Russian Oil & Gas Strategy: What does it mean for the global oil markets? 17th MIDDLE EAST PETROLEUM & GAS CONFERENCE 21 April 2009, Dubai, UAE Tatiana Mitrova, Ph. D. Center for International Energy Markets Studies Energy Research Institute of the RAS

Russia in the world oil & gas balance

Russian Oil Production and Export in , bln.t. Source: Rosstat Production Export

Short-term effects of the crises Sharp oil price decline and export duty lag led to upstream losses in 4Q2008, independents were mostly affected Ruble devaluation, decrease in costs and MET reduction allowed Russian oil companies to generate profits in 2009 even in 40 $/bbl environment as major part of their costs is in Roubles Optimization of the investment programs started Considerable decrease in tax burden Oil and gas companies (especially state-controlled) can count on the support from the government. Moreover, the largest projects could be viewed as infrastructure ones, creating additional employment opportunities (similar to Roosevelts New Deal) Legislative changes as of 01/01/2009 are a substantial but still insufficient relief for oil companies Export customs duty Source: Ministry of Natural Resources and Ecology of RFSource: Rosstat

New incentives needed Source: Rosneft

Regulatory Changes

Short-term oil production trend Source: CDU TEK, Troika.

Prospects of Russian oil production, mln. t Source: ERI RAS Crises scenario

Major oil export projects: additional flexibility BALTIC PIPELINE SYSTEM (BPS-II) Belarus Lithuania Latvia Estonia Pskov region Novgorod region Leningrad region Tver region Smolensk region Bryansk region Kaluga region Tula region MOSCOW GREEC E BULGARIA ROMANIA Alexandrupol is Burga s Constant sa AEGEAN SEA BLACK SEA Baltic Pipeline System-2Caspian Pipeline Consortium Burgas-Alexandroupolis

Eastern Siberia development and ESPO High geological risks The governments plans on petroleum licensing in the region lag far behind plans Delays in infrastructure development High capital and operational costs High uncertainty of ESPO tariff Construction of the first phase of the ESPO pipeline to Skovorodino is well advanced and will likely be completed as planned in late 2009 Transneft and China have also finalized the details of construction of a branch from ESPO to China.. The challenge to fill the pipeline Transneft proposal for a single network pipeline rate of some $4.4/bbl starting in 2010 to effectively equalize costs of exporting crude to the East or West

Prospects of Russian gas production, bcm Source: ERI RAS Crises scenario.

Yamal – the main growth driver Gazprom became extremely focused on Yamal project and spent some $4 bln. last year on Bovanenkovskoye field. This year the figure is to spike to $6.5 bln. Last year Gazprom began laying the Ukhta-Bovanenkovskoye gas pipeline, completed half of the Baidaratskaya Bay 72 km long crossing, drilled the first production well and did much infrastructural work It is planned to produce the first 7.9 bcm in According to the General Scheme of Gas sector the Yamal output was slated to spike to in 2020, thus offsetting falling production in NPT

Shtokman project Phase one bcm annual output The Shtokman Development Company has approved the project`s first $800 mln. budget for and will make a final investment decision this year In June 2008 construction of the first semi-submersible drilling platform started at the Vyborg Shipbuilding Plant The decision will hinge upon oil and gas price forecasts and the government`s willingness to provide support for the project With a slowing economy in the intended European and US markets, Shtokman project could now be less a priority

Gas production in Eastern Siberia and Far East Refuse from Altai project in General Gas Scheme In the medium-term China will receive gas from Central Asia Most attractive markets – Japan and S.Korea – are LNG-focused Sakhalin transforms in a major gas-producing region with Sachalin-2 starting LNG supply in several weeks Source: General Scheme of Gas Sector Development until 2030.

Market-oriented flexible approach in gas production Source: General Scheme of Gas Sector Development until 2030.

New Gas Pipelines Nord Stream SRTO- Torjok Yamal-Europe Pochinki- Izobilnoe Blue Stream II Vidyaevo- Volkhov CAC-3 Yamal- Ukhta Yamal- Yamburg South Stream CAC

Russia and OPEC Broad cooperation with OPEC is one of Russias political priorities On October 22, 2008 there was held an unprecedented meeting of President of Russia Dmitry Medvedev and Secretary General of OPEC Abdullah Salem Al-Badri In September, December 2008 and March 2009 Russian delegation, headed by Vice Prime minister Igor Sechin who is in charge of fuel and energy sector, was present at OPEC oil ministers meeting. Russia affirmed its intention to cooperate with OPEC with possibility to become an observer without joining the Organization Russian government took the lead to arrange a regular energy dialog between Russia and OPEC, aimed at contributing to long-term stability of oil market to the benefit of oil market participants

Russian proposals To reduce the role of traders in favor of direct contracts between oil producers and consumers To develop new oil trading system with switching to long-term supply contracts; setting new trading floors in the producing countries; increasing the number of markers in the oil market To set up inventories in producing countries To coordinate investment process in gas industry in order to avoid oversupply To coordinate tax policy (harmonizing the fiscal burden on oil-producing companies) To increase the role of producers by involving significant non-OPEC producers in the effort to stabilize markets – such as Kazakhstan, Azerbaijan, Norway, and Brazil