Russia 090508 Basic Political Developments

Activity in the Oil and Gas sector (including regulatory)

Ukraine government to earmark more revenues for gas payments

http://www.businessneweurope.eu/dispatch_text8551

bne
May 7, 2009

There is a mini drama that plays out in Kyiv at the end of every month: can the national gas company Naftogaz come up with the cash to meet its Russian gas bill?

This week the company called a press conference with a metaphorical hankerchief in hand to announce it had paid off "almost all" of the $545m out of the $625m it owes, but quickly said that the rest of the money would be paid by the end of the day.

The company nearly didn't make the payment at all in April, bring down Russian threats that it would charge fines for delay and force the Ukraine to change form paying a month in arrears to a month in advance.

The company has been struggling to come up with the dollars each month and has had to turn to the national bank for help.

In the hope of alleviating the pressure on the company, the government said on Wednesday that it may send funds received from municipal heat power supply companies to the gas company to put against the Russian gas bill.

The new arrangement is actually only the formalisation of a scheme that was used in March and April to find cash quick to pay the city of Kyiv's debt to power company Kyivenrego.

Novatek OAO (NVTKq.L) and other independent gas producers cut gas production less than Gazprom

http://www.businessneweurope.eu/dispatch_text8550

Citi
May 8, 2009

According to a source in the Agency of gas information quoted by Interfax, Novatek's gas output is being maintained at the current level of 83-84mcm/day to secure planned production level of gas condensate that is extracted with natural gas. The source said that there has been an agreement with Novatek on its current gas output. Other independent gas producers also have not cut gas output as much as Gazprom as most of their output is associated gas produced with crude oil.

In our view, Novatek's gas condensate production is being maintained at the current level, as 100% of it is being exported and the company has to pay export duties, the same as oil companies pay exported crude oil. Novatek's current gas output is in line with the average in 2008, but given that in the first two months of 2009 it was 13% higher YoY, we expect the company to produce 31.5bcm of gas in 2009, +3.6% YoY, while our gas condensate production forecast is 2.77mt, +8% YoY due to the launch of the 2nd phase of Yurkharovskoye field last year that allowed the company to produce more wet gas from Valanzhin deposits. We view the news as supportive for Novatek.

Nord Stream shapes up with Greenpeace

http://www.russiatoday.ru/Business/2009-05-07/Nord_Stream_shapes_up_with_Greenpeace.html

07 May, 2009, 17:34

Greenpeace Russia believes it has a frank and constructive relationship with the builders of Nord Stream pipeline according to Russia’s Ria Novosti news agency.

Program director of Greenpeace Russia, Ivan Blokov, says the perception is common to representatives of non-government organizations monitoring the project, despite the fact that issues remain to be resolved about the laying and proposed route of the pipeline.

"Regarding the construction itself, the non-governmental organizations have questions for the laying of onshore pipeline, and its underwater part. These are the issues we were unable to solve last April 28 at the public hearing on the offshore portion of the pipeline," he said.

According to Blokov, the decision on contentious questions will largely depend on the implementation of the project and the degree to which comments from NGO’s are considered. But he noted that in general a gas pipeline is better environmentally than an oil pipeline, saying

"In terms of a possible accident the gas pipeline is a lot safer for the Baltic Sea than an oil pipeline. In the case of a blow-out, a gas leak won’t cause as much damage to the ecosystem of the sea as an oil spill."

Nord Stream has spent over 100 million euro on environmental impact studies, and presented in a 2,000 page report in March. It says the outlined route avoids sensitive areas, as well as historic wrecks on the seabed, and the operator is also committing to clearing the waters of leftover WW2 mines.

Nord Stream gas pipeline is an international 7.5-billion euro project. The 1220-kilometre pipeline will connect Russia and Germany along the seabed of the Baltic Sea. It will deliver gas extracted from one of the world’s largest fields, the Shtokman field in the Barents Sea. Once the first line is launched, it will deliver 27.5 billion cubic metres of fuel to Europe annually, with the volume increasing to 55 billion cubic metres a year by 2014.
WWF claims Nord Stream environmental impact assessment is incomplete

http://www.businessneweurope.eu/dispatch_text8548

bne
May 8, 2009

The Nord Stream assessment of the gas pipeline project's impact on the environment is incomplete and does not meet the international impact assessment criteria, WWF Director for Latvia Ugis Rotbergs informed LETA, referring to a report prepared by the WWF Baltic Ecoregion Program.

The impact assessment does not analyze worst-case scenarios, which leads to significant errors in the project's environmental impact assessment, and much work will have to be done yet to precisely assess the Nord Stream project's impact on the environment, explained Rotbergs.

Rotbergs also reminds of the critical situation in the Baltic Sea and the serious problems that pose major threat to the sea's ecosystem.

Alternatives to the underwater pipeline project, such as building a ground pipeline, are practically not addressed in the Nord Stream environmental impact assessment. Compensation mechanisms and monitoring programs that it offers are vague and too general.
The southern energy corridor in context (2)

http://www.todayszaman.com/tz-web/detaylar.do?load=detay&link=174626&bolum=101
Complementing Russia’s foreign policy is Gazprom’s strategy of buying into various energy markets and perpetuating its “divide and conquer” maxim. The gas row between Russia and Ukraine, which escalated into the “New Year’s crisis,” exposed European disunion along differing levels of Russian gas dependency and clashing concepts of energy security. Russia, on the other hand, has been able to capitalize on this.
Europe’s lack of unity over which energy policies to pursue stalled legislation for preventing third parties such as Gazprom from expanding control over strategic energy assets. Although the EU tends to downplay this deficiency, it decreases the chances that a genuinely European common strategy will come to fruition any time soon.

The Nabucco consortium includes several leading energy companies: the state-run Turkish Pipeline Corporation (BOTAŞ), Bulgaria’s Bulgargaz, Romania’s Transgaz, Hungary’s MOL, Austria’s OMV Gas and Power GmbH and Germany’s RWE Supply and Trading GmbH. As projected, Nabucco would run through Georgia (or any other alternative transit route, such as Iran), Turkey, Bulgaria, Romania and Hungary, and would terminate in Baumgarten, Austria. On Jan. 25, 2008 OMV sealed a deal for a joint venture with Gazprom for extending Baumgarten’s storage and distribution capacity. Accordingly, Gazprom holds a 50 percent stake there. Initially OMV insisted that this project had nothing to do with Nabucco, although some took it as a sign that the Austrians were secretly hoping that Russian gas could fill the pipeline if other supplies did not. Yet a different train of thought seems to be more plausible.

The Baumgarten facility, led by OMV, was planned to store Nabucco gas and distribute it to other European consumers. Gazprom, in which the Russian state has a 51 percent stake and which intends to sell its own gas through its own pipelines, now shares control over the OMV network, and thus is a stakeholder in its decision-making. As a result, Gazprom, on the one hand, can decide which natural gas artery (Nabucco or South Stream) should flow into the major European terminal, and Russia, on the other, can steer decisions over which role transit countries such as Turkey will play in the future supply chain. With Gazprom’s participation in this venture, Russia has improved access to information regarding price offers the EU is extending to Azerbaijan, allowing Russia to trump the offers each time.

Moreover, OMV has been buying into Hungary’s MOL. Considering Russia’s significant share in OMV, any amount of OMV ownership of MOL again translates into stakes for Russia’s energy giant. Even further challenging the Nabucco project is the fact that OMV and MOL, together with yet a third consortium member, Bulgargaz, have already signed up to Gazprom’s South Stream project. If, under the current circumstances, Nabucco were to materialize at all, Russia’s increasing control over its planned supply chain would, first of all, diminish the security-enhancing aspect of Nabucco, which is the reason it was planned in the first place, and ultimately obstruct any Turkish plans to assume a hub position in the planned supply route.

Prospects for Turkey

Summits prior to the upcoming “southern corridor” conference have taken place against the backdrop of a range of partly correlated developments, which have obscured prospects for a secure southern gas corridor balancing Russian involvement, a prerequisite for a strong Turkish posture in the future European energy structure. Russia’s assertive politics against the crumbling facade of unity and cooperation among Western opponents has been able to induce a shift in the southern energy corridor concept for European energy security and independence, which ultimately evolved to include Russia for strategic reasons. The Georgia crisis ruined the idea of a secure alternative gas route via Georgia, and thus Turkey, which does not have any other operable gateways to energy sources. Inevitably, it accelerated the pace of Turkish-Armenian rapprochement, yet alienated Azerbaijan, and seemingly pulled it closer to Russia.

Energy triangle?

There are incentives on the Azerbaijani and Armenian sides for exploring the pragmatic aspects of a potential trilateral relationship. Its dependency on Russian energy forecloses any future chances for Armenia to play an independent and significant role in the region. But rapprochement with Turkey and Azerbaijan would change this in several ways. It would free Armenia from its landlocked position, as an effect of which its foreign policies remain myopic and based on a limited worst-case-scenario perspective. It could elevate Armenia’s role to an energy transit route for future pipeline projects, with prospects for foreign investment in the modernization and expansion of its infrastructure as in the case of Georgia. Turkey is already working out arrangements for the US and the EU to extend financial aid to Armenia. As of April 1 this year, Armenia’s natural gas prices will rise gradually to European levels until 2010, in accordance with an energy accord signed between Gazprom and ArmRosGazprom. Yet the availability of Azerbaijani gas in the Armenian gas market would fuel competition and would arguably keep Russian gas prices down at reasonable levels in the future.

Reportedly Azerbaijan’s proven gas reserves have been revised up from approximately 2 trillion cubic meters to 5 trillion cubic meters, which makes it even more attractive. Azerbaijan would lose its strategic importance for the West and, ironically, for Russia if it moved closer to the latter, particularly in the energy sphere. The Russian offensive in Georgia has forced Azerbaijan to rethink its relations and priorities with the West. But Azerbaijan needs a Western prospect as well, particularly because only this promises a more equal footing in relations with Russia and on the Nagorno-Karabakh issue. Azerbaijan will continue to press ahead with its choices only by balancing Russia and the West, particularly regarding the energy dimension of relations.

In the swiftly changing global system, Turkey is a regional power on the rise. Over the last couple of years it has been able to shake off the remains of a rigid foreign policy, previously enforced by the Cold War paradigm. With its far-sighted, highly diversified and multi-dimensional foreign policy based on the synthesis of others’ sensibilities, preferences and possibilities and its own interests, necessities, priorities and capabilities, Turkey has evolved from a highly functional Western military bulwark to a highly strategic state, now able to balance various roles and power poles. However, if Turkey is to consolidate itself as a pivotal energy bridge in the region and wants to extend its influence among its Central Asian kinsmen, it needs to have direct access to Azerbaijan. The shortest route is through Armenia. Russia will profit from the normalization of ties between Armenia and Turkey only if it does not involve a comprehensive approach to disputes, which could tie Azerbaijan closer to the two.

Rapprochement with Armenia must go hand-in-hand with a diplomatic foray into Azerbaijan with a view to assuaging its concerns. Turkey has to understand that a hasty rapprochement with Armenia without consultations with its Azerbaijani counterparts will not only lift Azerbaijan’s dual leverage on Armenia in the Nagorno-Karabakh issue, but will turn this dual pressure toward Azerbaijan, as two recent statements reflect. On the one hand, the Azerbaijani Defense Ministry expressed concerns over Russian arms transfers to Armenia in January this year. Russia’s motive for transferring arms to Armenia appears to have been threefold. First, after the Georgia crisis Russia sped up the implementation of its ambitious military modernization plans, which include upgrading aging arsenals and acquisition of precision “smart” weapons and modern communication gear. While rising oil prices have enabled Moscow to almost quadruple its defense spending over the last decade, modernization plans allowed Russia to sell older arms to Armenia at domestic prices. Secondly, Russia presumably anticipates the future possibility of NATO training camps and troop bases in Georgia, which gives it incentive to beef up its Armenian outpost. Based on an agreement for military cooperation signed in 1997, Russia is Armenia’s military ally. Thirdly, Russia had seen Azerbaijan channeling energy export revenues toward boosting its armed forces and increasingly determining the balance of power with Armenia. Russian arms sales tilt the military balance in the Caucasus in favor of Armenia, Russia’s ally.  

Most recently, on the other side, Azerbaijan warned that Turkey’s Armenia venture may increase tensions in the region. Given the shift in the balance of military power, in addition to dynamics exacerbating Azerbaijan’s security dilemma, this is quite probable. Russia’s military cooperation with Armenia indicates that the Nagorno-Karabakh issue cannot be solved impartially. Turkey must reiterate its support for Azerbaijan and communicate its incentives to restore ties with Armenia on a bilateral basis. The coincidence of a meeting between Armenian and Azerbaijani leaders and the “Southern Corridor -- New Silk Road” conference yesterday carries great symbolic value. A positive outcome in the bilateral meeting will have an impact on the future of the European southern corridor concept, and inevitably on which role Turkey either must or can assume in the broader energy structure. Without Azerbaijan, the second Turkish state, trilateral energy dialogue is inconceivable.  

The Turkmen window of opportunity

In early April, prior to the Ashgabat Energy Summit on Reliable and Stable Transit of Energy, an explosion struck the Turkmen-Russian Central Asian Center 4 (CAC-4) pipeline, temporarily suspending Turkmen gas supply to Russia. The rupture, which Turkmenistan claims happened due to GazpromExport’s sudden import cut (arguably because of lower demand in Europe) and a sharp rise of pressure in the pipe, curbed Russo-Turkmen dialogue for expanding energy relations. Russia attributed the incident to worn-out infrastructure and Turkmen negligence.

Previously Russia had expressed concerns over Turkmenistan’s failure to set up a follow-up meeting with Russia after Turkmen President Gurbanguli Berdimuhammedov’s visit to Moscow on March 25, 2009.  During the March visit the presidents had signed a dozen agreements on enhancing cooperation at multiple levels, leaving aside the most critical one, which called for the construction of a new “East-West pipeline.” From the Russian perspective this left the meeting inconclusive. According to Russia’s plans, the new natural gas corridor would run Turkmenistan’s gas to its Caspian coast, plugging it into the existing, but old Caspian Pipeline, which already carries Turkmen gas to Russia via Kazakhstan. Together, the East-West pipeline and Caspian coastal conduit, once fully reconstructed and revamped, would add at least another 20 billion cubic meters to the annual 45 billion cubic meters of Turkmen gas flow into Russia. From the Russian perspective, these outlets would deliver the gas needed to feed Russia’s ambitious pipeline projects, Nord Stream and South Stream, which are to boost the vast volumes of gas exported to the major European market. A day after the Nabucco Budapest Summit, Gazprom deputy chief Alexander Medvedev had announced plans to enhance the projected capacity of its South Stream by 50 percent from 31 billion cubic meters annually to 47 billion. Securing Turkmen gas for its own purposes would strengthen Russia’s project against any southern gas corridors excluding its involvement. Thus, Turkmenistan’s attitude is a serious blow to Russia.

Citing the lack of alternatives to Russia and the recent pipeline explosion, the Turkmen president used the Ashgabat conference to communicate Turkmenistan’s “sovereign right” to diversify export routes and markets for its vast 75 billion cubic meters of produced gas per year. In order to benefit from this outburst, Turkey will have to boost its ties with Turkmenistan. Operable pipelines theoretically exist linking Turkmenistan to Turkey via Iran. Such projects have to be given a new impetus. Turkey’s foreign policy must consider the recent developments as opportunities, rather than challenges, and must integrate them to consolidate Turkey as a major regional player politically and in the new great game for energy security. Turkey’s own energy security is of the utmost importance by virtue of being an underpinning of national security. At the domestic level privatization policies must, therefore, be executed to a degree that allows Turkey to maintain its sovereignty over its strategic energy assets and energy companies, such as BOTAŞ.

* Bala Çelebi Şentürk is an energy strategy analyst who can be reached at [e-mail] Russia’s foreign policy is Gazprom’s strategy of buying into various energy markets and perpetuating its “divide and conquer” maxim. The gas row between Russia and Ukraine, which escalated into the “New Year’s crisis,” exposed European disunion along differing levels of Russian gas dependency and clashing concepts of energy security. Russia, on the other hand, has been able to capitalize on this.