Russian Oil & Gas Strategy:Russian Oil & Gas Strategy:What does it mean for the What does it mean for the

global oil markets?global oil markets?

17th MIDDLE EAST PETROLEUM & GAS CONFERENCE21 April 2009, Dubai, UAE

Tatiana Mitrova, Ph. D.Tatiana Mitrova, Ph. D.Center for International Energy Markets StudiesCenter for International Energy Markets StudiesEnergy Research Institute of the RASEnergy Research Institute of the RAS

Russia in the world oil & gas balance

Russian Oil Production and Export in 1999-2009, bln.t.

Source: Rosstat

Production

Export

Short-term effects of the crises Sharp oil price decline and export duty lag led to upstream losses in 4Q2008, independents

were mostly affected Ruble devaluation, decrease in costs and MET reduction allowed Russian oil companies to

generate profits in 2009 even in 40 $/bbl environment as major part of their costs is in Roubles Optimization of the investment programs started Considerable decrease in tax burden Oil and gas companies (especially state-controlled) can count on the support from the

government. Moreover, the largest projects could be viewed as infrastructure ones, creating additional employment opportunities (similar to Roosevelt’s New Deal)

Legislative changes as of 01/01/2009 are a substantial but still insufficient relief for oil companies

Export customs duty

Source: Ministry of Natural Resources and Ecology of RF Source: Rosstat

New incentives needed

Source: Rosneft

Regulatory Changes

Short-term oil production trend

Source: CDU TEK, Troika.

Prospects of Russian oil production, mln. t

Source: ERI RAS “Crises scenario”

Major oil export projects: additional flexibility

BALTIC PIPELINE SYSTEM (BPS-II)

Belarus

Lithuania

Latvia

Estonia

Pskov region

Novgorod region

Leningrad region

Tver’ region

Smolensk region

Bryansk region

Kaluga region

Tularegion

MOSCOW

GREECE

BULGARIA

ROMANIA

Alexandrupolis

Burgas

Constantsa

AEGEAN SEA

BLACK SEA

Baltic Pipeline System-2 Caspian Pipeline Consortium

Burgas-AlexandroupolisRussia: Crude Oil Exports vs. Export Capacity

(Base Case)

0

50

100

150

200

250

300

350

400

450

500

1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 2023 2026 2029

mill

ion

met

ric

ton

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Capacity: East Asia

Capacity: Barents Sea

Capacity: Southern Druzhba

Capacity: Northern Druzhba

Capacity: Other

Capacity: Primorsk

Capacity: Butinge

Capacity: Ventspils

Capacity: Odessa

Capacity: Tuapse

Capacity: Novorossiysk

Non-FSU Crude Exports

Eastern Siberia development and ESPO High geological risks

The government’s plans on petroleum licensing in the region lag far behind plans

Delays in infrastructure development

High capital and operational costs

High uncertainty of ESPO tariff

Construction of the first phase of the ESPO pipeline to Skovorodino is well advanced and will likely be completed as planned in late 2009

Transneft and China have also finalized the details of construction of a branch from ESPO to China. .

The challenge to fill the pipeline

Transneft proposal for a single network pipeline rate of some $4.4/bbl starting in 2010 to effectively equalize costs of exporting crude to the East or West

Prospects of Russian gas production, bcm

Source: ERI RAS “Crises scenario”.

Yamal – the main growth driver Gazprom became extremely focused on

Yamal project and spent some $4 bln. last year on Bovanenkovskoye field. This year the figure is to spike to $6.5 bln.

Last year Gazprom began laying the Ukhta-Bovanenkovskoye gas pipeline, completed half of the Baidaratskaya Bay 72 km long crossing, drilled the first production well and did much infrastructural work

It is planned to produce the first 7.9 bcm in 2011. According to the General Scheme of Gas sector the Yamal output was slated to spike to 135-175 in 2020, thus offsetting falling production in NPT

Shtokman project Phase one - 23.7 bcm annual output

The Shtokman Development Company has approved the project`s first $800 mln. budget for 2008-2009 and will make a final investment decision this year

In June 2008 construction of the first semi-submersible drilling platform started at the Vyborg Shipbuilding Plant

The decision will hinge upon oil and gas price forecasts and the government`s willingness to provide support for the project

With a slowing economy in the intended European and US markets, Shtokman project could now be less a priority

Gas production in Eastern Siberia and Far East

Refuse from Altai project in General Gas Scheme

In the medium-term China will receive gas from Central Asia

Most attractive markets – Japan and S.Korea – are LNG-focused

Sakhalin transforms in a major gas-producing region with “Sachalin-2” starting LNG supply in several weeks

Source: General Scheme of Gas Sector Development until 2030.

Market-oriented flexible approach in gas production

Source: General Scheme of Gas Sector Development until 2030.

New Gas PipelinesNew Gas Pipelines

Nord Stream

SRTO-Torjok

Yamal-Europe

Pochinki-Izobilnoe

Blue Stream II

Vidyaevo-Volkhov

CAC-3

Yamal-Ukhta

Yamal-Yamburg

South Stream

CAC

Russia and OPEC Broad cooperation with OPEC is one of Russia’s political priorities On October 22, 2008 there was held an unprecedented meeting of President of Russia Dmitry Medvedev and Secretary General of OPEC Abdullah Salem Al-Badri In September, December 2008 and March 2009 Russian delegation, headed by Vice Prime minister Igor Sechin who is in charge of fuel and energy sector, was present at OPEC oil ministers meeting. Russia affirmed its intention to cooperate with OPEC with possibility to become an observer without joining the Organization Russian government took the lead to arrange a regular energy dialog between Russia and OPEC, aimed at contributing to long-term stability of oil market to the benefit of oil market participants

Russian proposals

To reduce the role of traders in favor of direct contracts between oil producers and consumers

To develop new oil trading system with switching to long-term supply contracts; setting new trading floors in the producing countries; increasing the number of markers in the oil market

To set up inventories in producing countries To coordinate investment process in gas industry in order to avoid

oversupply To coordinate tax policy (harmonizing the fiscal burden on oil-producing

companies) To increase the role of producers by involving significant non-OPEC

producers in the effort to stabilize markets – such as Kazakhstan, Azerbaijan, Norway, and Brazil