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Russia Oil and Gas Competitive Intelligence Report 2010 The Russian government has stated that it intends to expand the role of nuclear and hydro-power generation in the future to allow for greater export of fossil fuels. Russia has an installed nuclear capacity of more than 21GW, distributed across 31 operational nuclear reactors at 10 locations, all west of the Ural Mountains. However, Russia's nuclear power facilities are ageing. Half of the country's nuclear reactors use the RBMK design employed in Ukraine's ill-fated Chernobyl plant. The working life of a reactor is considered to be 30 years -- and nine of Russia's plants are between 26 and 30 years old, with a further six approaching 25 years of age. The Russian Ministry of Atomic Energy predicts that by 2020 nuclear generation could reach 300TWh, more than double the 2003 level. However, many plants are due for decommissioning, and meeting this target will require between US$5bn and US$10bn per year of investment over the next decade. Russia has adopted the European Emissions Standards for fuels, although on a different timeframe. Russia phased out Euro-2 standard fuels in 2008 and hopes to phase out Euro-3 by the end of 2009. Euro- 4 is expected to be allowed until 2013. In Europe, Euro-5 has already been introduced for most vehicles and Euro-6 is slated for implementation in 2014/2015 for all vehicles. This means that while upgrades to facilities are particularly important when the refined products are destined for export to the EU, even fuels used in Russia will need to meet higher quality standards. Russia's newest crude oil export terminal, the port of Kozmino, began operations in December 2009. The port sent its first cargo to Hong Kong. The oil exported via Kozmino port is sourced from East Siberia. It is transported to Kozmino from the Meget railway terminal, in the Irkutsk region. From there it is sent to the Skovorodino oil terminal, which started operations in October 2009. Kozmino terminal, which is operated by national oil midstream monopoly Transneft, is intended to be the terminus of the Eastern Siberia-Pacific Ocean (ESPO) pipeline, which is due to be completed in 2014-15. The Skovorodino oil terminal is the end point of Phase 1 of the ESPO pipeline, but Kozmino will receive oil delivered by rail from Skovorodino until the second phase has been completed. Russia may relax rules limiting offshore exploration and production (E&P) in the country to Rosneft and Gazprom, according to a report by the Moscow Times newspaper. According to the report, which cited deputy energy minister Sergei Donskoy, the proposal would allow subsidiaries of the two companies to join them in offshore exploration and could lead to international oil companies (IOCs) also becoming involved. In the Moscow Times article, published in March 2010, Donskoy claimed that the Natural Resources and Environment Ministry believes the two companies have insufficient resources to develop Russia's continental shelf on their own. Under a plan drafted by the ministry, both Gazprom and Rosneft 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 of the two © Business Monitor International Ltd Page 65
Russia Oil and Gas Competitive Intelligence Report 2010 companies to develop offshore fields on their own or in partnership with other companies. The newspaper reported, however, 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. In 2008, the two companies invested only RUR56.4bn (US$1.9bn at current rates) in E&P offshore Russia, a rate which Donskoy claimed would mean ministry targets for offshore areas would take 165 years to fulfil. The fact that offshore projects are effectively limited to just two state companies, preventing other Russian and international companies from participating, has slowed the development of these areas. According to the Moscow Times, the CEO of ConocoPhillips, Jim Mulva, claimed in March 2010 that the legally-privileged position of Gazprom and Rosneft had led to slower growth for their privatelyowned rival Lukoil, in which Conoco holds a 20% stake (which it is reducing to 10%). If the ministry proposal is accepted, it could therefore present significant opportunities to IOCs. Russia is the major gas exporter to Europe but the reliability of its supplies in the past few years been causing concern, thanks to pricing disputes with transit states such as Ukraine, frequent pipeline incidents and the capriciousness of the Russian weather. The Kremlin sees Asia the future source of export growth, but gas pipeline projects to the east of the Ural Mountains remain in the planning stages. The country has an extensive gas export pipeline network bound for the western markets. Some of the infrastructure, however, has fallen into considerable disrepair, which is most acute in the poorer Former Soviet Union (FSU) countries that now serve as transit states on the way to the EU. In order to diversify its export routes, gain greater security of transport and maintain a closer grip on ex-communist states, Russia has been looking to construct new pipelines bypassing Eastern Europe. © Business Monitor International Ltd Page 66
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