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Russia Oil and Gas Competitive Intelligence Report 2010 companies' first JV, Vietnam-based Vietsovpetro. PetroVietnam would have a 49% stake in the US$1.25bn JV, which will explore blocks N1, N2, N3 and N4 in Nenets. The blocks currently consist of 13 fields and hold estimated oil reserves of around 572mn bbl. According to Zarubezhneft, the partners were planning to start drilling at the fields by end-2008 and expect to produce 80,365-100,457b/d within five to seven years. Zarubezhneft, which controls a 51% stake in the JV, will provide the remainder of the capital. In December 2009, PetroVietnam also established a gas partnership with Gazprom, the 49:51 Gazpromviet, again mirroring a sister JV in Vietnam. The new JV will jointly develop the Nagumanov field in the Urals region. Japan's Mitsubishi and Mitsui are interested in acquiring stakes in the Sakhalin-III project in Russia's Far East, according to a report in Japanese newspaper Yomiuri Shimbun citing unnamed industry sources. The Japanese companies already hold 10% and 12.5% stakes respectively in the adjacent Sakhalin-II project, which supplies LNG to Japan. Their intention to farm in to the Gazprom-led Sakhalin-III development is therefore believed to be motivated by the expected cost synergies with Sakhalin-II and a desire to secure additional gas supplies. In October 2009, AIM-listed Matra Petroleum spudded its first appraisal well at the Sokolovskoe field in the Arkhangelovskoe licence in the Orenburg region of the Urals. The A-13 well is estimated to cost around US$4.5mn and is expected to be completed by the end of February 2010. Western Siberia-focused independent Exillon Energy launched a successful US$100mn IPO on AIM in December 2009, making it the first share offering by a Russian oil producer since the start of the financial crisis in mid-2008. Exillon, which is registered in the Isle of Man and headquartered in Dubai, acquired its first assets in early 2009, receiving permits for 10 oil fields in north-western Siberia. Its operations are split between two subsidiaries: Exillon TP, which operates five fields in the Timan-Pechora Basin in the Komi Republic and Exillon WS, which operates another five fields in Khanty-Mansiysk. The Exillon WS and TP fields were discovered in 1971 and 1988 respectively and are both producing an unspecified small amount of light oil. Despite the fields' long production history, Exillon believes the assets hold significant upside potential and is seeking to raise funds for their development through an IPO. © Business Monitor International Ltd Page 63
Russia Oil and Gas Competitive Intelligence Report 2010 Market Attractiveness Analysis Russia Energy Market Overview The June 2009 BP Statistical Review of World Energy attributes 79.0bn bbl of proven oil reserves to Russia, which is a possibly conservative total that still represents almost 7% of the world's oil. However, the end-2009 Oil & Gas Journal (OGJ) annual survey suggests just 60bn bbl. Large parts of Russia are under-explored, while there appears to be significant reserves potential in its share of the Caspian Sea. Gas reserves of 43,302bcm (BP data) account for more than 30% of the world total. In 2009, oil production was around 11.6% of the world's total at an estimated 10.15mn b/d, and Russia meets 22% of the world's gas demand. There are 42 oil refineries in Russia, many of which are incapable of meeting modern fuel standards. Total crude distillation capacity is around 5.55mn b/d. With 157bn tonnes of proven coal reserves, Russia ranks second in the world behind the US. Poor management during the Soviet era and a sharp decline in demand during the early 1990s undermined the coal industry. After a slight decline in 2002, production rebounded in 2003-2008, with 2008 output of 327mn tonnes. According to the government's energy strategy, Russia should produce more than 400mn tonnes by 2020. Russia's adherence to the stipulations of the Kyoto Protocol may lower utility sector demand for coal. In a December 2008 BBC interview, the governor of the Kemerovo region, which is responsible for over half of the country's coal production, voiced concerns over the region's ability to sustain coal production growth. He noted that the region had already seen almost 200 rivers ruined after being used for mining activities. These environmental problems may hinder Russia's desire to keep increasing coal production. Gas is the dominant fuel in Russia, accounting for an estimated 56.2% of 2009 primary energy demand (PED). It is followed by oil at 18.3%, coal at 14.4%, hydro at 5.6% and nuclear with a 5.3% share of PED. Regional energy demand is forecast to reach 1,543mn toe by 2014, representing 17.0% growth over the period. Russia's estimated 2009 market share of 50.4% is set to fall to 49.7% by 2014. State gas monopoly Gazprom provides subsidised gas to the power industry through a deal with former monopoly supplier Unified Energy System (UES), meaning that price increases as part of a deregulation programme could make gas too costly for much of the Russian population. Russia's power sector includes more than 440 thermal and hydro-power plants (approximately 80 of the former are coal-fired), plus 31 nuclear reactors. A few generators in the far-eastern part of the country are not connected to the power grid. The system has a total electric generation capacity of almost 216 gigawatts (GW), with 2009 generation at an estimated 984TWh. The collapse of the Soviet Union initially precipitated a dramatic decline in energy generation, (down 18% between 1992 and 1999), followed by a gradual recovery (up 18% between 2000 and 2009). © Business Monitor International Ltd Page 64
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