Russia 101202 Basic Political Developments

Russian oil flows to Central Europe 'to dry up'

http://www.euractiv.com/en/energy/russian-oil-flows-central-europe-dry-news-500199
Published: 02 December 2010

Russia's growing oil exports to Asia and the Baltic have unsettled European traders and refiners, who fear shortages on the Black Sea and in Central Europe should Russian output stall or decline.

Background

Oil and gas reserves are unevenly distributed around the globe, and the largest reserves are situated in politically or economically insecure regions such as the Middle East and Russia.

North Sea oil and gas fields have already been exploited beyond their peak and the EU's energy dependency on non-EU countries is expected to climb from 50% in 2000 to 70% in 2030.

The EU-Russia Energy Dialogue was founded 10 years ago, at the EU-Russia Summit in Paris on 30 October 2000. Then-leaders of the EU and the Russian Federation recognised that energy relations - as one of the key areas of cooperation between the EU and Russia - had to be upgraded.

Politicians in the European Union and the United States have repeatedly accused Russia of using its vast energy resources to bring its neighbours to heel, though Moscow says it is simply trying to bring market pricing for its energy supplies. 

In 2008, Germany received around 350,000 barrels per day (bpd) of crude, just under 15% of its total consumption, via the Druzhba pipeline running from Russia to the EU via Ukraine and Belarus. Refineries belonging to Total, Shell and BP are among the biggest buyers of crude from Druzhba. 

Poland imports around 400,000 bpd of crude via Druzhba for domestic refining, or more than three-quarters of its consumption, and exports another 90,000 bpd of Druzhba crude via the Baltic Sea port of Gdańsk.

Although the world's largest oil producer has repeatedly said it has no plans to cut supplies to European markets, evidence is growing that it is focusing on supplying Northwest Europe, the Pacific and a soon-to-be-pumping pipeline to China to the detriment of Black Sea and Central European routes.

This is not so much of a long-term problem for the Black Sea and Mediterranean markets, which will become less dependent on sour and heavy Russian Urals grades as production grows in Kazakhstan and Azerbaijan, whose sweet and light grades will become dominant, traders predict.

But for Central Europe, the problem of dwindling Urals supplies may prove more difficult to tackle. German refineries rely on crude from the Druzhba pipeline to such an extent that the issue might ultimately become of major concern to German politicians.

"We are witnessing a tectonic shift, and foreigners become very worried. It sounds crazy for now, but we may end up by having Germany and Poland importing crude from the Baltic Sea instead of Druzhba," one major Russian trader said.

Ten years ago when Russia launched Primorsk, its first oil port in the Baltic, in order to cut reliance on transit via former Soviet Baltic republics, few traders would have dared to predict the route would replace the Black Sea as the main export channel.

Plans for large exports to Asia by the then-President Vladimir Putin had seemed a dream if not a fantasy.

Primorsk vs. Novorossiysk

A decade later, Primorsk is now Russia's biggest port with exports of 1.55 million barrels per day (bpd), while Kozmino on the Pacific has ramped up exports to 360,000 bpd from scratch two years ago.

Meanwhile, combined exports from Black Sea ports including Russia's Novorossiysk and Ukraine's Yuzhny and Odessa are running as low as 700,000 bpd during some months or less than half of combined capacity.

In the long term, Russia plans to export as much as 1.6 million bpd to the Pacific and Asia, including through a newly built link to China, due on stream in January.

Jonathan Kollek, vice-president for trading at TNK-BP, Russia's No. 3 oil firm, which is half-owned by BP, said the shift from the Black Sea and Druzhba to Asia and the Baltic would continue.

"Novo(rossiysk) will dwindle, while the Baltic will pump at full capacity. Novo and Druzhba will be marginal plays to some extent, but you will see flows of products through Novo increasing," he told Reuters.

Peter O'Brien, vice-president at Russia's largest oil producer Rosneft, said the extent to which flows will shift to Asia from Europe would depend on Russian tax policies on production and exports from different regions.

"It is a function of which production you have in, say, five years," says O'Brien, whose company dominates East Siberian production and is pressing the government for more tax breaks to enable it to export more to Asian markets.

O'Brien also noted that some of the proposed changes in taxation may discourage refining, which would free up more crude volumes for exports.

Merkel 'should call Putin'

Russian oil output has repeatedly pleasantly surprised markets in recent years.

Traders say Moscow would have had enough crude for both Europe and Asia if it were not building a new major Baltic port at Ust Luga. Like Primorsk, Ust Luga is also located near St. Petersburg, the home town of Putin, now prime minister and still Russia's most influential politician.

It is due to start next year and ultimately ship up to half a million barrels per day of crude to European markets.

"With the Chinese pipeline due to start any day and the launch of Ust Luga, I'm wondering if we will witness the death of Druzhba. Merkel should call her 'friend' Putin to figure out what's going on," one trader with a Russian major said.

Putin has repeatedly criticised the European Union's stated aim to diversify away from Russian oil and gas after disputes between Russia and its neighbours led to cuts in flows.

Ust Luga and the Chinese pipeline are not the only factors affecting future exports as the country expands its refining capacity, despite the proposed changes in taxes.

Oil firm Tatneft launched Russia's first major post-Soviet refinery and is seeking to regain control of Ukraine's Kremenchug, which now often sits idle.

"If Tatneft gets Kremenchug, there will not be much volume left for the Black Sea. That will make Mediterranean markets very volatile and people will have to get used to constant arbitrage between the saturated Baltic and the hungry south," one major Urals trader said.

(EurActiv with Reuters.)

Gazprom

Gazprom May Be Interested in Poland’s Anwil, Ciech, Prawna Says

http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=arEX5hEtcQto

By Maciej Martewicz

Dec. 2 (Bloomberg) -- OAO Gazprom of Russia is examining the possibility of acquiring a Polish chemicals maker and may be interested in PKN Orlen SA’s unit Anwil SA, state-controlled Zaklady Azotowe Pulawy SA and Ciech SA, Dziennik Gazeta Prawna reported, citing a person it didn’t name.

The Polish government aims to sell all of its stakes in chemical companies as soon as next year and Gazprom isn’t currently bidding to buy them, the Warsaw-based newspaper said.

Click here for web link

To contact the editor responsible for this story: Maciej Martewicz at [e-mail]

Last Updated: December 2, 2010 01:45 EST

Gazprom creates two joint ventures with Ukraine

http://www.kyivpost.com/news/business/bus_general/detail/91891/
Yesterday at 21:29 | Interfax-Ukraine

Russia's Gazprom has announced that Gazprom chief executive Alexei Miller and Ukrainian Energy Minister Yury Boiko reached agreements to set up two joint ventures to produce coalmine methane and develop the offshore Pallas natural gas field in the Black Sea.

The Ukrainian Fuel and Energy Ministry in turn confirmed that the creation of such joint ventures had been under discussion at a meeting in Moscow, yet, it did not report on the agreements on the JVs' creation.

"The sides have agreed to set up two joint ventures to produce coalmine methane from the coal-beds in Ukraine and develop the offshore Pallas natural gas field in the Black Sea," Gazprom said in a statement.

"The sides also touched upon other issues of strategic cooperation under the conditions of partnership enjoying equal rights in the framework of recent agreements reached between the presidents of Ukraine and Russia in Moscow on Nov. 26, 2010," reads a statement by the Ukrainian Energy Ministry.

Gazprom's announcement was more laconic – it said that Miller and Boiko had continued discussing issues of further development of strategic partnership between Gazprom and Naftogaz.

The Ukrainian ministry also reported that Naftogaz CEO Yevhen Bakulin was present at the meeting.

The ministry said in a comment to Interfax-Ukraine that its statement was correct and contained no mistakes.

As was reported, following a meeting with Ukrainian Prime Minister Mykola Azarov, Russian Premier Vladimir Putin suggested late in April that Gazprom and Naftogaz be merged. At the first phase a joint ventures was proposed to be created on a parity basis, which would include production and transport assets from the Ukrainian side and natural gas deposits of the same value from Gazprom's side.

Early in September Gazprom's head said that Ukraine had already listed a number of companies that could assess the Ukrainian gas transport system and Russian gas fields.

The Ukrainian leadership repeatedly stressed that it was ready to set up a gas joint venture only on equal conditions and saw no grounds for a hurry in those issues.

Pallas, which lies in the northeastern part of the Black Sea and has an area of 162 square kilometers, has forecast reserves of 157 billion cubic meters and recoverable reserves of 75 billion cubic meters.

In January this year the Ukrainian government issued Naftogaz a 30-year license to develop Pallas, where gas is believed to be obtainable from depths of between 3,000 and 5,200 meters.

Ukraine estimates that its Donets Basin alone contains 11.5 trillion cubic meters of coal-based methane.

Readiness to produce coalmine methane in Ukraine and invest funds in that business was officially announced by Russian-British TNK-BP and the Industrial Union of Donbass.

According to the Ukrainian Energy Ministry, among other potential investors are British-Dutch Shell and U.S.-based Chevron.

Gazprom, Namcor to Acquire Part of Tullow’s Gas Field in Namibia

http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=a4rVsLqyvV_Q

By Anna Shiryaevskaya and Eduard Gismatullin

Dec. 1 (Bloomberg) -- OAO Gazprom, the world’s largest natural gas producer, and Namibia’s state-owned oil company, Namcor, plan to buy part of Tullow Oil Plc’s Kudu field off the African nation’s coast.

Gazprom and Namcor plan to set up a joint venture that will hold 54 percent in the gas field, Boris Ivanov, head of the Moscow-based company’s international exploration and production unit, said in Gazprom’s corporate magazine. Tullow will hold 31 percent and Itochu Corp. the remaining 15 percent, he said.

Kudu “reserves may increase several times over with additional exploration,” Ivanov said in the issue of Gazprom magazine e-mailed today by the company. He estimated the field holds 50 billion cubic meters of gas (1.8 trillion cubic feet).

Gazprom is in talks with Namibian and South African authorities about plans to build an 800 megawatt power plant. Some electricity will be supplied to the domestic market with the rest to be exported to Botswana, South Africa, Zambia and Angola, Ivanov said.

Tullow, the U.K. explorer with the most drilling licenses in Africa, had examined plans to sell Gazprom, Russia’s state- owned gas monopoly, part of its 70 percent interest in the Kudu gas field to advance the project, Tullow Chief Operating Officer Paul McDade said in March.

To contact the reporter on this story: Anna Shiryaevskaya in Moscow at [e-mail] Gismatullin in London at [e-mail]

To contact the editor responsible for this story: Will Kennedy at [e-mail]

Last Updated: December 1, 2010 11:45 EST

Gazprom to start first offshore well on Libya’s shelf in 2011

http://www.prime-tass.com/news/0/%7BB062ED9C-3816-4B3B-B3E8-1503238ACB87%7D.uif

MOSCOW, Dec 1 (PRIME-TASS) -- Gazprom Libya B.V., an affiliate of Russian natural gas giant Gazprom, plans to start drilling from its first exploration well at offshore block 19 in Libya in 2011, Boris Ivanov, managing director of Gazprom EP International B.V., said in an interview with Gazprom’s corporate magazine seen by PRIME-TASS on Tuesday.

Gazprom EP International B.V. is the parent company of Gazprom Libya B.V.

Block 19 measures 10,300 square meters and is located on the shelf of the eastern Mediterranean Sea. The company has completed 3D seismic explorations of the block, and selected and prepared several sites for exploratory drilling, Ivanov said. The block has substantial potential in terms of volume of hydrocarbon reserves, he said.

Additionally, Gazprom Libya B.V. has completed 3D seismic explorations of onshore block 64 located in the Ghadames basin in the northwest of Libya and is preparing for future drilling, Ivanov said. The company plans to drill 18 wells at block 64, he said, without providing a timeframe.

End

01.12.2010 18:43

Eon offloads its 3.5% stake in Gazprom

http://www.ft.com/cms/s/0/aa932fe8-fd52-11df-b83c-00144feab49a.html#axzz16vyq7tNA

By Gerrit Wiesmann in Berlin and Isabel Gorst in Moscow

Published: December 1 2010 14:21 | Last updated: December 1 2010 23:00

Eon is selling its remaining 3.5 per cent stake in Gazprom, the Russian gas producer, for €3.4bn ($4.5bn), reflecting a souring of relations between the two companies and the German utility’s plan to cut its debt load.

The breakdown in relations is in part due to a dispute over gas pricing. Eon is one of the leading players among a group of European gas companies insisting that Gazprom abandons a formula linking gas prices with oil prices and instead trades more gas on cheaper spot markets.

Jonathan Stern, head of gas research at the Oxford Institute of Energy Studies, said the price dispute was “boiling up to explosion point between Europe and Gazprom. It has all got horribly, horribly bad.” Western Europe depends on Russia for more than a fifth of its gas imports.

But the move also closes a chapter in German energy policy, which began in 2002 when then chancellor Gerhard Schröder overruled the German cartel office and allowed Eon to buy German gas producer Ruhrgas, which had a stake in Gazprom.

Eon increased the existing Gazprom stake to 6.4 per cent, enough for a German national to become the only foreign representative among the non-executive directors on the Russian gas monopoly’s supervisory board.

Mr Schröder, a Social Democrat, hailed the move as a “milestone” on the road to deepening ties between Germany and Russia. However, since Angela Merkel, a Christian Democrat, became chancellor in 2005, the relationship with Moscow has cooled.

Johannes Teyssen, Eon’s chief executive, said the deal would put Eon on track to realising its target of €15bn in asset sales by the end of 2013, announced as part of a strategic review last month.

The proceeds are earmarked for paying down debt and investing in faster-growing markets beyond Europe.

Eon executives insisted the partnership with Gazprom remained “solid”. Mr Teyssen said Eon would remain “an active investor in Russia” in both power and gas.

The company became a junior partner of Gazprom’s in Russia’s Yuzhno-Russkoye gas field last year, when it swapped a 2.9 per cent stake in the Russian gas producer for a 25 per cent stake in the licence. It also has a controlling stake in power producer OGK-4.

Klaus Schäfer, head of Eon’s gas unit Eon Ruhrgas, said the stake sale would “in no way alter the continued solid partnership” with Gazprom, which he says is cemented by gas exploration and planned Nord Stream gas pipeline between Russia and Germany. Eon has a 15.5 per cent stake in the pipeline, while Gazprom has 51 per cent.

The Düsseldorf-based company said it planned to complete the sale of a 2.7 per cent stake to VEB, Russia’s state development bank this month, having sold the rest of the 3.5 per cent stake in the market.

Mr Teyssen last month said he would give Eon a “more international foundation” by investing in energy markets beyond the company’s European core.

Burning need for gas production

http://www.ft.com/cms/s/0/c3dff400-fbd5-11df-b7e9-00144feab49a.html#axzz16wCK0zQH

By Charles Clover

Published: December 1 2010 17:42 | Last updated: December 1 2010 17:42

Novy Urengoy, just a few miles south of the Arctic Circle, lies atop Russia’s vast gas deposits – the very ones that heat western European homes and keep their lights on.

As the days get shorter, the technicians at Urengoy Gazprom – the largest chunk of Gazprom’s vast gas production empire – know that with winter looming, they must work hard to meet increased demand.

That is getting harder and harder to do, says Rustam Ismagilov, chief of the technical department of Gazprom Extraction Urengoy (Gazprom Dobycha Urengoy), the affiliate that manages the fields. He says many large gas field compressors need to be replaced.

“We used to be able to run them all year around,” he complains. “Now we have to give them a break during the summer, during the season of low demand, for maintenance.”

Ismagilov estimates the cost of replacing them at billions of dollars. “Taking into consideration the vast modernisation and reconstruction of production, we do not have quite enough investment here. Fifteen of our 21 plants were in place by 1987, and only one is new – it’s six years old,” he adds.

Gazprom is the engine of the Russian economy and accounts for 8 per cent of the country’s gross domestic product, but it is creaking under the demands placed on it by the state.

With demand for gas in Europe down 13 per cent in 2009 following the global recession, and world gas markets transformed by investments in shale gas and liquefied natural gas, the seller’s market enjoyed by Gazprom just a few years ago has been transformed into a buyers’ market. The company is being forced to renegotiate its prices while scrambling to meet basic investment needs. Production at existing fields is already in decline, and Gazprom itself forecasts output will drop from a maximum capacity of 600bn cubic metres to 400bn cubic metres by 2020.

Long taken for granted by the Kremlin as something akin to a giant wallet – one that could fund priority state projects such as the forthcoming Winter Olympics in Sochi – it was also made to bear the burden of the Kremlin’s geopolitical ambitions, becoming a chess piece in Russia’s energy diplomacy. In the process, Gazprom has spent a fortune pursuing political goals, sometimes at the expense of its balance sheet.

The group, for example, lost billions as a result of Russia’s brief gas war with Ukraine in January 2009, which most experts saw as a politically motivated move intended to destabilise Ukraine and drive Viktor Yushchenko, its westward-leaning president, from office a year later. In another case, pushed through for the sake of Russia’s political relationship with Italy, Gazprom agreed to buy a 20 per cent stake in Gazpromneft, its oil subsidiary, back from Eni, the Italian oil group, for more than $4bn, well above its market price – even as its revenues were falling, and even though Gazprom already controlled the company.

If Gazprom’s strength at the top of the oil and gas boom underpinned Russia’s hard-nosed energy diplomacy, as well as accumulating vast wealth for Gazprom and the state government, the optimism that accompanied the 2007 announcement by Vladimir Putin, prime minister and former president, that Russia was an “energy superpower” has all but vanished.

The decline of the oil price from its peak three years ago means Gazprom is now under pressure to renegotiate its long-term gas contracts, which are linked to the oil price, to reflect sweeping change in the gas markets. Demand has fallen precipitously in Europe, so much so that some analysts question the logic of further large-scale upstream investments – some of which, such as the massive Shtokman field and another large field in the Yamal peninsula, have in any event been put on hold.

Spot prices have fallen amid an influx of liquefied natural gas into European markets and the rapid development of alternative shale gas in the US.

For the first time, Gazprom earlier this year renegotiated its contracts with European energy groups to allow for up to 15 per cent of the sales to be tied to spot prices.

Today, Gazprom’s main investment objectives are the pipelines systems designed to feed the European market, whose objectives are as political as they are economic, and whose logic is being questioned. Indeed, it is open to question whether Russia will have enough gas to put in the pipelines, and even more questionable whether Europe will need it.

Julia Nanay of PFC Energy, the Washington-based consultancy, says the various pipeline projects being discussed are aimed at solidifying Gazprom’s strategic position in Europe. “These projects all attempt to validate or ensure Gazprom’s European position, while bypassing unreliable transit countries and encouraging non-Russian gas to flow to markets other than Europe,” she says.

The so-called North Stream is planned to carry gas directly to western Europe by way of a pipeline under the Baltic Sea. Consisting of two parallel pipelines, each with a capacity of 27.5bn cubic metres per year, the first gas is scheduled for delivery in late 2011. The South Stream, meanwhile, is set to deliver 63bn cubic metres of gas each year to southern Europe via a pipeline under the Black Sea. Yet the need for it is not obvious, say analysts, given that Blue Stream, the existing undersea pipeline to Turkey, may never run at full capacity.

Both new pipeline projects increase Russia’s political clout, as they link Russia directly with European consumers and avoid Ukraine and Belarus, which in the past have used their power as pipeline transit countries to block Russian energy shipments. A proposed pipeline to China from western Siberia is also designed both to tap a new market and to increase Russia’s bargaining power with Europe.

The silver lining in the global recession was that the drop in demand scuppered the pessimistic “gas gap” predictions of a few years ago that Gazprom would not be able to meet its European supply contracts. Alexei Miller, chief executive of Gazprom, optimistically said last summer that the company was on track to exceed pre-crisis levels of gas production by 2013.

But Jonathan Stern, director of gas research at the Oxford Institute for Energy Studies, says “there has been a complete change in the short-term outlook for Russia gas supply, which emerged due to the global recession”.

He adds: “It is highly questionable whether Gazprom should be making substantial upstream investments in high-cost supplies until it is sure that demand for that gas will materialise at prices sufficient to provide an acceptable rate of return.”