RUSSIAN THINK TANK CHIEF WEIGHS COMPETITION AND TURMOIL
By Alexei Chesnokov
Oil and Gas Industry Latest News
October 1, 2008
Russia
The Fund for National Energy Security (FNES) was created by Konstantin
Simonov two years ago. Its creation logically followed the work
of the Center for Political Conjuncture of Russia (CPCR), of which
Mr. Simonov is also the president.
The Fund for National Energy Security (FNES) was created by Konstantin
Simonov two years ago. Its creation logically followed the work of the
Center for Political Conjuncture of Russia (CPCR), of which Mr. Simonov
is also the president. The CPCR has conducted research in political
risk for many years, and this theme was further developed in the
FNES. The Fund also studies the mutual influence of energy on politics
and politics on energy in Russia, as well as in the world. The access
of foreigners to upstream, conflicts between suppliers and buyers,
export routes, problems resulting from political influence (and it
is present practically everywhere). This is to subject to analysis
and research by experts and specialists of the Fund. The FNES is a
non-governmental organization, which is funded by the sales of its
own various reports and research.
Some reviewers call the FNES the mouthpiece of the Kremlin, based
on the fact that many high officials in governmental structures
came from that organization. However, Mr. Simonov assures that his
research is absolutely impartial and says the government appointments
of FNES personnel are simply a testament to the high professionalism
of the FNES specialists. "In any case," says Konstantin Vasilievich,
"these rumors don’t bring me any dividends."
General Director of the Fund for National Energy Security Konstantin
Simonov, who holds a PhD in political science, answers the questions
of Oil&Gas Eurasia:
OGE: What do you think of the current strategy of Russia’s Oil&
Gas industry?
K. Simonov: The existing strategy forecasts through the year 2020
and is declarative and unrealistic. It fails to acknowledge the
forecast of demand for hydrocarbons, property, implementation of new
technologies, and training of new specialists for the industry. Also,
the involvement of foreign companies is undetermined, and geopolitical
questions are not addressed. My colleagues and I are trying to create
a club of experts, with whom we can discuss the country’s energy
strategy through the year 2030. We would like the new Minister of
Energy to listen to the specialists’ opinions. In order not to plan
for planning’s sake and to implement the country’s Energy Strategy,
the process must be discussed by a wide range of specialists; it must
pass through expert evaluation.
OGE: In your opinion, does the crisis in the Caucasus have a hidden
oil and gas motive?
K. Simonov: The United States is playing an active game in the Georgia
region. Why is Vice President Cheney visiting Georgia and Azerbaijan,
describing Russia as an unreliable transit country and supplier of
hydrocarbons? The United States does not care about Europe’s energy
security. I think America is concerned about where oil is going to
go from Central Asia, and in the future, from Iran. Today Iran has
the largest proven gas reserves after Russia. The United States is
interested in Iran and created political conflict zones around the
country. It is an important goal for the United States to prohibit
Iran from supplying hydrocarbons to China. The U.S. provoked the
Georgian conflict by promising Saakashvili support. They use Georgia
as a puppet, and are now looking for an excuse to deploy troops to
the north of Iran–in Georgia and Azerbaijan. The political tension
around Iran is not subsiding. After Cheney’s visit, I absolutely
don’t dismiss the possibility that Azerbaijan will attack Karabakh
within six months. There is also a possibility of military action by
the U.S. against Iran.
OGE: What can you say about Russia’s cooperation with the Central
Asian republics in the oil and gas sphere?
K. Simonov: Kazakhstan, Uzbekistan, and Turkmenistan are our neighbors,
but not partners in the full sense of this word. Russia has not yet
done enough for them to become such. There are many projects and
conversations, but in practice little is being done. For instance,
the Caspian Pipeline Consortium and the Burgas-Aleksandroupolis
pipeline projects are not developing fast enough.
Kazakhstan recently agreed to increase their gas supply to China
by 30%. However, Turkmenistan’s reserves are not yet confirmed by
international audit and so it is possible that agreements with Russia
and China will not be honored, because there will not be enough gas
for everyone.
OGE: What is the fate of major foreign investors in the oil and gas
industry in Russia? How are the PSA projects (production sharing
agreement) developing?
K. Simonov: Today, countries that possess large hydrocarbon reserves
are tightening regulations concerning foreign companies. This
process is happening in Kazakhstan, Venezuela, Saudi Arabia,
the African countries, and Norway and the phenomenon causes a
backlash. Refining and retail companies are trying to prohibit
oil producing countries from entering their markets. New laws are
being adopted in the United States and Germany, the rules of access
to downstream are tightening. The EC practically excludes Russian
companies from this sector of economy. The countries that recover
natural resources understand what riches they posses and do not want
to share. And the countries that have a sales market, in turn, do not
let oil producers near it. By the way, there is data that the Russian
investment in European downstream is 7-8 times less than the European
investment in the Russian upstream. On the whole, foreigners do not
feel so bad in the Russian oil and gas industry, especially if you
compare it with Venezuela. For example, Shell remained a minority
shareholder in Sakhalin-2 project. Now this company’s participation
in the new projects on the Yamal peninsula together with Gazprom is
being discussed.
The German firm BASF is taking part in the Southern Russian field
development, which is, by the way, one of the last fields with
uncomplicated conditions of Senoman gas production. ENI participates
in the joint project with Gazpromneft. Total and StatoilGidro became
Gazprom’s partners in the Shtokman field project. An example of
a mutually profitable deal is the deal with the German firm BASF,
which offered Gazprom a share in the German gas company in exchange
for access to the Southern Russian field.
Really, the biggest problem for foreigners in Russia is not even the
law or political will, but the moment when they begin working with
our companies and see what kind of ineffective system of decision
making prevails among company officials. The problem of quality
state-corporate management is not solved here yet.
OGE: How can you comment on the rivalry between the two major state
companies Gazprom and Rosneft?
K. Simonov: Many experts often use the phrase "The Kremlin decided,"
but we have been trying to explain for a long time that it is
incorrect. There is no Kremlin. The concept of Kremlin can be
approached from many sides. There is Putin, there is Sechin,
there is Medvedev, and there are concrete people and concrete
interests. Gazprom–Miller’s interests and those of Medvedev’s, and
Rosneft’s interests and Sechin’s interests differ for understandable
reasons.
For example, let’s take the Shelf–recently adopted amendments to
the Subsoil Law and the Law on Continental Shelf stipulate that only
the companies with no less than 51 percent of state-owned shares and
which have a minimum of five years’ experience of shelf development
may participate in the exploration of the Shelf. We have just two
such companies–Gazprom and Rosneft. So we need to somehow divide the
Shelf. These are state companies, but Gazprom has 49 percent private
shareholders, and Rosneft sold 14 percent of shares to private
investors. Therefore the relations [between Gazprom and Rosneft]
are not just those of conflict, but of open conflict. To give you
an example, Daltransgaz vividly illustrated this when Rosneft sued
Gazprom in court. Or, for instance, FAS has recently been actively
attacking Gazprom, seeking to divest it of its monopoly in the market.
OGE: To what extent does this confrontation damage the state’s
interests?
K. Simonov: In my opinion, it certainly causes damage, because creates
uncertainty among investors. While the argument is going on regarding
sections of the Shelf, nobody is going to invest in its exploration
projects. Overall, we don’t give enough attention to the problem of
subsoil ownership. One of the main reasons for insufficient investment
in the development of fields with complicated recovery conditions is
the companies’ uncertainty about the long-term status of their work at
these subsoil plots. That is why the heads of oil companies are not
being entirely honest when they say that they are being smothered by
taxes. Taxes are not the main reason for insufficient investment. A
series of measures have recently been taken to decrease taxes, and
next year we will see how much more investments into the industry
have increased.
OGE: Some Western politicians are appealing to Europe to abandon buying
energy carriers in Russia, to find other suppliers. How real is this?
K. Simonov: According to many European companies’ estimates, Europe
will need additional 140 billion cubic meters of gas by the year
2015. Who can provide such an amount? Norway is capable of supplying
30 billion cubic meters at maximum, after that its recovery will
begin to decrease. North Africa will give a maximum of 50 billion
cubic meters. Where will the remaining 60 billion cubic meters come
from? From the liquefied gas market? There is not so much of it there,
and the demand is very high; a new, extremely powerful consumer is
entering the market–China. Therefore there is no real alternative
to Russia. The politicians who talk about this in earnest may be
called the "Brussels dreamers". This also concerns the plans to
switch to alternative fuel. In 2005 EC adopted the plan to increase
the use of alternative types of energy to 5 percent. The plan was
not realized. Instead, another plan was adopted, to increase the
share of alternative energy to 20 percent by the year 2020. Now,
let’s wait for the year 2020.
OGE: In your opinion, which is more correct: to invest large amounts
into exploration of East Siberia and the Shelf of the northern seas
or to direct these means into increasing the recovery efficiency of
already existing wells, which may also produce a huge effect?
K. Simonov: True, we have huge losses. We have low recovery efficiency,
and burning of associated petroleum gases, and even loss of electricity
from the power grid. We are falling way behind in energy supply,
the world has moved well ahead. Of course, we must deal with all of
this. But Russia must also develop the Shelf, and be present at the
liquefied gas market. These two directions do not contradict each
other and must develop simultaneously. But the saddest thing is
that we are discussing right now what needs to be developed. Where
do we invest? In East Siberian exploration and the Shelf, or to
increase recovery efficiency and the use of associated petroleum
gases? In reality nothing is being done concerning either one of
these issues. The Shelf exploration is progressing very slowly with
huge difficulties, for example, at the Shtokman project. Meanwhile,
we have seen no improvements recently in recovery efficiency or in
the use of associated petroleum gases. Something needs to be done.