Analysis: Russia to Develop Untapped Resources, Diversify Export Markets

Russia is seeking to develop its oil and natural gas resources, particularly in untapped areas like its offshore Arctic region, as well as diversify the number of oil and gas export markets available to Russia, and needs companies with deep financial pockets and a willingness to share risk. However, laws restricting exploration and production (E&P) activity by foreign companies and a sector structured to favor domestic firms must be addressed to encourage E&P activity and maintain production growth.

While the Russian government has welcomed foreign investment, it has limited companies to partnering in projects with Russian companies as operator. "It's hard for companies not to want to be in Russia because it has such vast resources, but the investment climate has not been favorable to foreign companies. The most they can hope for is an equal stake in a project with a state company, and that it ambitious," Andrew Neff, senior energy analyst at IHS.

BP's recent share swap with Rosneft, which will allow BP access to explore for oil and gas in Russia's Arctic, was made possible by BP's exceptional circumstances and its unique position in Russia via its TNK-BP venture, Neff said. However, it could set off a new frenzy of international oil companies (IOCs) looking to partner with national oil companies, if not in Russia, perhaps elsewhere.

"I think the share swap arrangement seems to preclude Rosneft making a similar deal with, say, Shell, but I do think other IOCs will be keen to get in on the action in Russia if the government is willing to let them in the door (likely only in partnership with Rosneft or Gazprom…the question is if the BP-Rosneft deal means that Rosneft will see BP simply as its preferred international partner or actually cut off other nascent relationships so that BP is Rosneft's only partner," Neff said.

The Russian government is expected to push towards private companies investing in exploring for and producing oil and gas in eastern Siberia as part of a plan to diversify its supply market to include China and other Asian countries, where crude oil demand has surged. "The thinking is that if Europe can diversify its gas suppliers, the Russia should be able to find alternative markets for its supply," said Neff.

These efforts include the first pipeline linking Russia and China, the 3,018-mile Eastern Siberia Pacific Pipeline, which is now operational and will transport 300,000 b/d of oil over a 20-year period. The project's second phase will see pipeline laid that will allow for oil shipments to Japan and Korea. Deloitte reports that the pipeline's completion is a win-win for both as Russia needs new export outlets while China pays huge transit fees from Middle East producers.

"The new focus on exporting oil and gas makes sense for Russia, which faces dimmer export prospects for the European Union as unconventional gas development begins and member states build terminals to import LNG from around the world,” Deloitte said. "For China, the new oil pipeline will help to diversify crude supply, guarantee oil safety and effectively help to control the oil price in China.” The pipeline's completion also paves the way for joint refining programs between the two countries and for other Asian national to participate in Asia's increased demand for oil and gas. Currently, Vietnam is one of Russia's key strategic partners in the Asia-Pacific region and one of only a few countries to participate in oil extraction on Russian territory.

While Russia is rich in oil and gas resources, the Russian government in 2008 had to introduce a US$4.2 billion tax cut at mid-year to reverse declining production after a period of growth from 1998 through 2004. "From the oil company's perspective, the government was taking all the revenue from high oil prices, leaving them will little to invest in new production, so there was nothing to offset declining production from aging fields in Western Siberia," Neff said.

"It's amazing how quickly the industry turned things around," said Neff, noting that Russian oil production passed the 10 million b/d mark in 2010. However, "there's still a sense that Russian production could come to a cliff if they don't make changes." Shifting from a production-based tax system to a profit-based tax system has been discussed as a means to attract more E&P investment; however, these efforts will be delayed until next year as the government has sought to stabilize other areas of the Russian economy.

Russia was the second largest gas producer worldwide with 19.3 Tcf in production and the largest gas exporter with 7.3 Tcf of exports in 2009. However, the global gas market has undergone dramatic changes in the past two years. With the U.S. shale gas boom adding additional supply to the U.S. market, the demand for liquefied natural gas (LNG), and many LNG cargoes destined for the U.S. have been redirected to Europe and Asia. As a result, demand for Russian gas exports in Europe has declined.

Eastern European countries that rely heavily on Russian gas also have pushed for new inter-connectors within Europe so that gas can flow west to east rather than east to west. This move will allow these countries to bolster their energy supply security. Some countries are seeking to reduce their reliance on imports such offshore gas development projects in Romania and Bulgaria and shale gas drilling in Poland.

While Russian gas production recovered in 2010 due to increased domestic demand within Russia and slight recovery in European demand, Gazprom's gas exports to Europe in 2010 were essentially flat year-on-year versus 2009. The state of the European gas market has resulted in the Shtokman gas field development being delayed until 2016, and it remains questionable whether the project will be ready by then.

Gazprom has sought to diversify its customer base by investing in pipeline projects that will supply China and/or the wider Asia Pacific market. Gazprom also is constructing the Nord Stream pipeline directly to Germany and pushing for a plan to build the South Stream pipeline via the Black Sea direct to Bulgaria, from where two branches would supply central and southeastern Europe, mainly as to diversify export routes and reduce Gazprom's own reliance on Ukraine as a transit state for carrying Russian gas to Europe.


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Generated by readers, the comments included herein do not reflect the views and opinions of Rigzone. All comments are subject to editorial review. Off-topic, inappropriate or insulting comments will be removed.
REX P. DILLEE | Jan. 20, 2011
Since when does the legislative body of the U.S.A. have the power to regulate other world countries business with BP?


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