Europe And Russia On The Verge Of Mutual Energy Mistake

National Energy Security FundNational Energy Security Fund

Europe & Russia: On the Verge of Mutual Energy Mistake

Konstantin Simonov Konstantin Simonov

ParisParisMay, 20May, 202010 2010


European HopesEuropean Hopes

•Europe believes in the beginning Europe believes in the beginning of an era of cheap hydrocarbons, of an era of cheap hydrocarbons, a competitive gas market, and a competitive gas market, and oversupply for years to come oversupply for years to come

•The EU proceeds from the The EU proceeds from the assumption that the only assumption that the only necessity is to provide necessity is to provide infrastructure for accepting and infrastructure for accepting and distributing hydrocarbons in the distributing hydrocarbons in the EUEU


Main Issues of Gas Main Issues of Gas Diversification Diversification

• Central Asia: Lack of new transport routes leads to Central Asia: Lack of new transport routes leads to China’s increasing domination in the regionChina’s increasing domination in the region

• There has been no way for Nabucco to solve the problem There has been no way for Nabucco to solve the problem of filling the pipeof filling the pipe

• Iran still remains a country with high political risksIran still remains a country with high political risks• Qatar with its LNG has come to the EU because of the Qatar with its LNG has come to the EU because of the

plain trap into which it fell in the US as it believed plain trap into which it fell in the US as it believed absolutely unreliable forecasts of the American gas absolutely unreliable forecasts of the American gas market development. For that reason, it has simply been market development. For that reason, it has simply been forced to find a market for new LNG quantities at any forced to find a market for new LNG quantities at any prices prices

• Shale revolution in the EU: much more talk than action Shale revolution in the EU: much more talk than action here, unlike the UShere, unlike the US

• Declining internal conventional gas production remains Declining internal conventional gas production remains the key problem the key problem

• Energy efficiency: less progress in the period of an Energy efficiency: less progress in the period of an economic crisis and relatively low oil prices economic crisis and relatively low oil prices


European Gas Paradoxes European Gas Paradoxes

• Simultaneous expectations of a cheap gas era and Simultaneous expectations of a cheap gas era and shale revolutionshale revolution

However, if you want substantial shale gas However, if you want substantial shale gas production in the EU, gas must be expensive. If gas is production in the EU, gas must be expensive. If gas is cheap, no money will be invested in shale productioncheap, no money will be invested in shale production

• Confidence in Qatar’s satisfaction with any margin Confidence in Qatar’s satisfaction with any margin earned according to the “cost-plus” method earned according to the “cost-plus” method

If Qatari gas costs $90 per 1,000 cubic metres, this If Qatari gas costs $90 per 1,000 cubic metres, this does not mean that Qatar will always be happy to sell does not mean that Qatar will always be happy to sell it at $100. It is not at all certain that Qatar will it at $100. It is not at all certain that Qatar will prioritise the policy of conquering new markets prioritise the policy of conquering new markets without thinking about higher cost-effectivenesswithout thinking about higher cost-effectiveness


Diversification as Salvation Diversification as Salvation from Russia from Russia

Europe forces Russia into other Europe forces Russia into other markets by itself markets by itself

•““LNG will replace pipeline gas” LNG will replace pipeline gas” •““Spot market will replace long-Spot market will replace long-

term contracts”term contracts”•““Ukraine is not our problem” Ukraine is not our problem”


Is This Justified in Medium Is This Justified in Medium Term? Term?

The EU may be in for The EU may be in for 15-2015-20 years of difficulties because years of difficulties because • Demand for gas may begin to recover Demand for gas may begin to recover • Export of gas from Iran may not start in the next 15-Export of gas from Iran may not start in the next 15-

20 years 20 years • Central Asia will find itself politically dependent on Central Asia will find itself politically dependent on

China China • Qatar will seek to make supplies more profitableQatar will seek to make supplies more profitable• Internal production of conventional gas will be Internal production of conventional gas will be

seriously declining seriously declining • It will be difficult to finance grandiose energy It will be difficult to finance grandiose energy

efficiency projects efficiency projects • The “shale revolution” will require 15-20 years to The “shale revolution” will require 15-20 years to

move from words to actual projects, which US move from words to actual projects, which US experience has shown graphicallyexperience has shown graphically


Russia’s “Symmetrical Russia’s “Symmetrical Response” Response”

•Diversification of supplies: entering Diversification of supplies: entering Asian markets. This strategy is being Asian markets. This strategy is being implemented for both oil and gas. implemented for both oil and gas. However, as is the case with Europe’s, However, as is the case with Europe’s, its efficiency raises serious doubtsits efficiency raises serious doubts

•Russia is abandoning the logical Russia is abandoning the logical principle “Western Siberia for the principle “Western Siberia for the West, Eastern for the East”West, Eastern for the East”

•The “pipeline race” continues that The “pipeline race” continues that diverts financial resources rather than diverts financial resources rather than delivers hydrocarbons to new markets delivers hydrocarbons to new markets


Russia’s “Symmetrical Russia’s “Symmetrical Response”Response”

• An entire system for redirecting oil from An entire system for redirecting oil from Western Siberia to the east is being created, Western Siberia to the east is being created, which looks very strange from an economic which looks very strange from an economic point of view. Huge money is invested in point of view. Huge money is invested in infrastructure that is necessary to take oil infrastructure that is necessary to take oil from a more profitable market to a less from a more profitable market to a less profitable marketprofitable market

• The more so because the cost of export rises The more so because the cost of export rises significantly given such strange logisticssignificantly given such strange logistics

• Development of Eastern Siberian fields is Development of Eastern Siberian fields is behind schedule. Meanwhile, pipelines are behind schedule. Meanwhile, pipelines are being built as a matter of urgency being built as a matter of urgency


Oil Production in Oil Production in East SiberiaEast Siberia

Deposit

2009 output Reserves License owner

Vankor 3.64m tons 520m tons Rosneft

Verkhnechonskoe 1.3m tons (С1+С2) 201.6m

tons TNK-BP, Rosneft

Talakan 1.9m tons C1- 105.449m tons С2 -18.132m tons

Surgutneftegas

Alinskoe 10,000 tons 5m tons Surgutneftegas

Kuyumbinskoe 31,400 tons Slavneft-

Krasnoyarskneftegaz

Srednebotuobinskoe 10,000 tons С1+С2 123m tons Taas-Yuryakh

Neftegazodobycha

Dulisminskoe 100,000 tons Dulisma (99% belongs

to Sberbank)

All deposits 6.99m tons 1.2bn tons

Source: NESF


East or West?East or West?

• The energy strategy stipulates sharp growth The energy strategy stipulates sharp growth in the share of oil exports in the eastern in the share of oil exports in the eastern direction – from 8% in 2008 to 22-25% in 2030direction – from 8% in 2008 to 22-25% in 2030

• The energy ministry officially proposes to cut The energy ministry officially proposes to cut oil exports to the west by 20% to 25% by 2030oil exports to the west by 20% to 25% by 2030

• In 2009 practically all auctions on fields in In 2009 practically all auctions on fields in Eastern Siberia failed. In the Krasnoyarsk Eastern Siberia failed. In the Krasnoyarsk region all 16 tenders did not take place. Out region all 16 tenders did not take place. Out of 12 auctions in the Irkutsk region only one of 12 auctions in the Irkutsk region only one was held (on the Ayansky western block). was held (on the Ayansky western block). Only one successful auction was carried out in Only one successful auction was carried out in Yakutia that was won by Rosneftegaz state Yakutia that was won by Rosneftegaz state company (the Srednebotuobinskoe deposit)company (the Srednebotuobinskoe deposit)


China in Russian China in Russian UprstreamUprstream

Leading Buyers of Licences for Russian Oil & Gas Fields in 2009, Billion Roubles

3,733

2,724 2,629

1,277

0

0,5

1

1,5

2

2,5

3

3,5

4

Surgutneftegaz Kolvaneft Rosneft LUKOIL

Source: Rosnedra


Upstream DreamsUpstream Dreams

Gas production in 2008-2009 and forecast of condensate output in Eastern Siberia and the Far East (bcm)

Region 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2025 2030 Eastern

Siberia and Sakha

Republic (Yakutia)

6.1

7.3

9.4

10.5

11.9

13.6

15.8

22.1

37.9

52.7

76.7

95.6

111.8

143.7

148.6

Krasnoyarsk Region

4.2 5.3 6.9 7.5 8.2 8.2 8.7 12.4 15.3 18.0 20.7 24.3 24.6 30.6 31.5

Irkutsk Region

0.1 0.2 0.5 0.8 1.1 2.2 3.7 5.5 10.4 14.3 22.9 27.9 34.0 54.8 56.8

Sakha Republic (Yakutia)

1.8 1.8 2.0 2.2 2.6 3.2 3.4 4.2 12.2 20.4 33.1 43.4 53.2 58.3 60.3

Far East 9.1 15.0 22.6 25.8 25.8 25.7 26.2 33.5 39.8 43.7 45.6 45.6 46.6 60.2 84.2 Sakhalin

shelf 8.4 14.3 21.9 25.1 25.1 25.1 25.6 32.9 39.2 43.1 45.1 45.1 45.1 51.9 71.9

Sakhalin continental

shelf

0.7 0.7 0.7 0.7 0.7 0.6 0.6 0.6 0.6 0.6 0.5 0.5 0.5 0.3 0.3

West Kamchatka

shelf

1.0 8.0 12.0

Total 15.2 22.3 32.0 36.3 37.7 39.3 42.0 55.6 77.7 96.4 122.3 141.2 158.4 203.9 232.8 Source: Siberian Branch of the Russian Academy of Sciences


Case: Altai Gas PipelineCase: Altai Gas Pipeline

• Connects Western Siberian fields Connects Western Siberian fields that have an expensive market. It is that have an expensive market. It is by no means gas from Yakutia or by no means gas from Yakutia or other Eastern Siberian regions, but other Eastern Siberian regions, but gas from the Yamal-Nenets gas from the Yamal-Nenets Autonomous District, i.e. Western Autonomous District, i.e. Western Siberia, that the Altai gas pipeline is Siberia, that the Altai gas pipeline is intended to deliver to China intended to deliver to China

• Its length is 2,800 kilometres Its length is 2,800 kilometres (Russian territory) (Russian territory)

• A monopolistic consumer who will A monopolistic consumer who will not invest in the pipe not invest in the pipe

• The Turkmen precedent: for a long The Turkmen precedent: for a long time they fought for diversification, time they fought for diversification, and now they have got China that and now they have got China that refuses to pay more than $120 per refuses to pay more than $120 per 1,000 cubic metres1,000 cubic metres

Source: Gazprom


China Better Positioned to China Better Positioned to Solve Gas Problem than EUSolve Gas Problem than EU

• Counting on Counting on Central Asia and Central Asia and AustraliaAustralia

• Higher chances to Higher chances to start shale gas start shale gas production than production than those for the EU those for the EU

Comparison of Initial Conditions for Shale Gas Production in EU and China

Parameter EU China

Reserves

Considerable

Technology No, but may be

received from the US

No, but there is a high potential for industrial

espionage. Counting on development of production technologies in Australia

Investment

Government investment is limited by economic crisis and European

currency troubles

Substantial investment resources. More profitable to invest in shale gas than

US government bonds

Environment Serious limitations

Environmental concerns are thought to be a

limitation on the right to development,

environmental issues are ignored

Considerable, but distributed irregularly, which creates political

problems of a higher role of “shale” countries


Necessary AgendaNecessary Agenda

EU: VEU: Valuablealuable Activities Activities RF: VRF: Valuablealuable Activities Activities

Change of diversification Change of diversification rhetoricrhetoric

Liberalization of access of Liberalization of access of foreign companies to shelf foreign companies to shelf

and other upstream and other upstream projects projects

Refusal from public support Refusal from public support of the most unrealistic of the most unrealistic

projectsprojects

Refusal from pipeline export Refusal from pipeline export of gas to China of gas to China

Support of Support of acquisitionacquisition of of Naftogas by GazpromNaftogas by Gazprom

IImplementationmplementation of principle of principle “East fo East, West for “East fo East, West for

West”West”


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Europe And Russia On The Verge Of Mutual Energy Mistake