Russia - Oil & Gas Financial Journal

Different Focuses – One Aim
“Russia is currently the number one oil producer in the world. And of
course expanding oil exports is of fundamental importance to us, since
this is where our core budget revenues come from,” Deputy Prime Minister
Igor Sechin recently stated. By keeping production levels at the end
of 2009 above 10 million barrels, the country overtook Saudi Arabia to
become the world’s biggest producer of oil.
As well holding this enviable position, Russia also holds 32% of the
globe’s proven gas reserves and is the largest exporter of gas. The
global gas market in 2010 looks very different to a few years ago, due
to the rising importance of shale gas in the US market and predicted
slumps in global demand. Gas has always been indexed to oil prices,
but gas prices stood at around U$ 4.6 per British thermal Unit (BTU)
at the end of June 2010, twenty times less than the current oil price.
Historically, it has always been closer to ten times less. Despite this situation,
at the most recent meeting of the Gas Exporting Countries Forum,
Russian Energy Minister Sergey Shmatko stood against putting quotas
on production, an alternative to indexation. “All ministers agreed and
supported that we continue our efforts to achieve indexing gas to oil,”
he said after the forum.
New pipeline projects to extend and diversify Russia’s export reach
are positioning the country in a new light: as a major supplier to Europe
and the CIS through projects such as the Caspian Pipeline Consortium
(CPC) Baltic Pipeline System (BPS), as well as gas through Nord Stream
and South Stream. Valery Yazev, vice chairman of the State Duma, Russia’s
equivalent of the United States House of Representatives, explains
the need to develop such projects when there is already pipeline capacity
to Europe. “By 2020 Russia will need to transport an additional
100bcm of gas per year to Europe and that is what North Stream and
South Stream are meant for. They are additional transport routes, which
will diversify the transit system and reduce the dependence of Russia
and European countries on countries such as the Ukraine, which have
caused transport problems in the past.”
Oil and gas are clearly hugely important for the Russian state budget.
Although Finance Minister AlexeY Kudrin has been pushing for some
time for “ending dependence on oil”, Russia’s 2009 budget was contingent
on oil prices reaching U$ 95 per barrel. When this did not happen
the country’s reserve fund built up during the boom years had to be
used, which meant that oil and gas revenues accounted for 11% of GDP
and half of the country’s spending for the year.
The Russian government is also looking at reshaping its oil and gas
taxation system. The current system taxes upstream production but
allows companies to make their money in refining and downstream
activities, essentially fostering an environment where only Russia’s largest
integrated players stand to benefit. A new taxation model would look
to stimulate growth across the energy value chain and encourage the
development of smaller oil and gas
companies more suited to exploiting
mature deposits in Western Siberia.
Encouraging the development
of junior companies in Russia has
been an issue for the last few years,
as Yuri Shafranik, former Minister of
Fuel and Energy (1993-1996) and
today chairman of the Union of Oil
& Gas Producers of Russia explains.
Igor Sechin, Deputy Prime Minister “In 1996, 16% of Russia’s total production
volume belonged to small
and medium companies. Today, that
percentage hardly reaches 2%. Small
business today is burdened with tax.
We realize this problem and our mission
is to analyze the issue and try
and persuade the Government and
the State Duma that it is very important
and that resolving it is in the
national interest.”
As well as addressing this issue
AlexeY Kudrin, First Deputy Prime
Minister and Minister of Finance and making sure that Russia capitalizes
on fields that are not of strategic
importance to the major players,
any new taxation system must also
encourage Russian companies to
exploit promising new regions such
as East Siberia. The new taxation
model must also acknowledge the
current issue in convincing investors
that moving to these new regions is
worth the investment. This may take
the form of a revenue-based tax system,
or continued tax holidays for
Valery Yazev, Vice Chairman of State
Duma
specific fields, but will have to take
pains to maintain a balance between incentives for upstream and downstream
operations.
The energy sector as a whole has undergone some major changes
over the last decade from commodity producers to consumer facing
power generation companies. Yuri Lipatov, chairman of the State Duma
Committee for Energy has overseen many of these changes, including
the liberalisation of the power generation industry. He explains that in
the end these changes should always be concerned with improving the
experience of the end-user. “We hope that the philosophy of the law
will, at the end of the day, form competitive pricing, which in turn will
70 www.ogfj.com • Oil & Gas Financial Journal August 2010