The once all-powerful Russian energy sector appears to be on unpredictable and
shaky grounds today. The development of the giant Kovykta gas field, once
considered as a major project, has been placed on hold; the jewel in the crown
Shtokman field is in trouble; Sakhalin-2 is being forced to divert its gas to
the strategic Russian Far East for domestic consumption, while original plans
to sell this gas to China are being abandoned.
These fundamental changes come at a time when less-than-transparent deals are
taking place in the ownership of Russian oil and gas companies. That raises the
question of whether these developments are related and if so, what impact, if
any, they
could have on European and Asian energy security.
On August 28, the Russian newspaper Kommersant reported that Moscow intends to
invest US$1.8 trilllion to $2.1 trillion in the oil and gas business by 2030 to
increase production in order to keep up with projected European and Asian
demand for Russian hydrocarbon exports as well as with increasing Russian
domestic consumption.
The new investment strategy envisions a three-stage program - 2009-2015,
2015-2022 and 2022-2030. The costliest of these is projected to be the third
stage, during which investments into the oil sector are projected at $313
million to $321 million and the gas industry is expected to receive $284
million to $299 million. Kommersant noted that as a result of these
investments, gas production would increase by 4% as compared with 2008. Oil
production is expected to rise by almost 9%.
The projections for future production increases seem to contradict the
statistics for 2009, which show that in the first half-year, gas production
fell by a record 20.8% (Gazprom's figures alone decreased by 24.4%), while gas
exports fell by 36.7%.
Although the 2009 figures are linked to the world economic crisis, which
lowered industrial production and subsequently reduced oil and gas consumption,
many economists suggest that the crisis is coming to an end and that energy
prices are showing signs of recovery. However, can the Russian oil and gas
industry recover fast enough to meet renewed demand for its products or has it
become mired in a domestic crisis brought about by the mismanagement and
politicization of its energy sector?
The widespread impression in the West - as well as among many experts in Russia
- is that such giant Russian energy companies as Gazprom, Gazpromneft,
Surgutneftegaz and Rosneft are managed by hidden owners who operate as proxies
for high-level personalities in the Kremlin. The veracity of these claims might
prove difficult to establish in court, but the opacity permeating much of the
operations of these companies does little to dispel doubts among investors.
Furthermore, investment projections on the Russian energy sector over the past
few years have changed numerous times, giving an impression that there is no
clear vision in the minds of policymakers in Moscow as to where the energy
sector is headed. The depletion of Western Siberian gas fields for example, is
not a surprise - it has been known for at least a decade - yet Gazprom refused
to act on information its own analysts were reporting to senior management.
Planned increases in gas production are almost always linked to projected
export sales, which in turn are influenced by competition in the market. In
2009, many European companies found it cheaper to buy spot liquefied natural
gas (LNG) from Qatar than to buy more expensive Russian gas. It remains unclear
whether the Russian state is capable of funding a $2 trillion program of
investments at a time when foreign investor confidence in Russian energy has
diminished and money remains tight.
The European gas market is searching for alternative suppliers of gas and
developing new energy sources, while the US energy market is undergoing
fundamental changes which should considerably lower demand for oil imports by
2030, releasing more oil to other markets.
Moreover, the world LNG market is predicted to grow considerably by 2030,
creating even greater alternative sources of gas not held hostage to Russian
land-based pipelines.
It is not inconceivable that the real reason for the chaos in Russia might well
be concealed within the Kremlin. In June, Volga Resources, the Luxembourg-based
fund owned by Gennady Timchenko, reputedly a long-time colleague of Russian
Prime Minister Vladimir Putin, purchased an 18.2% stake in Novatek, Russia's
largest private gas producer. Gazprom owns a 19% share in Novatek, which in
theory means that the pro-Kremlin Gazprom-Timchenko group owns a 37.2% stake in
Novatek.
"The companies did not disclose any financial details of the deal, but said
that it was based on the market price," according to the Dow Jones Wire Service
on June 15. "Based on the current price of Novatek shares, the deal was worth
about $1.5 billion."
Novatek also said on June 9 that it would acquire a 51% stake in Yamal LNG, the
operator of the large South-Tambeyskoye gas condensate field, from companies
affiliated with Volga Resources. Despite a Volga spokesman's statement quoted
by Russian news agencies, that the two deals were not related, Moscow-based KIT
Finance said that these two consecutive deals looked like an asset swap,
whereby "Timchenko has exchanged the upstream asset (Yamal LNG) for the stake
in Novatek."
"Novatek will get the license on the giant South-Tambei field as well as
potential support from its shareholder, Timchenko, who is a known and powerful
person within the Russian oil and gas sector, KIT added", the Dow Jones wire
report said.
It is possible that Timchenko, through his contacts with Putin, was fully
briefed on the coming investments into the gas sector and saw the Novatek
transaction as another opportunity to get on board for what might be a highly
profitable deal.
The constant gyrations of Russia's energy investment strategy do not bode well
for European or Asian energy security. It creates a high level of anxiety among
consumers in the post-recession world economy. The identity of the
beneficiaries behind such deals needs to be transparent not only in the case of
the Timchenko-Novatek deal, but for the entire Russian energy investment
program.
Roman Kupchinsky was born in Vienna, Austria and emigrated to the United
States in 1949. He graduated with a degree in political science from Long
Island University; served in the US Army as a rifle platoon leader in Vietnam.
From 1978-1988 was president of Prolog Research Corp, a Ukrainian-language
publishing house and research company. From 1990-2002 was director of the
Ukrainian service of Radio Free Europe/Radio Liberty. From 2002-2008 he was a
senior analyst at RFE/RL. He is the author of numerous articles on Ukrainian
affairs, Russian energy and international politics. He lives in Arlington,
Virginia.
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