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Russia Oil and Gas Competitive Intelligence Report 2010 In the past, Gazprom has successfully managed to fend off attempts by the Finance Ministry to increase its tax burden by arguing that it already faces extremely high new-generation E&P costs. This time, Gazprom has suggested that rather than increasing tax on production and exports, an import tariff should be introduced. Taxing the gas that Gazprom purchases from Central Asia (and resells to Europe) would likely cost the company less as the volumes it buys from abroad are significantly lower than its domestic output. Putin has responded to Gazprom's proposal saying that as the introduction of import tariffs were 'not just an economic question', the government would look into the issue at a later stage. Offshore Exploration Russia may relax rules effectively limiting offshore E&P in the country to Rosneft and Gazprom, according to a report by the Moscow Times newspaper in March 2010. The report, which cited deputy energy minister Sergei Donskoy, said the proposal would allow subsidiaries of the two companies to join them in offshore exploration and could lead to IOCs also becoming involved. In the Moscow Times article Donskoy claimed that the NREM believes Gazprom and Rosneft have insufficient resources to develop Russia's continental shelf on their own. Under a plan drafted by the ministry, the companies would be allowed to share access with their subsidiaries and could farm out a stake of up to 50% in offshore projects to foreign companies. The proposal would also allow any of the subsidiaries to develop offshore fields on their own or in partnership with other companies. However, the newspaper also reported that it is unclear whether the proposal has been submitted to the Russian cabinet. Under legislation passed in 2008, offshore fields in Russia can only be developed by companies in which the government owns a stake of 50% or greater. In addition, companies applying to work on the fields must have a five-year record of working on such projects, effectively limiting participation to Gazprom and Rosneft. It is arguable that this has damaged Russian investment in offshore areas. The two companies invested only RUR56.4bn (US$1.9bn at 2010 rates) in E&P offshore Russia in 2008, a rate that Donskoy claimed would mean ministry targets for offshore areas would take 165 years to fulfil. Government Policy Under the Energy Strategy 2030, Russia is expecting to sustain its oil output at roughly 2009 levels and dramatically boost gas production. The plan, drafted in August and approved in November 2009, calls for annual production of 10.6-10.7mn b/d of oil and 885-940bcm of gas by 2030. Exports of crude and oil products are expected to rise to 6.6mn b/d while gas sales abroad are to reach 349-368bcm by that year. Most of the extra gas exports are expected to be absorbed by Asia. To achieve the set output growth, the government wants an annual investment of US$28.4bn (late 2009 exchange rate) in the oil sector and US$27bn in the gas sector. The oil output target is theoretically achievable, especially after a downward revision of the August 2009 draft. The level of capex outlined in the plan, however, is unlikely to be sufficient. Gas production goals look extremely ambitious outright given the current volumes and dynamics of the global supply and demand. © Business Monitor International Ltd Page 9
Russia Oil and Gas Competitive Intelligence Report 2010 The government is moving forward plans to privatise a larger share of Rosneft. In July 2010, the Finance Ministry included the country's largest oil producer in the list of nine companies earmarked for partial privatisation in 2011-2013 in an attempt to eliminate the budget deficit. Up to 24.16% of Rosneft could be sold, leaving the state with the 51% controlling stake. As the jewel in the Russian state sector's crown, the Rosneft stake could provide around RUB500bn (US$16.5bn) for the treasury, or half the overall divestment target. A non-controlling stake in Transneft may also be sold, although government officials have been given conflicting signals. In July 2008, Russia’s state market regulator, the Federal Financial Markets Service (FFMS), put a 25% cap on the proportion of shares domestic mineral resources companies, and other ‘strategic’ industries, can list abroad. Moreover, under the new rules, only 5% of the energy companies’ total sales are allowed to come from operations in foreign countries. This will push Russian companies to raise finance at home, in line with President Dmitry Medvedev’s plans to turn Moscow into a major financial centre by 2020. The head of the FFMS said at the time that the companies’ shares can, and therefore must, be traded in roubles in Russia, adding that all the necessary conditions to enable that process were in place. The ruling is the most explicit recent step in the Kremlin’s programme of consolidating control over Russia’s mineral resources and suggests further downside risks to an investment climate already marred by a poor licensing, privatisation and regulatory structure. As the extent of the global economic meltdown became clear in September 2008, Russia's main producers collectively approached the Kremlin for assistance. The CEOs of Lukoil, TNK-BP and Rosneft plus Gazprom’s Deputy Chairman Alexander Ananenkov wrote to Prime Minister Vladimir Putin asking for state credit ‘to pay for foreign debts’. Although the companies did not specify the required sum, they argued that the overall debt volume of the Russian energy sector was around US$80bn and required state action. The companies also requested Putin to order the finance ministry and the central bank to work out a mechanism of financing strategic projects with the help of 'state targeted credits'. The government has signalled its intention to provide US$50bn from Russia's gold and foreign exchange reserves to help refinance domestic corporations' foreign debt and grant selected tax holidays. Although these moves will be supportive, they may not be enough on their own to help Russia's major oil producers ride out the current crisis. Each of the major companies is therefore also adopting its own strategies to minimise the negative repercussions of the economic downturn. International Energy Relations South Korea Gazprom and its South Korean counterpart Kogas signed an MoU in June 2009 to jointly study the options for delivering Russian gas to South Korea. In particular, the MoU will look at ways of supplying South Korea with gas from the Sakhalin projects. According to Platts, under the terms of a previous © Business Monitor International Ltd Page 10
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