-percent share to each of the project’s new participants: Caspian Investments Resources, a joint venture between Lukoil Overseas and Mittal Investments, and Repsol Exploration Kazakhstan SA, a subsidiary of Spain’s Repsol.The Zhambai project shareholding structure changed again in 2010 after China’s Sinopec acquired a 50-percent stake in Caspian Investments

Resources: KazMunaiGas and Repsol retained their shares of 50 percent and 25 percent, respectively, while Lukoil Overseas’ share decreased to 12.5 percent and Sinopec received a 12.5-percent stake.In May 2012, Lukoil quit the Tyub-Karagan and Zhambai-Zaburunye projects in Kazakhstan. One of the reasons was that the second exploration well drilled at Tyub-Karagan field did not reveal commercially viable hydrocarbon reserves. Lukoil’s decision to quit Zhambai-Zaburunye was prompted by problems which the company had looking for a drilling contractor capable of providing services in the offshore conditions. Zhambai was the only Lukoil project in a non-Russian Caspian Sea area.

CORPORATIONS





CORPORATIONS


OIL FIELDS AND BLOCKS OF CASPIAN INVESTMENT RESOURCES

Fields/Blocks Location Description Operator/Participants

Alibekmola field

The Alibekmola field is located 15 km north of the Zhanazhol field (CNPC), and about the same distance from the Kenkiyak-Orsk pipeline system. A rail link is available just 50 km from the field. A pipeline system now links the Alibekmola Field directly with the Black Sea port of Novorossiysk via the CPC pipeline.

Alibekmola was discovered in 1987. The field is a large north to south trending anticlinal fold with a faulted western margin. Oil was found in Carboniferous organic – detrital limestones intersected between 1,850m and 3,660m. There are two productive layers (KT-I and KT-II). The anticline is bounded to the west by a prominent North South trending fault, which separates Alibekmola from the South Alibekmola field. Closure is up to 500 metres. Maximum daily production from this field has reached 21,600 bpd. The field’s recoverable reserves make up 54.1 million tonnes of oil and 13,000 tonnes of gas condensate.

Operator: KazakhOil-Aktobe LLP. Participants: KazMunaiGas - 50% and Caspian Investment Resources - 50% (Lukoil - 50%, Sinopec - 50%). The Alibekmola and Kozhasai fields’ development is carried out in accordance with a subsoil use contract signed in August 1999 for 25 years.

Kozhasai field

The Kozhasai field is located 280 km south of Aktyubinsk and is 40 km south west of Alibekmola. The northwestern corner of Kozhasai is adjacent to the Zhanazhol field (CNPC).

The Kozhasai field was discovered in 1978. Kozhasai, like Alibekmola, is an anticline that covers an area of about 19 km by 4.5 km. The field has the KT-II reservoir (KT-I is absent), which occurs approximately at the same depth as the lower KT-II reservoir at Alibekmola, and between 3200m and 3800m. Kozhasai is an oil and gas accumulation. The gas cap has a gross hydrocarbon thickness of 208m and the oil layer has a combined gross thickness of 522m. Net pay in the oil layer averages 19 to 25m. Kozhasai oil is light with an API gravity of 40° with a paraffin content of 7.4%. Gas factor is 929 scf/bbl. The field’s recoverable oil reserves are estimated at 16.1 million tonnes. In 2014, the Alibekmola and Kozhasai output amounted to more than 0.8 million tonnes of liquid hydrocarbons and about 0.4 billion cubic metres of gas.

Operator: KazakhOil- Aktobe LLP. Participants: KazMunaiGas - 50% and Caspian Investment Resources - 50% (Lukoil - 50%, Sinopec - 50%). The Alibekmola and Kozhasai fields’ development is carried out in accordance with a subsoil use contract signed in August 1999 for 25 years.

North Buzachi field

The North Buzachi field is an onshore, mid-grade (19º API) oil discovery located in the Mangistau region of western Kazakhstan, close to the Caspian Sea. The field is approximately 250 km north of the Caspian Sea port of Aktau. The field lies beneath a damp salt flat and scrubby desert terrain. There are several producing fields nearby such as Kalamkas and Karazhanbas. The field is an anticline structure approximately 25 km in length that covers an area of about 125 sq. km.

The North Buzachi field was discovered by Kazneftegasrazvedka in 1975. Over 100 evaluation wells were drilled, but the field failed to produce. The reservoir consists of fluvio-deltaic and shallow marine sandstones of the Jurassic and Cretaceous age. The main Jurassic sands are at a depth of around 450 metres. There are just over 1 billion barrels of oil in place within the Jurassic reservoirs. The Cretaceous reservoir contains some 600 million barrels of oil. In June 2003, Kazakhstan’s central development committee approved field development with water flood pressure support under the Full Field Technical Development Scheme for the field. Recoverable oil reserves make up 79.9 million tonnes. In 2014, the field produced about 2 million tonnes of liquid hydrocarbons and more than 90 million cubic metres of gas.

Operator: Buzachi Operating Ltd JV. Participants: CNPC - 50% and Caspian Investment Resources - 50% (Lukoil - 50%, Sinopec - 50%). Field development is carried out in accordance with a subsoil use contract signed in May 1997 for 25 years.

Karakuduk field

The Karakuduk oil field is situated within the Aristanov Step of the North Ustyurt Basin located approximately 340 km north east of the port of Aktau in the Mangistau region of western Kazakhstan.

The field was discovered in 1971 by a state exploration organization and a total of 22 exploration and appraisal wells were drilled and then abandoned. The central development commission of Kazakhstan approved the field development project in 1996. Recoverable oil reserves are estimated by Ryder Scott at 63 million barrels (proved+probable) as of December 31, 2003. In 2014, the field produced more than 0.8 million tonnes of liquid hydrocarbons and about 0.1 billion cubic metres of gas.

Operator: KarakudukMunai LLP. Participants: Caspian Investment Resources (Lukoil - 50%, Sinopec - 50%).

Source: Caspian Investor, public sourcesr




to carry out 100-percent funding of a project to develop the corresponding deposits.” This means that Nelson received the Alibekmola and Kozhasai fields for free. As for the promised investments, the company owners decided to transfer the obliga-tion to a future buyer. So, Nelson Resources, which paid $90 million to buy a share in Buzachi Operat-ing and $4 million to purchase a stake in Kara-kudukmunai, was sold to Lukoil for $2 billion.

Lukoil decided to recoup some money from its new asset cost and share risks by bringing in a new partner. In late 2006, Lukoil Overseas signed an agreement to sell a 50-percent stake in Caspian Investments Resources to India’s Mittal Invest-ments. Under the deal, which was completed in early 2007, Mittal Investments paid $980 million in cash and committed to pay half of Caspian In-vestments’ outstanding debt of about $160 million.

Lukoil planned to use the proceeds for the acquisi-tion of new assets, including those in Kazakhstan. Among the company’s possible acquisitions were Karazhanbasmunai and MangistauMunaiGas, which together produced more than 10 million tonnes of oil per year.

THREE YEARS LATERIn late 2009, Mittal Investments decided to sell its stake in Caspian Investments Resources. Lukoil was initially called a potential buyer, but soon dismissed the reports.

The development of the small deposits owned by Caspian Investments required significant invest-ments. Also capital-consuming was the planned exploration of the South Zhambai and South Zaburunye offshore fields, which had its explora-tion period extended to the end of 2011. Lukoil was reported to have developed a coordinated techni-cal plan to build the first 1,850-metres exploration well in the area, and the plan was expected to start implementing in 2010.

Over the three years, the situation on the Kazakh financial and petroleum markets changed greatly: the values of Kazakh companies fell several times due to the global economic downturn.

Kazakh authorities have also changed their at-titude towards international companies operating in their country. The government pressed Lukoil’s Karachaganak partners Italy’s Eni and Britain’s BG, which owned a 32.5-percent each in project opera-

CORPORATIONSRUSSIA, CHINA CALL ON LUKOIL, SINOPEC TO MAKE PEACE

OIL FIELDS AND BLOCKS OF CASPIAN INVESTMENT RESOURCES (continued from page 27)

Fields/Blocks Location Description Operator/Participants

Arman field The Arman field is located in the northwestern part of the Buzachi peninsula on the Caspian Sea coast (in the Beineu district of the Mangistau region), 270 km from the city of Aktau.

The field was discovered in 1979. Tectonically, it is a narrow anticlinal fold complicating the western part of the Kalamkas raising and separated from it by a fracture. Productive layers are located in the Middle Jurassic reservoirs, having oil and gas horizons at a depth of 880 to 1280m. Productive horizons are composed of terrigenous rocks. The reservoir pressure makes up to 14.25 MPa, temperature is 37-510C. The oil has a high content of sulphur, paraffin and resins. Initial oil reserves were estimated at 30 million tonnes. In 2004, the field produced more than 65,000 tonnes of liquid hydrocarbons and more than 8 million cubic metres of gas.

Operator: Arman LLP. Participants: Caspian Investment Resources (Lukoil - 50%, Sinopec - 50%).

Zhambai South & South Zaburunye Blocks

It is believed that the pre-salt South Zhambai structure has the same type of reservoirs and hydrocarbons as the nearby fields of Astrakhan, Kashagan and Tengiz.

The huge pre-salt South Zhambai structure, with estimated hydrocarbon reserves of around 14 billion barrels of oil equivalent is conveniently located in close proximity to existing export pipelines. The South Zaburunye field consists of two wings: southwestern and northeastern. An oil flow of 190 bpd from well G-25 was tested from the interval 883-889m in the northeastern wing. Oil density was 29º API. Local specialists estimate the South Zaburunye in-place reserves at 50 million barrels.

The licence to develop the blocks is owned by Zhambai LLC: KazMunaiGas (50%), Repsol (25%), Caspian Investment Resources (25%).

Source: Caspian Investor, public sourcesr




tor Karachaganak Petroleum Operating (KPO). Ka-zakh fiscal authorities have repeatedly presented claims to KPO, and the dispute eventually moved to the courts. In addition, Lukoil had problems registering its purchase of a 50-percent stake in the Turgai Petroleum joint venture, bought by the Russian company from its partner PetroKazakh-stan. To buy the stake, Lukoil used its pre-emptive purchase right, which was later challenged by CNPC (See “Long legal arguments” below).

It was against this background, that Mittal Invest-ments sold its 50-percent stake in Caspian Invest-ments Resources to Sinopec in 2010. The parties have never disclosed the value of the transaction.

FALLING OUTPUTOn April 15, 2014, Lukoil said that it had sold its 50-percent share in Caspian Investment Resources to Sinopec. After the deal was signed, Lukoil’s Alekperov said that Sinopec would pay $1.2 bil-lion, but that the price could be adjusted by the time of the deal completion at the end of 2014. Lukoil aimed to optimize its portfolio of overseas hydrocarbon assets, but planned to redirect the proceeds from the sale to exploration projects, including those in the Caspian Sea, said Alekperov.

Experts believed that the main reason for the sale was the decline by a third over the past five years of the unit’s production. “Peak production is still expected at only one of the four fields, North Buzachi, while other fields have already passed it,”

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Kommersant newspaper quoted a source close to Lukoil Overseas as saying.

LONG LEGAL ARGUMENTSLukoil has had problems with its Chinese partners before. CNPC in August 2005 agreed to buy 100 percent of shares in PetroKazakhstan, a Canada-registered upstream company with assets in Kazakhstan. The firm had a 50/50 joint venture with Lukoil Overseas, Turgai Petroleum, created in 1995 and which has a licence to produce oil in the northern part of Kazakhstan’s Kumkol field. Lukoil Overseas, which had the pre-emptive right to buy out PetroKazakhstan’s half in the joint venture, filed a lawsuit to the Stockholm arbitration court to resolve the dispute. In addition, Lukoil Overseas filed a suit to Canada’s Royal Court of Alberta to suspend the sale of PetroKazakhstan to CNPC.

The Stockholm arbitration court on October 27, 2006 upheld Lukoil’s right to acquire a 50-percent stake in Turgai Petroleum.

According to changes made to Kazakh legislation in 2005, KazMunaiGas received the pre-emptive right to buy out stakes in the country’s joint ven-tures, as well as the right to have at least 50-per-cent shares in all new offshore projects. These changes allowed the PetroKazakhstan purchase by CNPC. The Chinese company paid $4.18 billion for a 50-percent share in PetroKazakhstan and simultaneously agreed to sell a 33-percent stake to KazMunaiGas. In 2009, KazMunaiGas’ subsid-iary KazMunaiGas’ Exploration and Development acquired the 33-percent PetroKazakhstan share from its parent company, while CNPC’s unit, CNPC Exploration and Development, became the second shareholder with a 67-percent stake. However, the Royal Court of Alberta suspended the deal upon Lukoil’s request.

As a result of the dispute, Turgai Petroleum stopped dividend payment to its shareholders in 2008. Despite the 2006 Stockholm arbitra-tion ruling in favor of Lukoil, it took the Russian company four years to settle its dispute with CNPC. On August 20, 2010, KazMunaiGas E&P issued a statement saying that PetroKazakhstan and Lukoil Overseas Kumkol B.V. had reached an agreement over their long-term dispute over Turgai Petroleum. Under the agreement, Lukoil was paid compensa-tion of $438 million, the statement said.

REUTERS/Stringer



TOTAL MAY SELL PSA STAKE

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By Victoria Nezhina

Russia’s state oil and gas firm Zaru-bezhneft has offered to buy French Total’s 40-percent stake in Russia’s Kharyaga oil project, according to federal and industry sources. Total - the largest shareholder and operator of the West Siberian project developed under a production sharing agreement (PSA) is said to have no major objec-tions to the deal. The Russian govern-ment, which has long been concerned about the French oil major not fulfilling the Kharyaga licence terms, suggested last year that Zarubezhneft should replace Total as project operator. The natural resources ministry has accused Total of not producing enough crude and flaring too much associated gas. This is one of the main reasons that Russia is trying to get the asset back, which, amid lower oil prices, seems to have lost some of its attractiveness for the French firm.

French oil and gas major Total is in talks to sell its 40-percent stake in Russia’s Kharyaga oil project to Russian state firm Zarubezhneft, Vedomosti business daily reported citing a federal official and a source close to Zarubezhneft’s board. According to the paper, the talks, which are still at a prelimi-nary stage, have been going on for two months and no documents have been signed yet.

The idea is said to have been first proposed by the Russian company, which owns a 20-per-cent in Kharyaga, developed under a production sharing agreement (PSA). Total is the largest shareholder and the operator of the project (See Chart 1 “Kharyaga PSA project”). Industry experts estimated the deal, which could increase Russia’s stake in Kharyaga to 60 percent, at $150 million to $300 million, according to Vedomosti. Norway’s

Statoil owns a 30-percent share in the Kharyaga PSA project.

A source close to Zarubezhneft’s board of directors said that Total had no principal objection to the deal and neither did the energy ministry. However, the Russian side believes that all the disputes concerning the project must be settled prior to the transaction, according to the source. In particular, the project operator Total E & P Russie has been sued by GlobalStroiEngineering (GSE), which was involved in the construction of an associated gas utilization unit at Kharyaga, for an alleged underpayment of 13 billion roubles, or about $250 million. There may be a chance that Russia gets the Kharyaga stake for free, if Total chooses not to comply with the suit.

TOTAL MAY WANT TO QUIT KHARYAGARussia’s Audit Chamber in January accused Total of failing to launch a unit to utilize associated gas, a byproduct of oil production, even though the company has received $480 million state compen-sation for the plant’s construction. (See “Russia’s Audit Chamber Finds Major PSA Violations,” Rus-sian Petroleum Investor, February’15). A source close to one of Kharyaga’s shareholders said that the delay was caused by the project operator’s in-ability to import the necessary equipment because of the Western sanctions imposed on Russia last year. In addition to flaring up to 78 percent of its associated gas production, Kharyaga has failed to avert declining oil output, the Chamber said. Vedomosti quoted a source close to the project as saying that Total’s fellow Kharyaga shareholders were also displeased by the way the French com-pany operated the inefficient project.

At the end of 2014, the energy ministry proposed that Zarubezhneft or another Russian company, “willing to undertake the responsibility,” should replace Total as the Kharyaga operator. In early February, energy minister Alexander Novak said that project partners were discussing the ministry’s proposal to include Zarubezhneft’s representatives in the Kharyaga op-erator structure. According to Novak, Total has met the proposal “with understanding”.




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According to Mikhail Subbotin, a senior researcher at the IMEMO institute of world economy and international relations, Zarubezhneft’s participa-tion in the Kharyaga operator’s activities would solely depend on Total’s “good will,” as it would be difficult to arrange legally. If Total agrees to sell its stake in Kharyaga, the project operator will have to be replaced, Subbotin added. Although it would take quite an effort to re-conclude all the contracts for a new operator, Russia has gon ethrough this before such as when state gas giant Gazprom re-placed Royal Dutch Shell in 2006 as the operator of another Russian PSA project, Sakhalin-2, which is much bigger than Kharyaga in terms of assets and investments.

Athough Kharyaga is not a huge project, it is important for Russia from a political point of view. Total is Russia’s long-term energy partner and a top foreign investor, which owns around a fifth of Russia’s second-largest natural gas producer NO-VATEK. After last years’ death of Total’s then CEO Christophe de Margerie at a Russian airport, the new head of the company, Patrick Pouyanne, as-sured Russian president Vladimir Putin that Russia would remain “at the very heart” of the French company’s development strategy (See “New Total CEO Shows Commitment to Russia,” Russian Petroleum Investor, December’14 / January’15). For Total, it would also be important to keep good relationships with Russia, despite the Kharyaga differences. “It would be exceptionally undesir-able, if this molehill grows into a mountain,” said Sberbank CIB analyst Valery Nesterov.

According to Nesterov, Kharyaga is not an easy project for Total. In the current economic situa-tion, many companies are seeking to optimize their

asset portfolios. If Total wanted to downsize its projects in Russia, the Kharyaga PSA would be a likely candidate for reduction, he added. Although Nesterov doubted that Total would like to sell the stake, the company is interested in staying in Rus-sia, and as soon as the country’s investment activ-ity revives, the French firm would have a stronger position compared to its competitors.

In addition to the Kharyaga share, Total’s Russian assets include a 18.24-percent stake in NOVATEK, a 20-percent share in the Arctic liquefied natu-ral gas (LNG) project Yamal LNG, a 49-percent stake in the Terneftegaz joint venture developing the Termokarstovoye gas condensate field in the Yamal-Nenets region and a 25-percent share in the giant offshore gas project, Shtokman, which was indefinitely suspended after Norway’s Statoil quit the project in 2012.

Kharyaga is tiny compared with Yamal LNG, Total’s most important Russian asset, so the French com-pany would not lose much if it quits the oil PSA, according to Sergei Vakhrameyev, an analyst at the investment company Ankorinvest.

INITIAL CONFLICTSTotal’s disagreements with the administration of West Siberia’s Nenets region, where the Kharyaga field is located, began soon after the French com-pany joined the project in the mid-1990s. Although the PSA was signed in 1995, it came into force only in 1999, as the regional administration, then headed by Vladimir Butov, tried to limit the fast growth of the project’s costs and secure bigger budget revenues. The local authorities said that

KHARYAGA PSA AT A GLANCE

The Kharyaga oil deposit was discovered by the U k h t a n e f t e g a z g e o l o g i a production association in 1970 and had 58 wells drilled by 1982. The field is part of the Timan-Pechora oil basin located in the Nenets region, 60 km from the Arctic Circle. The deposit, which covers an area of 750 square kilometers, consists of six groups of oil-bearing reservoirs, containing harder-to-extract oil with a

high content of sulphur and paraffin. The field is being developed under a production sharing agreement (PSA), which was signed on December 20, 1995 by the Russian government, the Nenets region administration and Total E & P Russie, the Russian subsidiary of France’s Total. The agreement entered into force on February 12, 1999 for a period of 29 years, renewable for up to 33 years. Total E & P Russie operates

the Kharyaga PSA project, which covers two out of six geological layers of the Kharyaga field.Kharyaga’s explored oil reserves under the C1 category of the Russian reserves system are estimated at 132.969 million tonnes, while its recoverable reserves are seen at 57.433 million tonnes.The project started commercial oil production in 1999 and extracted its first profitable barrels in February 2006.

According to the development scheme, approved in 2007, the field is set to achieve its maximum production level of 3.1 million tonnes of oil and 400 million cubic metres of associated gas in 2013. Kharyaga’s peak oil production estimate was lowered from the 3.45 million tonnes envisaged by the previous plan, although Total E & P Russie had proposed reducing the forecast more significantly to 2.2 million

tonnes per year. In 2012, Total delayed Kharyaga’s peak production deadline from 2013 to 2022 or 2023, and reduced peak production volume to not more than 1.9 million tonnes. In 2014, the Kharyaga field produced 1.48 million tonnes of crude.Total currently owns a 40-percent in the Kharyaga PSC project, while Norway’s Statoil holds 30 percent and Russia’s Zarubezhneft owns 20 percent.



Total was uncooperative. “The administration of the Nenets autonomous district is concerned by the progress of the production sharing agreement on Kharyaga field. One special concern is the ris-ing costs of the project. The administration has repeatedly requested documents from the operator justifying the rising costs, but Total E & P Russie, refuses to do so,” the regional administrations said in a statement in August 2002.

According to the authorities, Kharyaga’s feasibility study, completed in 1992, set the cost estimates for drilling and oil production, which were twice as much as average Russian levels at the time. Based on the feasibility study, the total cost of the Kharyaga PSA was penciled at $2 billion, including both capital and operating costs, in 1999. By Au-gust 2002, Total more than doubled the Kharyaga cost estimate to $5 billion.

The actual cost of drilling one well at Kharyaga exceeded $6 million, or three to four times the average Russian level, while the cost of produc-tion of a tonne of crude was around $65, or two to three times higher than the nationwide average. At the same time, accumulated revenues from the sales of 51 million tonnes of the Kharyaga crude were expected to have totaled just $6.6 billion in the 29 years of the field’s development. This made the regional authorities concerned that, if costs continue increasing, the PSA project might


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become unprofitable by 2010 and so become use-less for Russia. Under a PSA, a state starts getting its share of project revenues after an investor fully recovers its costs.

The Nenets administration argued that the Kharyaga operator was developing the project without a properly approved long-term plan. “At some point, the entire project turned out to be split into separate parts, fulfilled by different compa-nies at different times, without mutually linking solutions and under constantly changing process parameters. By the beginning of 2002, no produc-tion wells had been drilled at the field, which had not achieved the earlier approved oil production levels,” the region’s administration said in a state-ment. The administration also said that there was no technological development plan that would provide a clear picture of the PSA’s future. Accord-ing to the Kharyaga cost estimates, submitted by Total E & P Russie to the Russian government, the operator spent around $146 million on the project in 2001 and more than $178 million in 2002 on top of the $250 million spent from 1999 to 2001. The Nenets region’s administration refused to approve the 2001 and 2002 costs.

In mid-2003, Russia’s tax ministry filed a suit ac-cusing Total of non-payment of $48.5 million in income taxes.

FRANCE ALLOWS TOTAL TO STAY IN RUSSIA

French authorities have allowed oil company Total to continue its work at three Russian projects despite EU sanctions imposed on Russia due to its role in the Ukrainian crisis. The Treasury of France issued a permit for Total to stay in the Yamal LNG and Kharyaga PSA projects and the Terneftegaz joint venture, Total said in its financial report for the first quarter of 2015.Yamal LNG, the $27 billion Arctic Yamal peninsula liquefied natural gas (LNG) project, had to revise its financing plan due to sanctions, as the project cannot

be financed in US dollars, as had been planned earlier. The Yamal LNG project, operated by Russia’s №2 gas producer NOVATEK, envisages the construction of an LNG plant to export 16.5 million tonnes of the super cooled fuel per year. The plant will be located at the Yamal peninsula’s South Tambeiskoye field, which has proved and probable gas reserves, under the international PRMS reserves system, estimated at 927 billion cubic metres as of December 31, 2013. The project would also see the construction of a sea port

and an airport near the village of Sabetta (See «Yamal LNG Project on Track Despite Sanctions», Russian Petroleum Investor, February’15). NOVATEK owns a 60-percent share in the project, while Total and China’s CNPC hold 20 percent each.The Kharyaga PSA project is currently operated by Total, but that could change as another Kharyaga shareholder, the Russian state-owned oil company Zarubezhneft, is reported to have offered to buy out the French company’s stake in the project. The Terneftegaz joint venture, in

which Total owns a 49-percent share and NOVATEK holds 51 percent, plans to launch production at its Termokarstovoye gas condensate field, on the Yamal peninsula, in late May, said NOVATEK’s chief financial officer Mark Gyetvay. The field is expected to produce 2.4 billion cubic metres of gas and 800,000 of gas condensate per year, he said.Total also planned to establish a joint venture with Lukoil to develop the shale oil reserves of the Bazhenov formation in West Siberia, but the companies

had to suspend work because of the sanctions. The EC on July 31, 2014 prohibited the supply of equipment for hydrocarbon exploration and production in Russia’s projects in the Arctic, on the deep-water shelf and in shale oil projects. In another decree of December 5, 2014, the EC clarified that the ban only applies to the Arctic shelf and deep shelf areas with a depth of over 150 metres, while the exploration and production of conventional oil reserves located below shale formations are still allowed.



TOTAL GOES TO COURTTotal challenged the Nenets administration’s re-fusal to recognize Kharyaga spending at the Stock-holm arbitration court. The court was expected to consider the issue in July 2005. However, Total did not count on verdict in their favour too much and hoped for a friendly settlement of the dispute. “We do not really believe in the efficacy of international courts and hence believe that that the decision on getting out of this situation can be found before the court makes its decision,” Jean-Pierre Dolla, general director of Total E & P Russie, said at re-gional parliamentary PSA hearings in 2003.

Dolla admitted that Kharyaga’s costs were some-times higher than those at similar Russian proj-ects, but said that the gap was due to the different accounting standards used by Russian companies and Kharyaga’s more complicated conditions. “Some costs at Kharyaga were really higher than those of the Russian companies working at other fields. According to documents, their well may cost $3 million to $4 million, while ours costs $6 million to $7 million… We have a different account-ing structure: in our costs we include a number of things, which in Russia would be regarded as other expenditure items. But the main thing is the complexity of the Kharyaga objects which we have got. The high contents of hydrogen sulfide, a lot of paraffin and things like that increase costs.”

Russia’s talks with Total revived in February 2005, after Alexei Barinov was elected as the new Nenets region governor. On May 31, 2005, the Kharyaga PSA joint committee, consisting of representa-tives of Total, Nenets administration and Rus-sia’s energy ministry, approved the project’s work programme and costs for 2004 and 2005. At the end of July 2005, the committee finally approved Kharyaga’s work programme and budget for 2002-2005, as well as its reports on cost reimbursement for 2001-2004.

On July 26, 2005, Total sent a letter to then-Russian prime minister Mikhail Fradkov, whom the company asked to provide guarantees that the numbers approved by the joint committee will not be reviewed by tax authorities. Total indicated that it was willing to recall its claim from the Stockholm arbitration court, but only after the tax authorities withdraw their tax claim and reimburse the VAT paid by Total over the past 3.5 years.

According to the development plan, submitted


by Total to the Russian side in 2003, the project’s total costs were seen to have amounted to $1.465 billion by 2006, while Russian state income was expected at about $60 million. In the whole 29-year PSA period, Kharyaga’s oil sale revenues (net of royalties) were planned to have totaled $3.209 billion with an average oil price set at $17 per barrel, while total costs to be reimbursed by the Russian side were penciled at $3.164 billion. This brought expected Russian state income to only $256 million, down from the earlier promised federal share of at least $2.5 billion.

In the proposed plan, the company also “un-reasonably reduced” Kharyaga’s recoverable oil reserves by 1.7 times, the local authorities said.

The energy ministry refused to approve the plan and recommended Total study the field more thor-oughly and re-calculate the reserves. It also asked the company to “take urgent measures to reduce the capital and operating costs of the field’s devel-opment.”

Total was the first foreign investor to file a lawsuit against Russia in an international court although the French company said that the claim was direct-

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Year of the signing of the PSA Concluded in 1995;Came into force – 1999

Duration of the PSA For 29 years with possible extension to 33 years

Shareholders From 1996: French TotalFinaElf – 50%; Norwegian StatoilHydro – 40%;

Nenets oil company – 10% Up to 2009: French Total – 50%;

Norwegian Statoil – 40%; Nenets oil company – 10%

After 2009: French Total – 40%; Norwegian Statoil – 30%;

Zarubezhneft – 20%; Nenets oil company – 10%

Project operator Total E&P RussieAssets The PSA provides for commercial development of

the 2nd and 3rd reservoirs of Kharyaginskoye fieldReserves Oil in place reserves – 132.969 mln tonnes;

recoverable oil reserves – 57.433 mln tonnesDate of start of the partition profitable production

February 2006

Source: Open sources, Russian Petroleum Investor

KHARYAGA PSA PROJECT




ed against former Nenets governor Butov, rather than Russia. Still, the process actually involved the Russian government, in particular, the ministries of energy, finance and natural resources, as well as the Nenets administration the Federal Tax Service and Zarubezhneft.

The Kharyaga proceedings coincided with Russian pressure on another PSA project, Sakhalin-2, which was accused by environmental authorities of li-cence violations. The pressure quickly receded after state-controlled Gazprom entered the project and replaced Royal Dutch Shell as its operator, prompt-ing analysts to conclude that Russia was trying to regain control over strategic hydrocarbon resources lavishly given out to foreigners during the crisis-hit first post Soviet decade of 1990s.

In addition to Kharyaga and Sakhalin-2, Russia has one more PSA project, the ExxonMobil-led Sakha-lin-1.

SHAREHOLDERS RESHUFFLE Total is not the only oil company that has had trouble with the Nenets administration. The re-gional authorities, from 1998 to 2002, also fought with Lukoil as it tried to prevent the private oil company’s monopolization of oil production in the region’s Timan-Pechora province. The company, which had licences for the bulk of the province’s oil fields, was accused of developing them too slowly and thus underpaying taxes to the regional budget.

In turn, Lukoil accused the administration of col-lecting illegal fees and interfering with its work. In 2001, oil companies actively participated in the regional election campaign, trying to bring their candidate to power, but Butov won the election. The administration reacted by hampering Lukoil’s

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projects, such as Polar Lights, SeverTEK and Northern Territory. Butov also opposed Lukoil’s en-try into the Kharyaga PSA and granted the license to develop the Val Gamburtseva field, claimed by Lukoil, to the small oil company Severnaya Neft.

Back in 1999, foreign participants of the Kharyaga project, Total and Norway’s Statoil, agreed to transfer 10 percent each of their stakes to a Rus-sian company to be chosen by the government. Lukoil, which had earlier acquired Komi-TEK, which had developed the Kharyaga deposit from the Soviet times, was an obvious candidate.

As the Kharyaga costs discussion was gathering pace, the Russian oil company chose the ‘let’s wait and see’ attitude. As soon as it became clear that the new Russian investor was expected to share Kharyaga’s past costs, Lukoil’s representatives un-officially indicated that the company was no longer interested in joining the project.

On October 24, 2002, Lukoil’s president Vagit Alekperov and Butov signed a memorandum of understanding which talked of priority directions of cooperation between the region and the company. Lukoil agreed to invest over $200 million in the region’s development in 2003 but it never used its right to join the Kharyaga project.

Another contender for a Kharyaga stake was Rosneft. On January 1, 2010, Russia’s state oil firm Zarubezhneft entered the Kharyaga project with a share of 20 percent after Total and Statoil reduced their stakes to 40 percent and 30 percent, respec-tively. At the end of 2009, when the deal was still awaiting for the green light from the state, the authorities approved the project cost at the lowest limit of the range requested by the company from $400 million to $500 million (See “Summer M & A Transactions”, Russian Petroleum Investor, September ‘09).

KHARYAGA PSA PROJECT PRODUCTION

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Oil production, thou tonnes

767.3 894.8 955.7 924.25 1,070.5 1,394.4 1,430.5 1,537.16 1,555.88 1,481.02

Gas production, mln cu m

105.1 124.6 128.1 132.6 134.5 168.3 175.0 195.45 206.71 208.496

Source: CDU TEK (Central Dispatch Unit of Fuel Energy Complex of RF Ministry of Energy)




TRANSACTIONS


KHARYAGA FIELD LOCATION

Pechora Sea

Nenets Autonomous District




TRANSACTIONS


CLAIMS STILL EXISTIn March 2006, Russia’s ministry of natural re-sources also laid claims to the Kharyaga project. The ministry said that Total had not drilled enough wells and had not been sufficiently compensating crude output with water replacement in wells to keep well pressure up. Also in 2006, Russia’s envi-ronmental watchdog Rosprirodnadzor, part of the natural resources ministry, accused the Kharyaga project of producing less crude than was stipulated by the licence.

Also, Total flared 76 to 78 percent of its associated gas, although all Russian oil projects were expect-ed to utilize up to 95 percent of the fuel by 2009.

In late September 2006, the Federal Agency for Subsoil Use (Rosnedra), also part of the natural resources ministry, initiated the process of review-ing the Kharyaga license agreement. Total E & P Russie responded by introducing a new technologi-cal scheme of the field’s development, consist-ing of five options. After a five-month study, the government selected the option, which provided that the field by 2013 should achieve its maximum

crude production level of 3.1 million tonnes to 3.2 million tonnes, down from 3.45 million tonnes envisaged by the previous scheme and up from the 2.2 million tonnes requested by Total. The project’s lifetime was set at 33 years, down from the 56 years suggested by Total. By the end of the period, the field was set to have 302 wells, including 225 production wells (including 11 horizontal wells) and 77 injection wells.

However, Total announced in the spring of 2012 that Kharyaga’s crude production peak had been delayed from 2013 to 2022 or 2023, when the proj-ect is forecast to produce not more than 1.9 million tonnes. In 2014, the Kharyaga field produced 1.48 million tonnes of oil.

Despite the PSA problems, the Russian govern-ment is unlikely to risk its overall successful coop-eration with France. Even after Paris indefinitely suspended the delivery of the Mistral warships ordered by Russia last year, Moscow said that it would not impose penalties for France’s failure to fulfill the $1.3 billion contract. Kharyaga is even less a reason for discord.

ASSOCIATED GAS UTILIZATION ON KHARYAGA PSA PROJECT

2005 2006 2007 2008 2009 2010 2011 2012 2013

Gas flaring, mln cu m

66.1 84.8 89.1 92.5 88.5 107.7 126 127.6 119.8

Associated gas utilization, %

37.1 32.0 30.5 30.3 34.2 32.0 28.6 26.0 22.0

Source: Total E&P Russie and open sources

Kharyaga

Statoil Annual Report 2011



APRIL M&A: RUSSIANS SELL ASSETS, FOREIGN COMPANIES LOSE INTEREST

TRANSACTIONS

By Victoria Nezhina

Russian companies in April sold their foreign assets as foreign investors held back from purchasing Russian up-stream units, which, not long ago, they had queued up for.

Lukoil’s subsidiary LITASCO and Dutch company Burando Maritime Services sold their terminal in Rotterdam. Gazprom Neft refused to participate in Libya’s Elephant project. while Gazprom in early April announced its intention to sell its stake in the Ger-man gas distributor Verbundnetz Gas, only to change its mind later. Many earlier planned deals fell apart. Ros-neft and Alltech could still finish work on the creation of a joint venture for the Pechora LNG project, but Rosneft cancelled its trading JV plan with Ital-ian refiner Saras. The Russian state oil firm also had to postpone its planned deal with Norway’s North Atlantic Drilling. Even long-term Russian part-ner, France’s Total, could soon quit the Kharyaga PSA project and remains undecided as to whether to buy further into gas producer NOVATEK.

Russian energy companies, on tight budgets be-cause of Western sanctions and falling global oil prices, are putting off their earlier planned M&A deals. When asked by journalists if Rosneft was going to complete its long planned joint venture with Russia’s Alltech group, Sergei Surkov, the deputy governor of West Siberia’s Nenets region, said that the timing could be better. “Don’t you see what the situation is like for Rosneft? It is asking for money from the NWF [National Wealth Fund].”

The state-controlled oil firm, which produces more oil than Iraq or Iran, requested more than $30 billion of state aid from the NWF earlier this year but the government said that it could only provide around $5 billion.

One of Russia’s top foreign investors, France’s Total could leave the Kharyaga oil project, which is developed under a production sharing agreement (PSA) in West Siberia (See article “Total may sell Russian PSA stake back to the state” in this issue).

Total is also hesitant about increasing its share in Russia’s №2 natural gas producer NOVATEK, said Total chief Patrick Pouyanne. “We are talking about increasing our NOVATEK stake from the cur-rent 18.24 percent to 19.4 percent, it is only about 1 percent, or around $250 million, while the size of our investment in the partnership is 10 or 20 times bigger. Let’s see in the future, in any case. It by no means affects our relationships with NOVATEK,” Pouyanne said.

Total stopped buying NOVATEK’s shares in July 2014, after Malaysian flight MH17 was shot down over Ukrainian territory held by pro-Russian rebels. The French oil major bought a 12 percent stake in NOVATEK for $4 billion in 2011 with an option to increase its holding to 19.4 percent within three years.

Total and NOVATEK are partners in the Yamal LNG project, which may see its shareholding structure change soon. NOVATEK, the project’s largest shareholder and operator, expects to sell 9 percent of its stake by mid-2015, said gas firm head Leonid Mikhelson. “Negotiations to sell a 9-percent stake in Yamal LNG are going on,” Mikhelson said without naming the potential buyer. “We aim to complete the negotiations before external financ-ing is opened,” he said adding that NOVATEK expects to attract external financing for Yamal LNG in mid-2015.

Mikhelson reiterated that NOVATEK was not plan-ning to reduce its Yamal LNG share below a con-trolling stake. Novatek owns 60 percent of the $27 billion project, alongside Total and China’s CNPC, which each have a 20-percent share.




TRANSACTIONS


OILFIELD SERVICE PROVIDERS UP FOR SALE Global oilfield services giant Schlumberger is still waiting for Russian authorities to give permission for them to buy a 45.65-percent share in Russian peer Eurasia Drilling Company (EDC) (See “March M & A transactions: Major deals hung up by regu-lators”, Russian Petroleum Investor, April’15).

The companies had to postpone the completion of

the $1.7 billion deal which was previously planned for the end of March, after Russia’s Federal Anti-monopoly Service (FAS) decided that, although the transaction does not violate antitrust regulations, exploration drilling at fields of federal significance could be regarded as a strategic activity, so the deal needs to be approved by the Russian govern-ment. According to Russian legislation, a foreign investor cannot purchase a share of more than 25 percent in a Russian strategic enterprise without

DOMESTIC M&A TRANSACTIONS, APRIL 2015

Description of the deal Asset owner Buyer

Rosneft and Alltech have yet to complete the Pechora LNG deal, earlier planned to close by the end of 2014. Rosneft’s president Igor Sechin and Alltech’s head Dmitry Bosov in May 2014 signed an agreement to establish a joint venture to expand cooperation in gas business in the Nenets region. The joint venture is planned to form a basis for the region’s new gas production centre, which is expected to implement various projects on gas processing and the fuel supply to end users. The Pechora LNG project would produce gas at the Kumzhinskoye and Korovinskoye fields and build gas-transport infrastructure, a gas processing plant, as well as an LNG plant and an export terminal.

JV creation –

Japanese investors will keep the exclusive right to enter East Siberia’s Chonsky project until the end of the first half of this year. Japanese investors last year signed an agreement to receive the exclusive right to join the Chonsky project, currently being explored by Gazprom Neft.

Gazprom Neft. Japanese investors

The Sistema group is considering selling its stake in the Targin oilfield services company. In 2013 and 2014, Sistema held equipment upgrades and business restructuring at Targin, where capital expenditures amounted to 3.7 billion roubles in 2014. The company plans to continue modernization this year.

Sistema –

Gazprom Neft and PetroVietnam signed a memorandum on expanding cooperation on the Pechora Sea shelf. The parties agreed to establish an expert group with equal participation to create a list of priority deposits and the basic conditions for future cooperation by the end of October 2015.

Memorandum on expanding cooperation

–

ALROSA could resume negotiations with Rosneft on selling the diamond miner’s gas assets. ALROSA purchased 100 percent of shares in Geotransgaz and 100 percent in Urengoi Gas Company in March 2013 for a total of $1.037 billion. In September 2013, Rosneft agreed to pay 1.38 billion to buy the assets. However, the two companies in March 2014 extended the preliminary agreement for a year due to the revaluation of the gas reserves.

ALROSA Rosneft

Schlumberger agreed to fulfil conditions put forward by the Russian authorities so the global oilfield service major could buy a 45.65-percent share in Russian peer Eurasia Drilling Company (EDC). One of the conditions requires that Schlumberger should sell within 12 months its Eurasia Drilling stake “at a fair market price” if Western sanctions impede the use or transfer of the company’s technology in Russia. The $1.7 billion deal, which also needs the green light from Russia’s government's commission on foreign investment, was postponed until May 31.

Eurasia Drilling: Alexander Japaridze (30.2%); Alexander Putilov (22.4%); free float - 30.67%

Schlumberger

France’s Total is hesitant about increasing its share in NOVATEK, according to the head of the French Firm Patrick Pouyanne. Total stopped buying NOVATEK’s shares in July 2014, after a Malaysian flight MH17 was shot down over Ukrainian territory held by pro-Russian rebels. The French oil major bought a 12 percent stake in NOVATEK in 2011 with an option to increase its holding to 19.4 percent within three years. Total currently owns a 18.24-percent stake in NOVATEK.

Total currently owns 18.24 percent in NOVATEK.

–

NOVATEK expects to sell 9 percent of its stake in Yamal LNG by mid-2015. The negotiations to sell the stake are going on, said the gas company without naming the potential buyer. NOVATEK plans to complete negotiations before the project’s external financing is opened, which should happen by mid-2015, the company said.

NOVATEK – 60%, Total – 20%, CNPC – 20%

–




TRANSACTIONS


DOMESTIC M&A TRANSACTIONS, APRIL 2015 (continued from p.36)


Total and Zarubezhneft are in talks on the Russian firm’s acquisition of Total’s 40-percent share in the Kharyaga PSA project. The share could be valued at $150 million to $300 million.

Total Zarubezhneft

Russian anti-trust authorities are considering the Baker Hughes/Halliburton deal which involves combining the companies’ Russian assets. FAS on April 21 postponed the decision on the near-$35 billion deal, which was announced in November last year. Under the deal, Halliburton’s subsidiary Red Tiger is expected to take over ten Russian companies, including ZAO Baker Hughes, Baker Hughes Technologies and Pipeline Service, Tyumen Plant of Oilfield Equipment and Orenburgneftegeofizika.

Baker Hughes and Halliburton

–

Energy ministry and the Federal Tariff Service (FTS) oppose the proposed detachment of Gazprom’s gas transportation business into a separate company as a measure to level gas transportation tariffs due to an expected growth in tariffs. The idea was proposed by independent gas producers in order to align gas transportation tariffs for independents and Gazprom subsidiaries.

– –

The Moscow Arbitration Court upheld the lower court decision, which has earlier dismissed the lawsuit filed by a minority shareholder of Bashneft, Railya Inozemtseva, against Rosnedra’s decision to transfer the licence on the Trebs and Titov field to the Bashneft and Lukoil joint venture, Bashneft-Polyus.

– –

Igor Rotenberg plans to invest his share of proceeds from the sale of a Mostotrest stake to increase his share in Gazprom Bureniye. TFK Finance bought a 38.63-percent stake in Mostotrest from Marc O'Polo Investments for 10.043 billion roubles. Prior to the sale, Rotenberg owned a 68.45-percent share in Marc O'Polo Investments, so he will get 6,874 billion roubles of the proceeds. Gazprom Bureniye, a former drilling subsidiary of Gazprom, was auctioned in 2011 as part of the gas giant’s efforts to get rid of non-core assets. Rotenberg, who bought a share in the unit at the auction, increased his stake to 79 percent after he bought out the firm’s share of his father Arkady Rotenberg in October 2014.

Marc O’Polo Investments Ltd – 68.45% of Mostotrest

TFK Finance

The draft presidential decree on the transfer of Bashneft to the Bashkortostan region has been submitted to the government. The region’s administration is expected to receive a 25-percent share in oil company. Russia’s state property management agency Rosimushchestvo had earlier demanded that the federal government should retain a stake of 50 percent plus one share in Bashneft and transfer the rest to Bashkortostan. Rosimushchestvo currently owns 73.9 percent in Bashneft’s authorized capital, or 84.4 percent of the company’s voting shares.

– –

Source: Russian Petroleum Investor

getting the green light from the government’s commission on foreign investment.

FAS had initially put forward 10 conditions for Schlumberger’s purchase of EDC but then reduced the number of conditions to eight.

One of the conditions is that Schlumberger should sell its Eurasia Drilling stake “at a fair market price” within 12 months if Western sanctions im-pede the use or transfer of the company’s technol-ogy in Russia, FAS said.

“The most important condition, on which Russia is going to insist, is if Schlumberger has to leave Russia, it should make sure that software solutions are not withdrawn from the country. What exists in Russia, should remain in Russia,” deputy FAS head Andrei Tsarikovsky told reporters. He added that Russia is interested in Schlumberger’s presence in the country.

Schlumberger is also required to provide the busi-ness plans of EDC and its subsidiaries, as well as financial and technological support information, to the foreign investment commission. Initially, the

data volume is expected to be proportional to the stake’s size, but as soon as Schlumberger increas-es its share to majority, the commission wants to receive the information in full.

Schlumberger also has to get the necessary licenc-es from the U.S. Office of Foreign Assets Control (OFAC), as well as from similar bodies in the EU and the Cayman Islands, where EDC is registered, for the unrestricted participation of EDC and its Russian subsidiaries.

Schlumberger first postponed the deadline for clos-ing the transaction until April 30 and EDC has now announced another postponement until May 31.

Another oilfield services M&A deal awaiting FAS approval is the merger of the U.S. industry giants Baker Hughes and Halliburton, in particular their Russian assets. At the end of April, FAS prolonged the period required to consider the deal, which also needs to be approved by the government’s commission on foreign investment.

Red Tiger, a subsidiary of Halliburton, has filed an application to receive the rights to manage the




TRANSACTIONS


Russian assets of Baker Hughes, which is being acquired by Halliburton in a near-$35 billion deal. The Delaware-registered Red Tiger wants to take over ten Russian companies, including ZAO Baker Hughes, Baker Hughes Technologies and Pipeline Service, Tyumen Plant of Oilfield Equipment and Orenburgneftegeofizika.

Halliburton and Baker Hughes announced the cash and stock deal, which will create an oilfield service behemoth to take on market leader Schlumberger, in November last year. The deal which needs the approval of anti-trust regulators in several coun-tries, is expected to close late in the second half of 2015.

The massive deal is not expected to cause big changes in the Russian oilfield services market, where the U.S. majors occupy a rather modest share of about 5 percent, according to Alexander Nazarov from Gazprombank.

Finally, Russia’s Sistema group said that it was considering selling its stake in the Targin oilfield services company, formerly called Bashneft Ser-vices Assets, which Sistema acquired in late 2013. Targin provides drilling, workover and mechanic services to energy companies in West Siberia, as well as the Volga and Urals regions. In 2013 and 2014, Sistema held equipment upgrades and business restructuring at Targin, which had capital expenditures of 3.7 billion roubles in 2014. The company plans to continue modernization this year.

FOREIGN INTEREST FADES AWAYForeign investors, which had recently queued up for Russian upstream assets, have largely lost interest. There were only two reports on poten-tial deals of this kind in April. Gazprom’s oil arm Gazprom Neft announced that Japanese investors could keep their exclusive right to enter East Sibe-ria’s Chonsky project until the first half of this year. “Our Japanese partners are currently deciding whether they are going or not going to renew the existing option,” Gazprom Neft’s deputy chairman Vadim Yakovlev told reporters. Japanese investors last year signed an agreement for an exclusive right to join the Chonsky project, currently being explored by the Russian company.

The project covers three fields - Ignyalinskoye,

Tympuchikanskoye and Vakunayskoye - located on the border of the Irkutsk and Yakutia regions in East Sibeira, where Gazprom Neft wants to de-velop its new hydrocarbon producing centre.

In addition, Gazprom Neft and PetroVietnam in April signed a memorandum for expanding cooperation on the Pechora Sea shelf. The parties agreed to establish an expert group with equal participation and to create a list of priority depos-its, and basic conditions for future cooperation, by the end of October 2015.

The memorandum came after Gazprom Neft re-ceived the exclusive right to negotiate the acquisi-tion of a 49-percent stake in Dung Quat refinery, Vietnam’s sole oil processing facility.

Gazprom Neft’s chairman Alexander Dyukov and the chief executive officer of Vietnam’s state oil and gas group PetroVietnam, Nguyen Xuan Son, signed the agreement during Russian Prime Min-ister Dmitry Medvedev’s visit to Vietnam in early April. Gazprom Neft said that it could co-finance the refinery modernization project in proportion with the Russian company’s future share. Accord-ing to the approved plan, the modernization will require investment of about $2 billion.

Gazprom Neft and PetroVietnam signed a frame-work agreement in 2013, which set the basic conditions for the Russian company’s potential acquisition of a stake in the Dung Quat refinery and its further modernization. At the end of 2014, Gazprom Neft and the plant’s operator Binh Son Refining and Petrochemical signed an agreement on the long-term supply of Russian ESPO crude blend to the refinery.

FOREIGN TRANSACTIONS OF RUSSIAN COMPANIESIn what is becoming a trend, a number of Russian companies are selling their foreign assets. Lu-koil’s international oil trading subsidiary LITASCO together with its joint venture partner Burando Maritime Services, a leading maritime services company in the Netherlands’s Amsterdam-Rotter-dam-Antwerp region, signed an agreement to sell 100 percent of their respective shares of Service Terminal Rotterdam (STR) to iCON Infrastructure Partners II. The transaction was expected to be completed by the end of April 2015.

IN WHAT IS BECOMING A TREND, RUSSIAN COMPANIES ARE SELLING THEIR FOREIGN ASSETS.




TRANSACTIONS


FOREIGN M&A TRANSACTIONS, APRIL 2015


Lukoil’s international oil trading subsidiary LITASCO together with its Joint Venture partner Burando Maritime Services, a leading maritime services company in the Netherlands’s Amsterdam-Rotterdam-Antwerp region, signed an agreement to sell 100 percent of their respective shares of Service Terminal Rotterdam (STR) to iCON Infrastructure Partners II. The transaction was expected to be completed at the end of April 2015.

LITASCO (100% subsidiary of Lukoil)

iCON Infrastructure Partners II

Gazprom Neft decided against participating in Libya’s Elephant project. Gazprom Neft and Eni in September 2011 signed an agreement on the Russian company’s acquisition of 33.3 percent of Eni’s stake in the Elephant oil and gas production project, which the Italian firm valued at around $170 million, but the deal stalled due to the military conflict in Libya. In December 2013, Gazprom Neft issued a notice of intention to exercise its option to acquire the Elephant share. The next step was to receive the approval of the deal from Libya’s state National Oil Corporation. Eni owns a total of 66 percent in the Libyan project.

Eni owns 66 percent in Libya’s Elephant project.

Gazprom Neft

Gazprom Neft received the exclusive right to negotiate the acquisition of a 49-percent stake in Vietnam’s Dung Quat refinery. Gazprom Neft will co-finance refinery modernization project in proportion to the Russian company’s share. According to the approved plan, the $2 billion modernization is expected to increase the plant’s oil refining capacity to 8.5 million tonnes per year from the current 6.5 million tonnes and improve its processing efficiency to produce fuels according to the Euro-5 standard.

The refinery is operated by Binh Son Refining and Petrochemical

Gazprom Neft

Gazprom announced its intention to sell its 10.52-percent stake in the German gas distributor Verbundnetz Gas (VNG) because of the Russian gas company’s inability to manage the gas distribution firm. Germany’s EWE, which has agreed to purchase the Gazprom’s stake, said that it could subsequently sell its 74-percent VNG share. However, Gazprom’s board on April 16 decided to keep the company’s stake in VNG.

Gazprom EWE AG

Ukraine’s Rivne supreme court of appeals upheld prosecutors’ claim to transfer the local oil product pipeline to Ukraine. The oil products, pumped by the nationalized pipeline, were recognized as the property of Russia’s Transneft.

– –

Rosneft and Norway’s North Atlantic Drilling announced that the termination date of their framework agreement, signed on August 20, 2014, was extended to May 31, 2017. The companies also agreed to renegotiate the terms of the $4.25 billion deal after rig rates collapsed with the 50 percent fall in crude oil prices and deep investment cuts by explorers.

– –

Rosneft plans to increase its share in its joint venture with Venezuela’s state company PDVSA, Petromonagas, to 40 percent from 16.67 percent. The deal is expected to be completed in two to three months.

Rosneft’s share increase from 16.67% to 40%

Rosneft

Rosneft denied reports about its alleged purchase of a 20-percent share in the Venezuelan National Oil Consortium from Gazprom Neft. Rosneft currently owns 80 percent in NOC.

20% in NOC – Gazprom Neft Rosneft

Britain will withdraw licences to develop oil fields in the North Sea from Dea UK, owned by LetterOne, if the company fails to sell the UK unit. Under the licence terms, Dea UK has three months to change the owner, but the ministry offered to extend the period to six months if LetterOne does not challenge the British authorities’ decision.

LetterOne –

The Russian-Chinese intergovernmental commission requested that Lukoil and Sinopec settle the issue of Kazakh assets (the Caspian Investment Resources company) in pre-action negotiations. The parties have begun discussions.

– –

Rosneft and Italian refiner Saras called off their plans to set up a trading joint venture for political reasons. The companies will exchange information on trading, but there will be no formal company. Saras and Rosneft, which holds a 21-percent share in the Italian refiner, agreed in 2013 to create a trading firm that would allow Saras to tap Rosneft’s crude oil portfolio in return for access to the wider Mediterranean.

Rosneft owns a 21% share in Saras –

Source: Russian Petroleum Investor




TRANSACTIONS


Under the agreement, LITASCO will remain the primary user of STR, a modern bunker fuel termi-nal located in the port of Rotterdam. The terminal, which has 242,000 cubic metres of storage capac-ity and a total quay length of 450 metres, was operated by the 50/50 LITASCO/Burando joint venture, which was established in 2003.

Gazprom Neft has finally decided against par-ticipating in Libya’s Elephant project. “We do not expect significant changes in Libya. Therefore, we have not extended the auction with Italy’s Eni,” Yakovlev told reporters.

Gazprom Neft and Eni in September 2011 signed an agreement on the Russian company’s acquisi-tion of 33.3 percent of Eni’s stake in the Elephant oil and gas production project, which the Italian firm valued at around $170 million, but the deal stalled due to the military conflict in Libya. In December 2013, Gazprom Neft issued a notice of intention to exercise its option to acquire the Ele-phant share. The next step was to receive approval of the deal from Libya’s state National Oil Corpora-tion. Eni owns 66 percent of the Libyan project.

Gazprom in early April announced its intention to sell its stake in the German gas distributor Verbundnetz Gas (VNG). According to Gazprom - which together with its German partner Winter-shall had held a blocking stake of 26.31 percent in VNG – it lost the ability to manage the gas distribution firm after Wintershall sold its share to German utility EWE at the end of 2014.

EWE on April 15 announced that it has agreed to purchase a 10.52-percent stake in VNG from Gazprom Germania, although the deal has yet to be approved by Gazprom’s board of direc-tors. The deal could be worth around 200 million euros, based on the fact that Wintershall sold its 15.79-percent VNG share to EWE for 320 million euros.

However, Gazprom’s board on April 16 decided to keep the company’s stake in VNG. EWE currently owns a 63.69-percent share in the gas distribution firm, while Gazprom Germania holds 10.52 per-cent. The remaining 25.79 percent are owned by several German utilities, including LVV, the local utility’s holding company from Leipzig.

Rosneft and Italian refiner Saras called off their plans to set up a trading joint venture, Saras Managing Director Dario Scaffardi said on April 28. “We decided reciprocally not to go ahead with

the joint venture for political reasons,” Scaffardi said on the sidelines of the company’s shareholder meeting. He added that the companies would exchange information on trading, but there will be no formal company.

Sanctions imposed on Russia by the United States and Europe in response to Moscow’s annexation of Crimea and its support of separatists uprising in East Ukraine have complicated life for Ros-neft, which had to cancel a number of its earlier planned foreign deals.

Saras and Rosneft, which holds a 21-percent share in the Italian refiner, had been seeking to create a trading firm that would allow Saras to tap Ros-neft’s crude oil portfolio in return for access to the Mediterranean.

The two companies agreed to establish a joint venture for the trading of oil and oil products in June 2013. At a meeting with Rosneft’s investors in London in the spring of 2014, the company’s head Igor Sechin said that the planned deal envisaged providing Russian crude supplies to Saras’s refin-ery in Sardinia, as well as the marketing of fuels produced by the refinery. Rosneft, which has good oil product distribution opportunities in Turkey, could have used the network to supply the Sardinia fuels, Sechin said.

In another deal stalled by the sanctions, Rosneft and Norway’s North Atlantic Drilling delayed clos-ing an earlier planned $4.25 billion cooperation deal by two years and agreed to renegotiate the terms of the agreement.

The Norwegian company, a subsidiary of the world’s third-biggest offshore driller Seadrill, an-nounced that the termination date of its frame-work agreement with Rosneft, signed on August 20, 2014, was extended to May 31, 2017 “at no cost.”

The companies also agreed to renegotiate terms after rig rates collapsed following the 50 percent fall in crude oil prices and deep investment cuts by explorers.

Under the deal, which had already been delayed to May this year, North Atlantic Drilling would buy about 150 land rigs from Rosneft. The Russian oil giant, meanwhile, would take a stake of about 30 percent in North Atlantic Drilling. Seadrill, which currently holds 71 percent of North Atlantic Drill-ing, would remain the majority shareholder.

Rosneft and Norway’s North Atlantic Drilling delayed clos-ing an earlier planned $4.25 billion coopera-tion deal by two years and agreed to renegotiate the terms of the agreement.



REGIONAL NEWS

RUSSIA SIDESTEPS SANCTIONS WITH CHINA FINANCING-ROSNEFT Russia is developing non-dollar financing and ties with China in the face of U.S. and EU sanctions, the head of Rosneft’s Swiss-based trading division Marcus Cooper said. «Sanctions are being counteracted ... from a very high level,» Cooper told the Platts’ Global Crude Oil Summit. Rosneft and its chief Igor Sechin, one of the closest allies of President Vladimir Putin, were hit by

sanctions that prevent long-term financing, development of tight oil, Arctic and offshore deposits as part of broader measures against Russia for its actions in Ukraine. Cooper, who previously worked for BP, joined Rosneft in 2013 to help the company build its global trading platform but Rosneft’s plan to acquire Morgan Stanley’s trading division fell apart because of sanctions. The company has however maintained its output and exports at pre-sanctions levels while expanding its tally of customers. Cooper said Rosneft is working to develop in-house expertise on oilfield services, platform operations and ship building,

saying that increased local expertise is «only a matter of time.» He also shrugged off any sanctions impact on refinery modernisation or downstream operations, and said the upgrades that were planned were going forward with no major problems. But Cooper acknowledged that sanctions had, for now, foiled Rosneft’s ambition to build or purchase a trading arm with global reach. «To have a successful trading operation, you need a huge amount of capital,» Cooper said, noting that sanctions drastically limit their access to credit lines beyond 30 days. «That has frustrated the strategy.»

RUSSIA

UKRAINEGAZPROM SAYS UKRAINE’S TOTAL GAS DEBT IS $29.5 BLN Russian natural gas producer Gazprom put Ukraine’s total gas debt at almost $29.5 billion, ratcheting up pressure in a gas pricing dispute with the country, which is fighting a pro-Moscow rebellion on its eastern outskirts. Ukraine’s Naftogaz and Gazprom are squaring off in an arbitration court in Stockholm, where Naftogaz is seeking more than $16 billion from the Kremlin-controlled company. Kiev is challenging the price of Russian gas, and billions of dollars in debts which Russia says have accrued, and is appealing to international arbitrators for a definitive ruling. «The total debt of Ukraine until this date is $29.477 billion,» Gazprom Chief Executive Alexei Miller told an energy conference in Belgrade. Of that, he said, $2.6 billion is for gas deliveries in 2013 and 2014, $200 million was for gas deliveries to southeast Ukraine, and the rest was a fine for «take-and-pay», in which clients pay a minimum for a certain volume of gas whether they buy the whole consignment or not. Naftogaz said in a statement the bills claimed by Gazprom under the take-or-pay stipulations contradict a 10-year contract signed in 2009. The company is also challenging the clause in the court. Previous gas disputes between Ukraine and Russia have affected the European Union, where Gazprom meets a third of gas demand. Around 40 percent of that gas travels via Ukraine, which until recently bought most of its own gas from Russia. Gazprom and Ukraine have agreed on the terms of Russian gas supplies to Kiev for the second quarter. Under this deal, Gazprom has dropped a take-or-pay clause. Miller repeated his concerns about Ukraine’s ability to fill its gas storage tanks to see the country and Europe through the winter. «Ukraine is already pumping gas and storing gas for the next autumn/winter period. The speed and volumes they have today definitely will not allow Ukraine to pump a minimal volume ... which will allow it to cover by 100 percent without any risk, to live through a cold winter, by both Ukraine and the European countries,» Miller said. «There is only one conclusion. Ukraine has to increase the speed of the pumping and purchasing.» He also said

Gazprom’s gas exports to Europe would increase by 5 percent in 2015 from a year earlier.

UKRAINE TYCOON CLOSES PLANTS AFTER «UNPRECEDENTED» GOVERNMENT PRESSUREA company controlled by Ukrainian tycoon Dmytro Firtash said it was closing down its last two nitrogen fertiliser plants in Ukraine because of «unprecedented pressure» from the government which had deprived the plants of gas. A statement by his Group DF said the closure of the Cherkassky Azot and Rivneazot plants would have an effect on grain sowing in autumn and threaten thousands of jobs. Firtash, one of Ukraine’s most influential oligarchs, whose businesses thrived under ousted pro-Russian president Viktor Yanukovich, escaped extradition to the United States last month when an Austrian court accepted his argument that U.S. efforts to try him on corruption charges were politically motivated. But, amid a campaign by Kiev’s pro-western government aimed at ending monopolies and weakening the political influence of the oligarchs, Firtash’s businesses have stayed in the cross-hairs of the government and the state prosecutor. The statement said that Group DF’s holding company Ostchem had come under «systematic and unprecedented» pressure from Prime Minister’s Arseny Yatseniuk’s party. It added that trumped-up criminal charges against some of Ostchem’s executives had led to gas supplies being cut off, leaving the company with no other choice than to close the two factories. A year ago, two other of Ostchem’s plants had been shut down in the east of the country because of the separatist conflict there. «Cherkassky Azot and Rivneazot have been closed. Autumn grain sowing will be under threat and many thousands of Ukrainians will be left without work,» it said. It described recent moves by the interior ministry against Group DF’s holdings as «cynical» and politically motivated.

OPECLUKOIL SEES RUSSIA NOT COORDINATING OIL POLICY WITH OPEC Russia is not coordinating its oil policy with OPEC, the chief executive of Lukoil, the country’s second biggest oil producer, said. Some producers in the Organization of the Petroleum Exporting Countries, keen to preserve their market share, have said they would only consider cutting output to defend oil prices if others outside the group did so too. Vagit Alekperov also told Reuters in an interview Russia and OPEC might, however, exchange views on technology and market forecasts. «Neither the Soviet Union nor the Russian Federation have ever been OPEC members and the Russian Federation doesn’t plan to join this organisation,» Alekperov said on a visit to Bulgaria, where the company is launching a new $1.5 billion plant. «Therefore ... the Russian government does not coordinate its actions with OPEC members.» Russia’s Energy Minister Alexander Novak will take part in an OPEC seminar in Vienna on June 3-4, ahead the group’s policy-setting meeting on June 5. Russia, the largest oil producer outside OPEC, was seeking closer ties with the group as oil prices collapsed last year but was unwilling to cut production or exports to support prices. Alekperov’s company pumps around 2 million barrels of oil per day - a little more than Norway as a whole. Lukoil was on track to increase its oil production by 1 percent this year and planned to spend around $15 billion in investments, envisaging an oil price of $60 per barrel, Alekperov said. «We are currently producing about 2.2 million barrels per day. This year we will stabilise production or increase it by 1 percent. This will only depend on what volumes Iraq will take from West Qurna project,» he said. «But at present we are on track for 1 percent growth,» he added. Oil and gas sales account for about half of Russia’s state budget revenues. The oil price has fallen sharply from a June 2014 level of $115 per barrel, though at below $66 it is off earlier lows. Lukoil operates Bulgaria’s only refinery and will launch a new plant in the Black Sea port of Burgas on Wednesday, helping raise the amount of crude processed there by more than 1 million tonnes to 6.8 million a year from 2016.



GASGREEK ENERGY MINISTER HELD GAS PIPELINE TALKS IN MOSCOW Greece’s energy minister has discussed in Moscow the construction of a pipeline that will transport Russian gas to Europe through its territory, the Greek energy ministry said late in May. Cash-strapped Greece has been making overtures to Russia since the leftist government of Alexis Tsipras took power in January. Athens says Moscow is considering paying it in advance for the Turkish Stream pipeline after abandoning the South Stream project last year. Energy Minister Panagiotis Lafazanis, part of the government’s far-left faction that is keen to boost ties with Russia, travelled to Moscow on Friday for talks with his Russian counterpart Alexander Novak, Deputy Finance Minister Sergei Storchak and Gazprom Chief Executive Alexei Miller. Lafazanis and Storchak discussed

the funding of the pipeline which will be built by a consortium of Russian and European firms, including a Greek state company, Greece’s energy ministry said in a statement. Russian banks have expressed interest in funding the project, the ministry added. After aborting a $40 billion South Stream pipeline last year, Russia is planning to build the Turkish Stream project to Turkey and further on to Greece via the Black Sea, in line with its plans to stop exporting gas via Ukraine by 2019. Greece and its EU/IMF creditors have been locked in talks for months on a cash-for-reforms deal and pressure is growing for a deal, since Athens risks default without aid from a bailout programme that expires on June 30. During his visit in Moscow, Lafazanis also expressed Greece’s interest in taking part in a development bank that a bloc of emerging economies - Brazil, Russia, India, China and South Africa (BRICS) - plan to launch in July, aiming at funding infrastructure. Storchak said Russia will support the

Greek request and made clear the country’s contribution to the fund will be very low.

NORWAY OVERTAKES RUSSIA AS WESTERN EUROPE’S TOP GAS SUPPLIER Norway has overtaken Russia as western Europe’s top gas supplier, data from state firms shows, indicating the European Union’s drive to reduce its dependence on Russian energy is bearing fruit. The sharp drop in oil prices has been another factor, as Norway offers more flexible pricing and big buyers held off buying from Russia in the hope the fall in crude price levels would eventually filter through to Russian gas. Norway exported 29.2 billion cubic metres (bcm) to western Europe in the first quarter of this year, figures from Norwegian state operator Gassco show, while Russia sold 20.29 bcm, according to data

from Gazprom’s regulatory filing and Gazprom officials. The data showed the trend began in the final quarter of 2014 when western Europe bought 29.5 billion bcm from Norway and 19.8 bcm from Russia, according to Gassco and Gazprom respectively. Exports to EU members in eastern Europe are not included in the data. It was the first time Norwegian exports have convincingly overtaken Russia’s since a brief period in 2012. The European Union has been striving to reduce its dependence on Russian imports and buy more from Norway and other gas producers, mindful of Russia’s dispute with Ukraine, the biggest transit route for Russian exports to the EU. Some EU firms have held off from buying Russian gas this year in the hope oil-indexed prices will drop later in the year, while Norwegian capacity has been boosted by the end of an outage at Troll, which produces around 30 percent of the Scandinavian country’s gas. Troll returned to full capacity of 120 million cubic metres per day in March last year,

but volumes were deliberately kept low over the summer months in line with reduced demand. The European Commission, the EU executive, said that for 2014 as a whole, Russia was still the main EU supplier, but its total share of imports dipped to 42 percent from 43 percent and in volume terms fell by more than 10 percent. Norway’s share of EU imports increased from 34 percent to 38 percent in 2014. Apart from a geopolitical row over Russia’s annexation of Ukraine’s Crimea region, Moscow and Kiev are locked in a dispute over the price Gazprom charges Ukraine for its supplies. The European Commission negotiated a three-month supply agreement between Moscow and Kiev at the end of March. Piling on the anxiety for Gazprom, Ukraine has also been seeking to use more reverse flow supply from the EU and take less Russian gas. In many cases, the gas it is receiving is still Russian, although cheaper than that offered in its long-term supply contract with Gazprom.

REGIONAL NEWS(continued from p.43)

LNGTOTAL’S CEO EXPECTS FUNDS FOR YAMAL LNG TO BE UNBLOCKED BY END-2015 Total’s chief executive said he expected funding for the $27 billion Yamal LNG project it is developing in Russia with Novatek to be made available by lenders before the end of the year. «It’s progressing well. We think we’ll get the funds before the end of the year,» Patrick Pouyanne told reporters on the sidelines of the French oil major’s annual general meeting.The liquefied natural gas (LNG) project in the Yamal peninsula in Siberia was barred from raising funds in U.S. dollars after the United States imposed sanctions on Russia. Total, Novatek and China’s CNPC are now seeking funds in euro, yuan and rouble.

VEB TO PROVIDE $3 BILLION IN BANKING GUARANTEES FOR NOVATEKRussian state development bank VEB pledged $3 billion in banking guarantees to Novatek to back its liquefied natural gas project Yamal LNG with the gas producer’s access to global funding limited by sanctions. Yamal LNG will be Russia’s second plant to produce liquefied natural

gas (LNG) when it is completed. Total investments in the project stand at $27 billion, of which shareholders expect to get $10-$15 billion from Chinese banks. VEB had been in talks with Novatek to provide $1 billion initially in a loan to Yamal LNG, where the other shareholders are France’s Total and China CNPC, holding a 20 percent stake each. «Now, the amount of risk we are taking under the project is tripling. At least we expect that no hard cash would be needed,» VEB chairman Vladimir Dmitriyev told reporters after the bank’s supervisory board approved the guarantees. Russia’s Sberbank and Gazprombank are among two other domestic banks expected to support Yamal LNG. VEB, Sberbank and Gazprombank are all under Western sanctions, imposed for Moscow’s role in Ukraine’s separatist conflict, limiting their ability to borrow on Western markets. Russian authorities have pledged billions of roubles to shore up the banking system and keep lending flowing. Yamal LNG was expected to get at least some of the Chinese funds last year. Novatek is also under Western sanctions. Last month, Total chief executive Patrick Pouyanne said that sanctions complicated fundraising although they did not directly affect Chinese financing to a number of Russian companies or individuals. Apart from the VEB banking guarantee, Novatek has secured 150 billion roubles ($3 billion) from Russia’s rainy-day National Wealth Fund. Novatek has also been in talks to sell 9 percent in Yamal LNG to raise funds. Dmitriyev said VEB was not considering buying into Yamal LNG. The first production unit, with annual capacity of 5.5 million tonnes,

is due to be launched in 2017. Peak production of 16.5 million tonnes a year is expected to be reached in 2021.

ROSNEFT TO CONSIDER MOVING LNG PROJECT FROM SAKHALINRussia’s top oil producer Rosneft said it is considering moving the construction of its liquefied natural gas plant away from the Pacific Ocean island of Sakhalin due to Gazprom’s venture not giving it access to a gas pipeline. Rosneft signed an agreement with ExxonMobil in 2013 that aimed at starting production of 5 million tonnes per year of LNG from 2018 at Sakhalin. Rosneft has long been seeking access to the Sakhalin pipeline, controlled by Sakhalin Energy, a venture between Gazprom, Shell, Japan’s Mitsui and Mitsubishi are also shareholders in the project. Gazprom had voiced strong opposition to plans by Rosneft and Exxon to build the $15 billion LNG plant to ship gas produced at their offshore Sakhalin-1 project, strategically sited near Japan, the world’s LNG top consumer. Gazprom has its own LNG plant in the region - the 10 million tonnes per year Sakhalin-2 project built by Shell - in which it acquired a controlling stake several years ago. Joint plans by Rosneft and ExxonMobil to build the LNG plant in Sakhalin has been hindered by infrastructure bottlenecks and uncertainty over gas reserves. Sources have said Rosneft may have to delay development of the plant for at least two years.



CORPORATE NEWS

UPSTREAMGAZPROM TRIMS 2015 GAS PRODUCTION PLAN AGAIN Russia’s top natural gas producer Gazprom has cut its 2015 production plan to 450 billion cubic metres (bcm) after warmer weather hit demand, company officials said on May, 19th, the second such downward revision in a week. The forecast is still higher than the 444.4 bcm of gas the company produced last year, an all-time low. A week before, Gazprom had revised its production plan for 2015 to 471 bcm. «In total we expect around 450 billion (cubic metres) this year,» said Vsevolod Cherepanov, a member of Gazprom’s management board. Vitaly Markelov, another management board member, said Gazprom had suffered from a mild winter, which hit gas demand. Gazprom, which accounts for 8 percent of Russian gross domestic product, has faced stiff rivalry from other domestic gas producers, such as Novatek, as well as from

sluggish demand in Europe. Sberbank CIB investment bank says Gazprom’s rivals have almost doubled their share of the Russian gas market to 35 percent in 2014 from 18 percent in 2009. Gazprom said gas pipes initially ordered for the South Stream underwater pipeline that was scrapped in December would now be used for its planned replacement, Turkish Stream. Gazprom reached an agreement with Turkey to start gas supplies via the Turkish Stream pipeline in December 2016. It plans to start laying pipes for the project in early June. Gazprom plans to supply up to 63 bcm of gas per year via Turkish Stream and to create a gas hub on the Turkish border with Greece, through which it wants to transit 47 bcm annually.

ROSNEFT RESHUFFLES MANAGEMENT… Russia’s top oil producer Rosneft said it had made changes to its managerial structure and that

veteran oilman Igor Maidannik had left the company. Kremlin-controlled Rosneft, the world’s largest listed oil producer by output, said its head, Igor Sechin, had taken the decision to «enhance the effectiveness of the company’s managerial structure». Maidannik held a senior position in Rosneft’s legal department and previously worked in the Anglo-Russian TNK-BP firm, which Rosneft bought for $55 billion in 2013. He will be replaced by Natalia Mincheva, Rosneft said, without giving details about her background. The firm said it had also made personnel changes in its information technology and logistics departments. The company, hit by Western sanctions over Moscow’s role in the Ukraine crisis, has been struggling to increase output and has cut staff. It also recently sold a 10 percent stake in Russia’s largest new oilfield, Vankor, to China National Petroleum Corp and has asked for 2 trillion roubles ($40 billion) in state help from one of Russia’s sovereign wealth funds. The government is yet to approve the state aid. Rosneft needs

to invest more than $21 billion annually until 2017 to launch new fields and upgrade refineries.

… AND LIKELY TO QUIT GAS PROJECT IN UAE Russia’s top oil producer Rosneft said it is considering quitting a gas project with UAE-based Crescent Petroleum in the emirate of Sharjah after exploration drilling failed to confirm commercial reserves. Abandoning the project would be yet another setback for Rosneft’s efforts to expand its global reach. The company also failed to secure a deal to acquire Morgan Stanley’s trading business earlier this year due to restrictions from the United States, which has imposed sanctions against the Kremlin-controlled company over Moscow’s role in Ukraine crisis. Rosneft and Crescent Petroleum had initially aimed to start production at the field, which was estimated to contain 70 billion cubic meters of gas and 16 million tonnes of gas

condensate, in 2013 after signing a deal in 2010. A spokesman for Rosneft said the company drilled two exploration wells with Crescent Group between 2011 and 2014 but tests failed to show commercial hydrocarbon reserves. «As the result, Rosneft is considering the possibility of exiting the project,» he said.Iraq approves $526 mln drilling deal for West QurnaIraq’s cabinet has approved a $526.6 million drilling deal with China’s Zhongman for the West Qurna Two oilfield, the government said in a statement. Under the 28-month contract, Zhongman Petroleum and Natural Gas will drill 66 production oil wells at West Qurna Two, operated by Russia’s Lukoil, the statement said. Current production capacity at West Qurna Two is over 400,000 bpd but actual output is less than 350,000 bpd. Ranked as one of the largest oil fields in the world, West Qurna Two, where Lukoil holds a 75-percent stake, is one of several big fields under development which are set to boost Iraq’s economy.

PROFITS & LOSSES GAZPROM M&T LOAN ELICITS MIXED RESPONSE FROM LENDERS Russian oil and gas giant Gazprom is raising a $350 million one-year revolving credit facility that will refinance existing debt for its UK and Singapore subsidiaries. Although Gazprom is not subject to international sanctions, the deal is receiving mixed responses from lenders who remain concerned about Russian exposure. The deal for Gazprom’s wholly owned subsidiaries Gazprom Marketing & Trading Ltd (Gazprom M&T) and Gazprom Marketing & Trading Singapore Pte Ltd (Gazprom M&T Singapore), has been reduced from an original total of $500 million in July 2014 and is offering higher pricing in a bid to attract support. “Like all Russian deals at the moment it has been repriced and downsized,” a banker looking at the deal said. ING, Natixis, UniCredit and

Raiffeisen Bank International are acting as mandated lead arrangers and bookrunners on the deal. Gazprom Marketing & Trading could not immediately be reached for comment. Most of the loan is expected to be funded by European and US banks, with around $85 million coming from Asian banks as Taiwanese retail banks remain wary of lending to Russian companies, banking sources said. “It is a myth there is an Asian market for Russia; there is little appetite,” the banker said. Bank of Taiwan and Chang Hwa Commercial Bank dropped out of Gazprom M&T’s deal in 2014 due to concerns over Russia. Some new Asian lenders were invited to join the refinancing at a roadshow in Singapore last week but are unlikely to be able to participate, bankers said. “It is a Russian company. No matter where it is registered, we only look at who the shareholders are. At this juncture even the slightest connection with Russia will stop us from entering a deal. Political risks are impossible to evaluate,”

a source from a Singapore-based bank said. European banks are more likely to lend to the transaction as some view Gazprom M&T as UK exposure rather than Russian risk. The deal has even attracted support from at least one US bank, despite stiff US sanctions against Russia. “This deal is different it doesn’t use our Russian limits, it is taken out of our UK limits. The last deal was done in the same way. This borrower has always been sold as a Western client,” a third banker said. Some other European banks, including BNP Paribas and Barclays, still view Gazprom M&T as Russian exposure and are unlikely to join the deal, sources said. “From a technical perspective it is a UK entity with UK funding costs so can be classed as UK risk, but it is Russian exposure. It is Gazprom Group exposure,” a fourth banker said. The loan has a letter of comfort from parent Gazprom. Gazprom M&T and Gazprom M&T Singapore signed the $500 million facility in July

2014, shortly after US and EU sanctions were imposed on Russian companies after Russia annexed the Ukraine in March 2014. That loan paid 125bp over Libor and 28 banks joined the deal. Bankers expect around 12 banks to join the refinancing, with responses due on June 11. The two-tranche refinancing is currently in syndication and pays a margin of 150bp over Libor. Mandated lead arrangers will earn top-level all-in pricing of 200bp with a 50bp upfront fee for commitments of $40 million or more and lead arrangers will earn 190bp with a 40bp fee for $20 million–$39 million. UK-registered Gazprom M&T was established in 1999 to manage Gazprom’s marketing and trading activities in Europe. Gazprom M&T Singapore is a platform for Gazprom’s LNG trading and shipping in Asia and also originates carbon-reduction projects. Gazprom Group has received three syndicated loans in 2015 so far, the company said when it published its 2014

results in April. This included a 230 million euros loan paying 130bp over Libor in January and a 130 million euro loan paying 175bp over Libor in March. Both loans mature in 2016 and were arranged by Deutsche Bank. In April, the group secured a $500 million loan paying 325bp which is due to mature in 2018 and was led by JP Morgan Europe.

BASHNEFT RECOMMENDS 113 RBLS PER SHARE IN DIVIDENDS Russia’s oil producer Bashneft said its board had recommended paying 113 roubles ($2.2) per share in dividends on its 2014 results. That is down from the 410 roubles it paid for the previous year. Bashneft added that the board proposed July 17 as the dividend record date for the determination of shareholders entitled to receive the dividend.



STATISTICS

OIL PRODUCTION IN APRIL 2015 (thousand tons)

Company April Daily Average +/- Daily . April Vs March

YTD

Vertically Integrated Companies:Bashneft:Bashneft 1,362.9 45.43 (0.4) 5,478.8 Bashneft-Polyus 107.7 3.59 0.2 411.3 Burneftegaz: 111.3 3.71 0.4 400.9 Total for Bashneft 1,581.9 52.73 0.2 6,291.0 Gazprom Neft: Archinskoye 25.8 0.86 0.0 99.1 CNT 57.7 1.92 (0.1) 225.4 Gazprom Neft 0.0 0.00 (1.8) 155.9 Gazpromneft-Angara 0.0 0.00 (0.0) 2.5 Gazprom Neft Orenburg 116.1 3.87 (0.7) 529.5 Gazpromneft-Khantos 1,176.9 39.23 35.8 1,478.8 Gazpromneft-Novy Port 35.3 1.18 0.3 108.7 Gazprom Neft Shelf 53.1 1.77 0.0 191.4 Gazpromneft-NNG 812.6 27.09 0.0 3,260.5 Gazpromneft-Vostok 115.8 3.86 (0.0) 466.5 MAGMA 0.0 0.00 (1.4) 134.5 Sibneft-Yugra 0.0 0.00 (32.7) 2,932.4 YuUNG 21.2 0.71 0.0 81.0 Zapolyarneft 379.9 12.66 0.1 1,506.8 Zhivoy Istok 1.1 0.04 0.0 2.6 Total Gazprom Neft 2,795.5 93.18 (0.3) 11,175.6 LUKOIL: LUKOIL-AIK 181.5 6.05 (0.0) 729.0 LUKOIL-KMN 65.9 2.20 (0.0) 265.0 LUKOIL-Komi 1,401.9 46.73 1.3 5,451.9 LUKOIL-Nizhnevolzhskneft 143.5 4.78 0.2 542.4 LUKOIL-Perm 1,177.8 39.26 (0.3) 4,723.7 LUKOIL-Zapadnaya Sibir 3,444.9 114.83 (1.1) 13,949.5 PermTOTINeft 17.6 0.59 0.0 70.1 RITEK 623.3 20.78 (0.0) 2,508.4 Tursunt 8.3 0.28 (0.0) 33.3 Volgodeminoil 47.6 1.59 0.0 189.6 Total for LUKOIL 7,112.2 237.07 0.0 28,462.9 Rosneft: Dagneftegaz 2.0 0.07 0.0 7.8 Grozneftegaz 36.6 1.22 0.1 138.3 Polar Lights 29.8 0.99 (0.0) 125.0





YTD

RN-Severnaya Neft (Northern Oil) 225.8 7.53 (0.1) 914.2 Rosneft-Dagneft 12.2 0.41 (0.0) 49.6 RN-Krasnodarneftegaz 71.4 2.38 (0.0) 284.0 Rosneft-Malaninskaya gruppa 3.4 0.11 (0.0) 13.1 Rosneft (Tomsk district) 0.00 0.0 Rospan International 66.9 2.23 0.0 263.9 RN-Purneftegaz 455.0 15.17 0.1 1,830.7 RN-Shelf far East 160.8 5.36 (0.0) 611.1 RN-Sakhalinmorneftegaz 100.9 3.36 (0.0) 416.3 RN-Stavropolneftegaz 69.4 2.31 (0.0) 280.8 Samaraneftegaz 951.4 31.71 0.2 3,774.8 Suzun 0.3 0.01 0.0 0.9 Taas-Yuryakh Neftegazdobycha 70.7 2.36 0.0 281.1 Udmurtneft 526.8 17.56 0.0 2,104.2

Vankorneft 1,809.5 60.32 (0.1) 7,239.8 Vostsibneftegaz 0.0 0.00 (0.5) 49.9 RN-Yuganskneftegaz 5,142.6 171.42 (0.7) 20,651.6 Yupiter-A 1.0 0.03 0.0 4.2 Buguruslanneft 133.0 4.43 (0.0) 536.2 Ermakovskoye 55.6 1.85 0.0 220.0 Kalchinskoye 33.5 1.12 (0.0) 137.6 Novosibirskneftegaz 198.2 6.61 0.3 764.3 Orenburgneft 1,324.8 44.16 (0.2) 5,345.0 Samotlorneftegaz 1,291.6 43.05 (0.1) 5,195.4 Severo-Varyeganskoye 35.6 1.19 0.0 142.1 RN-Nizhnevartovsk 427.0 14.23 (0.0) 1,723.7 RN-Nyaganneftegaz 507.0 16.90 0.0 2,024.0 RN-Uvatneftegaz 872.4 29.08 1.2 3,319.7 Tyumenneftegaz 15.3 0.51 (0.0) 61.5 Vanyeganneft 100.7 3.36 0.0 407.0 Varyeganneftegaz 135.5 4.52 (0.3) 547.7 Verkhnechonskneftegaz 707.9 23.60 (0.2) 2,852.9 Yugraneft Corp. 18.1 0.60 (0.1) 81.7 Total for Rosneft 15,592.9 519.76 (0.5) 62,401.0 RussNeft: Aganneftegazgeologiya 65.7 2.19 (0.2) 279.3 AKI-OTYR 148.7 4.96 0.0 594.7 Belye Nochi (White Nights) 92.6 3.09 0.0 367.8 Chernogorskoye 6.7 0.22 (0.0) 28.3 Goloil 10.0 0.33 (0.0) 41.8 Mokhtikneft 15.5 0.52 (0.0) 66.3 Nefterazvedka 0.5 0.02 (0.0) 2.1 RedOil 8.6 0.29 0.0 30.9 NK Russneft 59.6 1.99 (0.1) 246.0 Saratovneftegaz 0.3 0.01 0.0 1.2 Tomskaya neft 63.8 2.13 0.0 258.5

STATISTICS(continued from p.46)



STATISTICS



YTD

Ulyanovskneft 66.3 2.21 (0.0) 269.6 Valyuninskoye 1.9 0.06 (0.0) 7.3 Varyeganneft 80.3 2.68 (0.1) 334.8 Total for RussNeft 620.4 20.68 (0.4) 2,528.6 Slavneft: Obneftegazgeologiya 293.5 9.78 (0.0) 1,170.5 Obneftegeologiya 36.4 1.21 0.0 142.3 Slavneft 32.3 1.08 0.0 130.4 Slavneft-Krasnoyarskneftegaz 3.5 0.12 (0.0) 20.6 Slavneft-Megionneftegaz 734.0 24.47 (0.1) 2,943.3 Slavneft-Megionneftegazgeologiya 27.5 0.92 (0.0) 109.9 Slavneft-Nizhnevartovsk 145.8 4.86 (0.0) 602.6 Sobol 8.7 0.29 (0.0) 36.0 Total for Slavneft 1,281.7 42.72 (0.1) 5,155.5 Surgutneftegaz: Surgutneftegaz (UFO) 4,367.7 145.59 (0.1) 17,490.4 Surgutneftegaz (Yakutiya) 698.0 23.27 0.7 2,727.9 Total for Surgutneftegaz 5,065.6 168.85 0.6 20,218.3 Tatneft: Tatneft 2,173.4 72.45 0.1 8,668.6 Tatneft-Samara 22.0 0.73 (0.0) 90.4 Tatneft-Severny 1.5 0.05 (0.0) 6.3 Total for Tatneft 2,196.8 73.23 0.1 8,765.3 Total for Vertically Integrated Companies

36,247.0 1,208.23 (0.4) 144,998.3

Non-Specialized State-Controlled Companies:

Gazprom: Total for Gazprom 1,534.5 51.15 0.6 6,058.4 Total for Non-Specialized State-Controlled Companies

1,534.5 51.15 0.6 6,058.4

Other Oil-Producing Companies: NOVATEK: Total for NOVATEK 338.3 11.28 (0.3) 1,395.8 Other Oil-Producing Companies: 4,485.8 149.53 0.0 17,872.1 PSA Operators: PSA Operators 1,224.2 40.81 0.6 4,908.4 Total 43,829.8 1,460.99 0.5 175,233.1 Note: All figures are preliminary. Source: Russian Ministry of Energy




STATISTICS

GAS PRODUCTION APRIL 2015 (mln cu m)


YTD

Vertically Integrated Companies:Bashneft:Bashneft 46.0 1.5 (0.1) 176.4 Bashneft-Polyus 15.4 0.5 0.0 32.2 Burneftegaz 5.2 0.2 0.0 19.3 Total Bashneft 66.5 2.2 (0.0) 227.9 Gazprom Neft: Archinskoye 0.6 0.0 0.0 2.5 CNT 6.0 0.2 (0.0) 22.7 Gazprom Neft 0.0 0.0 (0.1) 3.6 Gazprom Neft Novy Port 0.8 0.0 (0.0) 3.8 Gazprom Neft Orenburg 109.6 3.7 (1.3) 570.2 Gazpromneft-Khantos 55.0 1.8 1.7 65.8 Gazprom Neft Shelf 0.6 0.0 0.0 1.4 Gazpromneft-NNG 571.8 19.1 0.2 2,270.0 Gazpromneft-Vostok 7.7 0.3 (0.0) 30.6 MAGMA 0.0 0.0 (0.1) 9.0 Sibneft-Yugra 0.0 0.0 (1.7) 135.9 YuUNG 11.5 0.4 0.0 39.2 Zapolyarneft 275.4 9.2 1.3 1,070.4 Zhivoi istok 0.1 0.0 0.0 0.2 Total Gazprom Neft 1,039.1 34.6 0.1 4,225.4 LUKOIL: Komineft 0.0 0.0 (0.0) 0.0 LUKOIL-AIK 16.8 0.6 (0.0) 68.1 LUKOIL-KMN 2.3 0.1 0.0 8.9 LUKOIL-Komi 149.9 5.0 0.1 575.2 LUKOIL-Nizhnevolzhskneft 153.2 5.1 0.3 617.8 LUKOIL-Perm 154.5 5.2 0.8 594.6 LUKOIL-Zapadnaya Sibir 1,029.9 34.3 (0.4) 4,149.4 PermTOTINeft 0.3 0.0 0.0 1.2 RITEK 52.2 1.7 (0.0) 211.1 Tursunt 0.4 0.0 0.0 1.6 Volgodeminoil 12.1 0.4 (0.0) 48.0 Total for LUKOIL 1,571.7 52.4 0.8 6,275.9 Rosneft: Dagneftegaz 19.7 0.7 0.0 78.0 Grozneftegaz 13.1 0.4 (0.0) 53.3 Polar Lights 2.5 0.1 (0.0) 10.1




GAS PRODUCTION APRIL 2015 (mln cu m)


YTD

RN-Severnaya Neft (Northern Oil) 19.2 0.6 0.0 76.7 Rosneft-Dagneft 2.2 0.1 (0.0) 8.9 Rospan International 345.1 11.5 0.1 1,359.2 RN-Krasnodarneftegaz 261.4 8.7 (0.2) 1,086.7 RN-Purneftegaz 444.5 14.8 0.3 1,747.2 RN-Sakhalinmorneftegaz 35.1 1.2 0.1 139.8 RN-Shelf Far East 42.0 1.4 0.1 144.7 RN-Stavropolneftegaz 7.4 0.2 (0.0) 30.5 Samaraneftegaz 48.4 1.6 0.0 189.4 Taas-Yuryakh Neftegazdobycha 6.3 0.2 (0.1) 29.0 Udmurtneft 1.1 0.0 0.0 4.2 Vankorneft 691.4 23.0 (1.7) 2,927.1 Vostsibneftegaz 0.0 0.0 (0.0) 0.9 Yuganskneftegaz 371.1 12.4 0.0 1,488.0 Buguruslanneft 2.6 0.1 (0.0) 10.9 Ermakovskoye 3.0 0.1 0.0 11.4 Kalchinskoye 1.5 0.1 0.0 5.8 KChNG 4.6 0.2 (0.0) 19.3 Nizhnevartovsk OGPC 19.5 0.7 0.0 75.5 Orenburgneft 251.2 8.4 (0.2) 1,005.2 Samotlorneftegaz 434.0 14.5 0.8 1,728.7 Severo-Varyeganskoye 29.7 1.0 0.1 115.6 Tyumenneftegaz 0.8 0.0 0.0 1.4 RN-Nizhnevartovsk 45.6 1.5 0.0 184.8 RN-Nyaganneftegaz 132.6 4.4 0.1 517.7 RN-Uvatneftegaz 17.4 0.6 0.0 69.1 Vanyeganneft 93.7 3.1 0.0 375.3 Varyeganneftegaz 121.4 4.0 0.0 472.0 Verkhnechonskneftegaz 11.5 0.4 (0.0) 47.8 Yupiter-A 0.0 0.0 0.0 0.1 Yugraneft Corp. 3.2 0.1 0.0 11.8 Total for Rosneft 3,482.8 116.1 (0.4) 14,026.1 RussNeft: Aganneftegazgeologiya 8.4 0.3 (0.0) 33.3 AKI-OTYR 11.7 0.4 (0.0) 44.3 Belye Nochi (White Nights) 56.4 1.9 0.1 215.2 Chernogorskoye 0.5 0.0 0.0 1.9 Goloil 1.0 0.0 0.0 3.8 Mokhtikneft 0.9 0.0 (0.0) 3.7 RedOil 10.0 0.3 0.0 37.0 NK Russneft 37.3 1.2 (0.0) 145.9 Saratovneftegaz 0.2 0.0 0.0 0.6 Tomskaya neft 6.8 0.2 0.0 23.7 Ulyanovskneft 0.6 0.0 0.0 2.1 Valyuninskoye 0.1 0.0 0.0 0.4




GAS PRODUCTION IN APRIL 2015 (mln cu m)


YTD

Varyeganneft 39.4 1.3 0.0 145.2 Total for RussNeft 173.2 5.8 0.1 657.2 Slavneft: Obneftegazgeologiya 8.4 0.3 (0.0) 34.7 Obneftegeologiya 0.3 0.0 (0.0) 2.0 Slavneft 0.2 0.0 0.0 0.8 Slavneft-Krasnoyarskneftegaz 0.1 0.0 0.0 0.3 Slavneft-Megionneftegaz 60.1 2.0 0.0 240.5 Slavneft-Megionneftegazgeologiya 0.5 0.0 (0.0) 2.8 Slavneft-Nizhnevartovsk 4.2 0.1 0.0 16.3 Sobol 0.5 0.0 (0.0) 2.4 Total for Slavneft 74.3 2.5 (0.0) 299.7 Surgutneftegaz: Surgutneftegaz (UFO) 746.5 24.9 1.2 2,960.4

Surgutneftegaz (Yakutiya) 65.2 2.2 (0.0) 263.7 Total for Surgutneftegaz 811.6 27.1 1.1 3,224.0 Tatneft: Tatneft 73.2 2.4 0.0 289.0 Tatneft-Samara 0.0 0.0 0.0 0.9 Total for Tatneft 73.2 2.4 0.0 289.9 Total for Vertically Integrated Companies

7,292.4 243.1 1.7 29,226.1

Other Gas-Producing Companies:NOVATEKTotal for NOVATEK 4,091.2 136.4 (3.2) 16,889.5 Other Gas-Producing Companies*

38,784.2 1,292.8 (35.2) 166,572.1

PSA Operators:PSA Operators 2,471.6 82.4 0.4 9,660.9 Total 52,639.5 1,754.7 (36.3) 222,348.8

*Including Gazprom and other gas produsing companies

Note: All figures are preliminary. Source: Russian Ministry of Energy



STATISTICSOIL REFINING, JANUARY-APRIL 2015 (thousand tons)Company/Refinery Primary Oil Refining Oil Products

Gasoline Diesel Fuel Residual Fuel Jet FuelNNK (Alliance Group):Khabarovsk Refinery 1,391.2 224.4 248.3 501.8 76.9 Total for NNK (Alliance Group) 1,391.2 224.4 248.3 501.8 76.9 Bashneft: Novo-Ufimsk Refinery 2,042.7 484.4 589.3 283.5 17.9 Ufaneftekhim 2,433.5 498.8 1,138.5 159.4 0.0 Ufimsk Refinery 1,697.7 480.5 695.7 535.1 0.0 Total for Bashneft 6,173.9 1,463.7 2,423.5 978.0 17.9 Gazprom neft: Omsk Refinery 6,929.6 1,537.8 2,103.0 536.9 521.2 Moscow Refinery 3,537.0 857.0 695.4 1,074.4 189.6 Total for Gazprom neft 10,466.6 2,394.8 2,798.4 1,611.3 710.8 Gazprom 1,807.7 843.8 454.4 93.6 58.5 LUKOIL: Nizhegorodnefteorgsintez 4,715.7 964.7 1,191.7 1,647.5 189.8 Permnefteorgsintez 3,539.3 448.5 1,361.7 478.7 147.1 Ukhtaneftepereeabotka 1,122.9 159.4 309.0 368.4 (0.6)Volgogradneftepererabotka 3,673.0 553.2 1,153.5 307.9 308.0 Total for LUKOIL 13,050.9 2,125.8 4,015.9 2,802.5 644.3 Rosneft: Achinsk Refinery 2,323.4 378.6 668.7 820.4 45.3 Angarsk Petrochemical Company 2,925.6 413.9 970.0 808.9 129.0 Komsomolsk Refinery 2,494.5 137.8 674.9 880.3 72.4 Novo-Kuibyshevsk Refinery 2,597.5 412.0 691.6 807.0 117.7 Samara Refinery 2,250.3 356.5 811.0 840.4 0.0 Syzran Refinery 2,189.8 389.3 683.3 712.7 22.0 Tuapse Refinery 3,201.5 0.0 1,056.5 1,519.3 0.0 Saratov Refinery 2,268.6 339.5 655.3 580.5 0.0 Ryazan Refinery 5,186.6 915.6 1,223.5 1,663.7 352.4 Total for Rosneft 25,437.8 3,343.2 7,434.8 8,633.2 738.8 Slavneft: Yaroslavnefteorgsintez 4,736.7 796.9 1,265.9 1,718.8 299.7 Total for Slavneft 4,736.7 796.9 1,265.9 1,718.8 299.7 Surgutneftegaz: Kirishinefteorgsintez 6,388.6 903.9 2,243.5 2,634.4 201.6 Total for Surgutneftegaz 6,388.6 903.9 2,243.5 2,634.4 201.6 TAIF-NK (Niznekamsk Refinery) 2,907.4 226.3 690.9 790.5 12.1 TANECO 2,846.1 0.0 468.4 703.8 0.0 Yaysky Refinery 994.8 0.0 401.1 413.9 0.0 Antipinsky Refinery 2,631.2 0.0 556.4 1,285.2 0.0 Mariysky Refinery 542.3 0.0 91.1 315.6 0.0 Yaroslavl Refinery 49.9 0.0 0.0 19.8 0.0 Afipsk Refinery 1,832.7 0.0 674.3 812.9 0.0 Gazprom neftekhim Salavat 2,351.1 308.8 634.7 352.1 0.0 KrasnodarEcoNeft 672.5 0.0 220.9 297.8 1.1 Novoshakhtinsk Nefteprodukt Refinery 810.6 0.0 0.0 20.3 0.0 Orsknefteorgsintez 1,796.8 259.4 516.3 583.3 87.7 Ilsky Refinery 908.7 0.0 102.4 427.3 0.0 NOVATEK Ust-Luga 2,276.3 0.0 0.0 0.0 0.0

Total for Companies and Refineries 90,073.8 12,891.0 25,241.2 24,996.1 2,849.4 Total for Mini-plant 2,737.2 89.9 452.0 852.3 22.0 Total 92,811.0 12,980.9 25,693.2 25,848.4 2,871.4 N

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STATISTICS

OIL EXPORT FROM RUSSIA, JANUARY-APRIL 2015 (thousand tons)

Company Seaports Oil pipelines YTDNovo-

rossiyskPrimorsk Kozmino Ust-Luga Druzhba

PipelineESPO

(China)CPC

Far abroad export and transit via Transneft by the directions

11,139.0 14,987.4 10,015.5 9,287.0 17,841.0 7,294.4 621.6 71,185.9

Vertically Integrated Companies:Bashneft 977.8 849.6 1,827.4 1,353.1Gazprom neft 1,847.7 409.2 2,256.9 1,563.2LUKOIL 6,940.4 1,691.7 8,632.1 6,447.9Rosneft 14,651.2 9,107.7 7,294.4 621.6 31,674.9RussNeft 718.6 177.7 896.3 679.5Surgutneftegaz 7,239.9 2,639.0 9,878.9 7,545.9Tatneft 2,011.6 1,475.8 3,487.4 2,696.1Total for Vertically Integrated Companies 34,387.2 16,350.7 7,294.4 621.6 58,653.9State Controlled Companies:Gazprom 214.0 214.0NOVATEK 132.2 132.2Other Oil-Producing and Exporting Companies

3,748.2 956.1 4,704.3

PSA Operators 494.7 494.7Total export for Russian Federation 38,976.3 17,306.8 7,294.4 621.6 64,199.1Kazakhstan's transit via Transneft 5,666.8 5,666.8Azerbaijan's transit via Transneft 508.5 508.5Turkmeniya's transit via Transneft 277.3 277.3

Belarus 534.3 534.3Far abroad export and transit via Transneft 45,428.9 17,841.1 7,294.4 621.6 71,186.0Export to far abroad passing Transneft 277.3Far abroad export and transit 71,463.3Far abroad export from Russia 64,476.4Far abroad transit 6,986.9CIS countries export 7,396.7Export to Kazakhstan 0.0Export to Kazakhstan via Transneft 0.0Export to Kazakhstan passing Transneft 0.0Export to Belarus 7,396.7Export to Belarus via Transneft 7,359.4Export to Belarus passing Transneft 37.3Export to Ukraine 0.0Export to Ukraine via Transneft 0.0Total export and transit 78,860.0Total export from Russia 71,873.0Total transit 6,987.0Note: All figures are preliminary; nonreconcilable totals reflect incomplete data supplied by the RF Ministry of Energy

Source: RF Ministry of Energy

© Thomson Reuters 2013

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