Russia's Role in Oil & Gas 2011

In March, as United Nations (UN) Security Council actions to send militia into Libya took shape, Russia’s President Dmitry Medvedev made it clear that the way Prime Minister Vladimir Putin remarked on decisions didn’t cut it. These individuals synonymous with Russia’s mysterious political elite had a bit of a squabble, but as the Kremlin-backed United Russia Party met in Moscow to hold a conference in the first week of October, they appeared to have patched up their differences.

Putin suggested that Medvedev steward the party list for December’s parliamentary elections, and in kind, seemingly responding to his request to head up the Duma, Medvedev put Putin forward as United Russia’s candidate for the March 2012 polls. Whether admired or revered, they make a formidable team, and both leaders have littered oil and gas industry headlines throughout the September and October months as reported dealings with nations from Venezuela to China have surfaced. Regardless of the contracts and trade partnerships that do (or don’t) take shape in 2011, Russia—whose chief export earner remains to be oil by a long stretch—will play a fundamental role in international petroleum supply, contracts and control. The question, as Prime Minister and President line up their options, is which nations this duo will do business with when emerging agreements are clarified?

China & the trillion-dollar gas deal

On October 3, during a televised meeting with Gazprom chief executive Alexei Miller, Putin ordered that his associate go about preparing proposals to expand into the lucrative Asian gas markets. Days later, as the PM embarked on a two-day state visit to China beginning October 11 (with Russian energy house executives from Gazprom, Rosneft and UC RUSAL in tow) gas talk was splashed all over international headlines. Varying degrees of comment from Russia and Chinese parties hinted that a deal (and an end to years spent trying to craft one) would be imminent.

Ongoing gas debate

Last year China became Russia’s biggest trading partner, and the nations have repeatedly expressed intentions to up their current US$70 billion annual business dealings to $100 billion by 2015 and $200 billion by 2020. Plenty of deals were struck during the 48 hours Putin spent meeting top Chinese minds from government, the energy industries and academia. We saw both parties ink an investment fund memorandum of intent between Russia’s Vnesheconombank (VEB) and Direct Investment Fund (RDIF) with China Investment Corporation (CIC), and some $7 billion in trade agreements (including energy matters). Yet the possibility of advancing a long-awaited 30-year, 68 billion cubic metre per annum gas deal with the host nation topped Russia’s goals.

The deal isn’t a new development. It dates back to initial talks in the 1990s and has taken various twists and turns. In 2006, China National Petroleum Corporation (CNPC) and Gazprom partnered on an agreement to construct the Altai project: A pipeline running from Taishet in Russia’s Altai Republic to the Xinjiang province’s Central Asia pipeline, including another eastern line to the north-eastern Sakhalin Island. On-off negotiations surrounding the deal have been around ever since (the latest target for commencing project construction works was 2016) and as China continues to diversify its energy sourcing (for 2010 Russia supplied approximately just six per cent of China’s natural gas) what may once have been perceived as an upper hand held by Moscow could be slipping from its grasp. The recurring bone of contention amid deal talk has been that of cost: Russia’s intentions to demand European-level gas prices and China’s adverse preference for its own (far lower) domestic Asian price settings.

Friendlier ties

In November 2010, Chinese officials stated that the pricing quarrel differed by $100 per 1,000 cubic metres, and speaking to journalists on day one of the recent excursion, Putin appeared to reiterate those sentiments when he stated that the nations really are teetering on the brink of an agreement this time.

“We are close to the final stage of work on gas supplies to Chinese market,” he told press.

“Those who sell always want to sell at a higher price, while those who buy, want to buy at a lower price. We need to reach a compromise which will satisfy both sides.”

Russian Deputy Prime Minister Igor Sechin spoke with the same volition. He told journalists that Russia and China are, “standing on the threshold of gas delivery agreements.”

“We are conducting normal, routine work that will end with the signature of a contract—of that I am certain,” he told Interfax news agency.

To date no such accord has emerged, and there have been various stages over the past few years when it was expected to be tied up (the last moment came when China’s President, Hu Jintao, visited Russia in June). A lot of positive reports, however, have surfaced since Putin’s latest jaunt. And if claims from Gazprom sources on the eve of the trip are to be believed—which revealed that conditions for delivery are the only outstanding concern—it may not be long before concrete decision-making materialises.

On Wednesday October 12, Putin met with Hu Jintao and Chinese legislator Wu Bangguo in the 16th meeting the nations have staged to discuss various fronts of bilateral cooperation. Referring to Russia as “an old friend of the Chinese people,” Hu Jintao told Putin, “I believe your visit will further promote the development of the China-Russia comprehensive strategic partnership of cooperation.”

Their meet marked the tenth anniversary of the signing of Russia and China’s Treaty of Good-Neighbourliness, Friendship and Cooperation, and prompted Putin to reiterate their 2015 and 2020 trade goals to the press once more.

Supply, demand & synergy

Relations between both nations have certainly improved during the course of deal discussions, not least in terms of trade partnerships. Both governments have moved forwards and teamed up on other energy projects in the past year—including the January opening of a 1,000 kilometre oil pipeline from Daqing, northeast China, to Skovorodino, eastern Russia, which is intended to supply 15 million metric tons each year to China—and on-ground development suggests that cooperation is increasing; proof that it is possible the governments will eventually transition from discussions to construction and operation.

Both China and Russia’s views on topics of international debate appear to have aligned as well. Reports even speculated whether both governments presented a united front in their refusal to back the European-drafted UN Security Council decision to condemn protesting rights abuses in Syria, from the first week of October. Both nations vetoed the U.S. backed statement and it has since been suggested that the move is a clear comment to the West not to meddle in their national concerns—perhaps before both parties elect to partner on a gas deal or similarly high profile bilateral accord.

Simultaneously, the alliance presented by Medvedev and Putin ahead of the October ministerial visit has been raised. Medvedev is said to have endured strained relations with China since his presidential tenure from 2000 to 2008, but with both nations wholeheartedly placing energy cooperation high on their political agendas—and continuing perceptions around Russian attempts to rise above Europe’s troubled export scene—it is possible that a friendlier outlook is in the making. The visit was particularly well-timed in respect to Gazprom, whose own offices in Germany, Czech Republic, Hungary, Poland, Bulgaria, Latvia, Estonia and Slovakia were raided by the European Commission in late-September/early-October over concerns about possible misdealing which may lend a wielding influence over continent-wide supply. Ahead of Putin’s trip, many pointed out the obvious for-and-against arguments for partnering in energy settings with population booming China; perhaps both Moscow’s biggest threat and opportunity simultaneously.

Venezuela: Taking gold home, investing in oil with Russia

Having returned to the helm as he battles cancer, Venezuelan President Hugo Chavez wasted no time in announcing plans to repatriate the nation’s gold held in overseas banks in the U.S. and Europe (aka-the West), decreeing industry nationalisation on September 19. By mid-October rumours of first shipment to get physical gold back into the South American resource haven signalled a date of November 5, and parties turned to the World Bank’s International Centre for Settlement of Investment Disputes to scramble for assistance. While orchestrating this mass move away from ties with the West, Chavez also carried out major changes to firm up relations with Russia in the realms of developing Venezuela’s enormous oil potential.

PDVSA hooks up with Russian consortium

Unforgettable events back in 2007 may have blotted the country’s oil industry copy book (when Chavez and his team seized majority control over any remaining privately held assets) yet in September 2011 Venezuelan oil minister Rafael Ramirez announced that state-run giant Petróleos de Venezuela (PDVSA) will use subsidiary vehicle, Corporación Venezolana de Petróleo, and state-controlled company, Minerven, to establish joint ventures and up production. Fresh from being declared home to the 2010 biggest proven crude oil reserves globally in July (totalling 296.5 billion barrels according to the Organisation of Petroleum Exporting Countries, OPEC) and targeting four million barrels per day production come 2014, news arrived of a US$4 billion defense loan from Russia to the South American partner, penned on October 7 by the Russian and Venezuelan governments in exchange for access to oil plays. The loan will be delivered in two equal parts—one in 2012 and one in 2013, according to Chavez. His government has spent $4.4 billion on various items of army goods, including fighter jets, weaponry and helicopters, and he assured the international community that Venezuela is quite simply modernising its defense forces, which were previously “defenceless,” and it is, “not a threat to anyone”. That same day, both countries agreed to pledge $2 billion through the international bank, Evrofinance Mosnarbank SA, for use on housing and the Junin-6 oil block joint venture.

The joint venture between PDVSA and a consortium of Russian companies is, according to Chavez speaking to Sechin and energy minister, Sergei Shmatko, a “modest proposal, one of those ideas that you launch: The creation of a new organisation in this emerging new world of oil giants. We are no more than four or five [oil super majors], among them Russia and Venezuela. It is an issue [which warrants us] to comment and discuss”.

In declaring the deal to be, “the largest petroleum energy project on the planet,” Chavez also said that its genesis bears no intention to diminish the role of OPEC; the body in which Venezuela is a founding member.

Getting into Orinoco

The focus for future operations rests on Venezuela’s Orinoco belt—a main area behind the OPEC 2010 reserves boost which country officials say may house around 300 billion barrels of recoverable oil—but its heavy and extra-heavy oil is neither cheap or easy to access. Ahead of the project subsequently announced, analysts expressed concerns about how economically viable it might be to extract the resources in question.

The new oil alliance will reportedly focus on the Junin-6 bloc, said to be capable of delivering 450,000 barrels of oil per day (bpd). Touring the fields in the week of October 6, Sechin said that “the physical work has begun,” for PDVSA and its Russian partners to commence production at approximately 50,000 barrels per day in May 2012. In Junin-6, PDVSA controls 60 per cent and Russian houses OAO Rosneft, Surgutneftegaz JSC, TNK-BP Holdings, Lukoil Holdings and Gazprom Neft (oil arm of Gazprom) hold the remaining 40 per cent.

Elsewhere, news delivered on October 8 revealed that Rosneft will pay $1 billion to enter the Carabobo 2 block in the southern Orinoco belt. This deal entails a first payment of $600 million to develop the oilfield and a $400 million payment following a final investment decision made. As agreed for the Junin-6 bloc, PDVSA will retain a 60 per cent interest in the project.

Plans to exploit the fields are in stark contrast to efforts made by the government to regain its stranglehold on the nation’s gold—exemplifying Venezuelan interests in Russia and exit strategies in respect to depending on the West. Venezuela will attempt to bring in around $80 million in investments to develop oil operations in the area, and speaking on state television, Chavez described the Russian alliance as the latest move by his government to reduce reliance on the U.S. and Europe and strengthen relations with his nation of choice.

Arrests, pricing & intrigue in Ukraine

In January 2009, Russian and Ukrainian squabbles resulted in a two-week shutdown of supply routes to Europe as the Kiev government continued its embattled attempts to secure reductions in Russian gas pricing in exchange for its role as a means of supply transit to the wider continent. As US$300 million European Union (EU) plans to upgrade and modernize a vital part of Ukrainian gas transport system are on schedule to start in 2012, it appears that the saga is still evident and reports are split as to whether discussions for favourable prices may resume in the future.

Kiev’s energy minister, Yuriy Boyko, reported September 30 that gas talks between his government and that of Moscow did not delve into pricing reductions.

That same day, news emerged that Ukrainian state-run group Naftogaz has partnered with ExxonMobil on a preliminary exploration agreement to develop the nation’s own native shale gas deposits—the fourth largest in Europe at approximately 42 trillion cubic feet—which present a vital source of supply away from high Russian prices. Just one month previous, Ukraine announced that it will enter a $800 million shale gas deal with energy conglomerate Royal Dutch Shell.

However, despite the advantageous deals signed in the past month, the country was dealt another blow on October 11.

‘Exceeding powers’ and political points

News that former Ukrainian Prime Minister, Yulia Tymoshenko, will be jailed for seven years over what a judge called ‘exceeding her powers’ in a 2009 Russian natural gas import deal which cost Naftogaz 1.5 billion hryvnias ($188 million) sparked outrage from much of the international community. Both the U.S. and European Union moved responded quickly, calling the sentence politically motivated, and the EU later postponed its invite of Ukraine President Viktor Yanukovych to Brussels indefinitely. Tymoshenko is the opposition leader and longstanding foe of Yanukovych, and she maintains that the actions for which she is now condemned formed the basis of settling the long-running dispute over pricing between Kiev and Moscow. On October 18, Medvedev and Yanukovych met for the Second Ukrainian-Russian Inter-Regional Economic Forum in Donetsk (eastern Ukraine).

International Developments

Russian O&G in Russia

On October 18, Gazprom’s oil arm, OAO Gazprom Neft (the nation’s fifth largest oil producer) posted a predicted net profit rise of 73 per cent to $5.4 billion.

That same day, news emerged that international technology giant Siemens will invest €1 billion over the coming three years in modernising and upgrading country infrastructure. Approximately €700 million will be committed to the country’s energy sectors—including €400 million on gas turbines and their associated infrastructure—through a joint venture between Siemens and Russian power plant major Power Machines.

In eastern Siberia, interest from Chinese group Sinopec reportedly continues to simmer. The firm partners with Russia’s Rosneft on the Sakhalin-3 block in the Pacific island of Sakhalin, and remains with “a special interest in east Siberian reserves” according to its Russian office director, Liang Yanji, speaking to Reuters in Moscow.

Agreements on gas routes through Belarus also gained clarity, after an October 18 meet between Gazprom chairman Alexei Miller and Belarusian deputy Prime Minister Sergei Rumas. As IRJ goes to press, both partners are said to be readying to announce supply and transport contracts, as well as the sale of Beltransgaz remaining shares to Gazprom

Russian O&G in Turkey

Russia appeared to lose influence in Turkey, October 6, when the Turkey-ussia Western Pipeline agreement was terminated, purportedly following disagreements between Istanbul and Gazprom over gas prices. Turkey will not renew its 25-year gas contract with Gazprom. The nation’s energy head, Taner Yildiz, said that gas pricing had risen 39 per cent in 29 months. Yildiz stated that Gazprom would now need to negotiate its own terms with the private contractors brought into play. Like Ukraine, Turkey’s role in weakening the Russian monopoly over European gas supply in the years to come has been repeatedly highlighted. As well as Russia, the nation has existing natural gas contracts with Iran and Azerbaijan, and plans to set up similar agreements with Turkmenistan, Iraq and Egypt. There are also plans to stockpile product until Southern Gas Corridor pipeline projects are in operation, making the nation an important supply route to Europe.

Russian O&G in Poland

Following Turkey’s lead in moving away from business dealings with Gazprom, Polish state-run company PGNiG reiterated previous threats to raise its issues with the Russian gas conglomerate in the international courts unless similar pricing adjustments were made, specifically, a return to the costing formula effective November 2006. The firm reportedly spent $3.3 billion on Russian gas in 2010.

One week later, on October 11, news from traders speaking to Reuters news agency revealed that Russia will continue on with plans to up crude shipments through the Polish port of Gdansk in October, and intends to send another two cargoes of 100,000 tonnes each amongst the transit plan.

Russian O&G in Iran

On October 9, the state-owned National Iranian Oil Company (NIOC) announced the cancellation of plans to work with Gazprom on the Azar oilfield—a cross-border operation known also in Iraq as Badra—instead offering the work to members of a domestic consortium. According to NIOC managing director, Ahmad Ghalebani, “unfortunately Russia’s Gazprom failed to fulfil its commitment and ignored ultimatums of National Iranian Oil Company”.

On October 11, it emerged that the contract had gone to the Iranian Oil Industries’ Engineering and Construction (OIEC) Company for a total $1.9 billion. The field, said to contain 400 million barrels on each side of the border in Iran and Iraq, was contracted to Gazprom to develop in 2009 for a potential deal worth $2 billion. Gazprom Neft, leading a consortium, also has a $2 billion deal to develop Badra.

Just when it appeared that Russia’s exit from the project was sealed, the NIOC invited Russian oil firms to participate in developing another project: The Changooleh oilfield. Rumours from October 15 also abound, hinting that Russian oil house Zarubezhneft—which signed a memorandum of understanding on cooperation with Iran earlier this year—may be invited to partake in the Azar field in Gazprom’s place.