1. Russian hydrocarbon sectors
Andrei V Belyi,
CEURUS, Tartu

2. structure Historical and institutional specificities
Reserves, production and exports
Dynamics in oil sector
Oil pipelines
Gas sector: domestic issues
Gas Export dimension State-owned companies
Gazprom and Rosneft: new policy dimensions

3. 1. Historical and institutional specificities
Soviet legacies of energy sectors
Non-rentable wide scale infrastructure (oil and gas pipelines, electricity networks)
Geology based resource classification (no link to market)
Social importance of access to resources, energy price and access to export
Increased rate of over-investments (corruption?)
High energy intensity (TPES/GDP), about 0.5

4. Dvorkovich view to support privatization
Decrease the role of the State in the economic segments or reinforce the State especially in the oil sector?
Dvorkovich view to support privatization
Sechin view to reinforce State in energy
In addition, Russia’s political strategy remains in scope of disputes

5. Regulation of hydrocarbon
No energy-specific regulator
Federal Anti-Monopoly Service (FAS) covering issues of competition, anti-trust and consumer protection (remains very liberal)
Federal Tariff Service (FTS) covering price regulation in natural monopolies; also responsible for monitoring of price
Ministries: (1) Economic development, (2) Energy and (3) Natural Resources
Oil sector was restructured since 1992
No monopoly on export but a growing concentration on production
Oil pipelines are unbundled from production, private pipelines are possible
Gas sector exempted from restructuring
But legislation is set for a wholesale market, issues with implementation
Gazprom owns MRG, the pipeline operator
Export monopoly, de-jure since 2005

6. 2. Reserves, production and exports
Before 1917
First drilling in Baku in 1846 (second drilling after US in 1814)
Volga region develomment since 1864
Large exploration and production works started in North Caucasus, Volga-Ural regions
Negative prospects for further oil discoveries proven to be wrong: with Timan Pichora and Western Siberia oil reserves Russian production boosted
1991- to date
New discoveries provide even larger production potential in the short-term production increase: North Caspian, East Siberia Sakhalin,
Exploration ongoing
Russian and Siberian North still has an important estimated resource potential
Vast reserves allowed an energy intensive economy but access to new fields in Eastern
Regions is more difficult hence requires a new approach
Source: IEA, 2002 , TEK, 2008 and BBVA, 2008
Arctic Shelf
Barents Sea
Kamchatka
Timan Pichora
West Siberia
Urals
East Siberia
Volga
Sakhalin
N. Caucasus
N. Caspian
Baku

7. Access to upstream Licensing PSA
Allocated by Ministry of natural resources
Licenses for exploration separated from licenses for production
Ministry may revoke the license. Disputes resolved by Highest Arbitral Tribunal
PSA
Separate legal regime approved by State Duma
No link with State taxation policies
In case of Sakhalin energy: State exerted pressure by using “environmental monitoring”

8. Russia’s oil and gas production since 2000
Russia is the first world gas producer,
But gas consumption close to the EU level
Oil Export growth with the production, but half of oil goes for Russian internal market
Production
Production
Export
Mln tons
Domestic consumption
Up to 70% of gas production is consumed
Domestically
BCM
Russia is the world largest oil and gas producer
But also a large hydrocarbon consumer
How to accommodate domestic demand and export ambitions?

9. Exports historically oriented to Europe
(outdated map shows that by 2001 no exports to Asia)

10. 3. Dynamics in oil sector
Russian oil companies
Approx. Production share in brakets
VSNK
(3-5%)
Yukos
acquires
VSNK
(20-21%)
Rosneft
(28%)
state-owned
Reasons for concentration:
Political:
Concentration of the control over strategic state resources
Easier conditions to conclude profitable concessions
Economic/financial:
Larger profits stimulated by the high world oil prices
Attraction of external capital to invest into the sector
Technical:
Better capability to exploit difficult areas of resources
Yukos
(12-13%)
Rosneft
(5-6%)
Rosneft
(5-6%)
TNK-British Petroleum
Holding (16-17%)
private
Onako
(1-2%)
TNK
acquires
Sidanko,
Onako
(12%)
Sidanko
(8-9%)
TNK
(9-10%)
Slavneft
(4%)
Gazpromneft
(8%)
State-owned
Sibneft
(9-10%)
Sibneft
(7-8%)
Tatneft
(6%)
regionally owned
Gazprom
(7-8%)
Gazprom
(7%)
Tatneft
(7-8%)
SurgutNG
(16-17%)
private
Tatneft
(5-6%)
SurgutNG
(11-12%)
SurgutNG
(15%)
Lukoil
(22%)
private
Lukoil
(19%)
Lukoil
(19%)
Slavneft
(5-7%)
With purchase of TNK-BP (2012), Rosneft can be defined as a new NOC 10

11. Transition from command to market economy in the 1990s lead to a decrease in production. In 1998 oil production represented 59% of its 1990 level
After 1999: oil sector regained its strength with the economic stabilization and world price increase
In 2004 Largest production subsidiary Yuganskenftegaz was taken over by the state owned company Rosneft from Yukos
Stagnation after 2007 mainly due to inefficient taxation system (Royalty is linked to world oil price)
Tax relief since 2009 for greenfields but limited effect
In 2013 production rate reached the level of 1988 but average marginal costs are high
Regulation on access to small fields is stalled
Oil Production and export: historical trends
1992: private and state-owned oil companies start operating Russian oil sector
Oil production decline after Break-down of the USSR (1991) Due to under-Investments
: lowest production level
Mln tons
Source: Oil & Capital
Profits decline  unwillingness to change classification to avoid decrease in capitalization 11

12. Oil products
Vertically integrated structure of oil refining and downstream distribution remains (i.e. low level of inter-company exchanges)
Quasi-monopolistic structure in downstream pushes prices up, Marginal costs are also above western average
Federal Antimonopoly Service (FAS) attempts to pressure oil company on prices
Increase of environmental standards (i.e. introduction of Euro standard for gasoil) have been inefficient (companies tend to decrease refining capacities, prices go up, but revenues decline)

13. Refineries are concentrated on the western part of Russia
Levels of price vary from 0.6 Eur to 1 Eur per l.
Yakutia and Far East have the highest levels (low market fragmentation)
Source: Russian Energy Agency, 2013

14. Average shipment length: 3000 km Druzhba pipeline: 5500km
Transneft pipelines
Specificities:
Telescope down effect: built to supply former satellite countries, the pipeline capacity is small on export points due to the low demand in Eastern Europe.
Different heavy and light oil sorts are commingled in Druzhba pipeline within one flow (so called Urals), Ministry of Energy constantly delayed quality banking
Pro rata regulation is applied: all oil producers get a quota according to the production level
World longest oil pipeline network
Source: TEK, 2008
Constructed during Soviet era, pipeline sector needs to be reshaped in order to meet world market structure
Druzhba
Baltic
terminals
Druzhba
Black sea
terminals(
crude oil
oil products
Length: km
Average shipment length: 3000 km
Druzhba pipeline: 5500km
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15. Oil shipment via Druzhba and Black sea terminals decreases
Geography of export by pipeline: decrease of Druzhba and increase of terminals
Geography of Transneft oil shipments in time
Source: TEK, 2008
Oil shipment via Druzhba and Black sea terminals decreases
Proportionally to an increased use of Baltic terminals and of the Pacific in future.
Effects: decrease of shipment to Baltic branches (LV and LT)

16. Other pipelines
Baltic Pipeline System (since 2002): new pipelines owned by Transeft
AS: Transneft allocates quotas to Kz
CPC - Private consortium lead by Shevron (US)
Commercial agreements for access, laws on natural monopolies do not apply

17. 5. Russian gas sector: domestic issues
EU oriented export, East direction is underdeveloped
Russia is the first world gas producer
Production
Export is monopolized by Gazprom
Oil companies and independents sell gas domestically
BCM
Domestic consumption
Russia is the world leading gas consumer:
Up to 70% of gas production is consumed
Domestically  need to reduce gas flaring

18. Novatek aims at producing
bcm by 2020
Gazprom would allocate an internal market, but price is uncompetitive
 Pressure on exports  Oct 2012 Novatek concludes 10 yrs agreement to supply German costumer EnBV with 2 bcm annually

19. Institutional setting
Increased role of FAS in limiting incumbent (Gazprom)
Gazprom gets however priority access in the upstream, mainly Arctics
Hence, level of fragmentation remains marginal  HHI is about 7000
Gazprom now controls up to 17% of generation with 36 GW of installed capacity
Long term effect on electricity market: if gas price is increased, and market fragmentation remains low, consumers will be sensitive to the price of fuel (gas)

20. Towards wholesale market?
Trade from 5+5 to 7+7 bcm, but slows down since 2009
2007: first electronic trading platform
Aiming at increasing sector’s efficiency
2010: Decree on wholesale market
objective to have a wholesale market by 2015
2013 amendment: FTS not to regulate the price but the access to pipelines only
No real implementation
MRG (pipeline operator) is responsible in drafting access code
Market to control Gazprom’s price hikes?
Or to find an alternative in the context of stagnating exports?
The issue of pricing is crucial since 2012!

21. 6. Export dimension Gazprom’s gas deliveries to Europe 2007-2011
Source: T. Vehrs, Gazprom Germania presentation, Tallinn
Most of gas is delivered under long term contracts, long term upstream investments needed:
- Development of upstream: Northern Yamal, South East Nadym Pur Taz; Far East; Eastern Siberia
- Largest investment plans: 40 billion USD till 2020 (mostly transport infrastructure)  need for long term contracts with take-or-pay
Gazprom participates in the spot, and increases competition for the European retailers  ground for disputes

22. EU-Russia gas trade issues
European retailers are under pressure on TPA; anti-trust monitoring against GDF and Eon
Gazprom attempts to keep price indexation to oil, in spite of the opposite trend (up to 50% of gas is hub-based in Europe)
PGNIG, EON: agreements on adjustments of long term contracts; RWE Transgas won an arbitral case against Gazprom on take-or-pay
Impact on relations with Ukraine? (Ukraine demands to decrease volumes without take-or-pay payment)
However: LNG export liberalization is foreseen for Autumn 2013

23. Gazprom and Baltic States: area of difficulty
Estonia
Latvia
Lithuania
Eesti Gaas Ltd.
JSC Latvijas Gaze
JSC Lietuvos Dujos
Gazprom - 37%
Itera Latvia- 9.85%
Gazprom - 25%
Itera Latvia- 25%
Gazprom %
Most difficulties are with Baltic states, where Gazprom has stakes in distribution
EE and LT decided to implement full ownership unbundling 
disputes

24. 7. State-owned companies: Gazprom and Rosneft
Both Rosneft and Gazprom are state-owned but dynamic of influence is different
Gazprom is a VIC which is in path to a decentralization (without losing the institutional structure)
Rosneft became a China-type NOC
Financial differences:
Since 2000s oil export revenue is higher (reaching 172 bln USD in 2012) then of gas (58 bln USD for gas)
Rosneft is less dependent on exports
Rosneft was successful in dealing with China
Level of securitization of oil imports from Russia is much less significant