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Russian Competitiveness in the Global Energy Sector
24 January 2018
11:00
KEY CONCLUSIONS
The effect of sanctions against Russia is disastrous for the entire global energy market, but even in these conditions the Russian energy sector shows good results

“Even worse than the sanctions is the protectionist trend, when they ban not only their own companies from participating in implementation of the projects, but also those associated with the companies, those who did not impose sanctions,” — Alexander Novak, Minister of Energy of the Russian Federation.

“Sanctions have interfered with the ability of the global industry to be global in terms of the flow of technology, and I think that’s a loss for everybody,” — Daniel Yergin, Vice Chairman, IHS Markit.

“The sanctions that were put in place were meant at the time when the oil prices were still high, and so the thinking behind the sanctions was not to impact current production, but rather future production,” — Daniel Yergin, Vice Chairman, IHS Markit.

“Sanctions were imposed in 2014, then they were expanded. From 2014 to 2017 we had increase of oil production by 15 to 20 million, gas production increased,” — Alexander Novak, Minister of Energy of the Russian Federation.

“Thanks to the sanctions, we learned to recover hard-to-extract deposits ourselves, we have our own inventions in terms of the development of the industry, science, we have commissions,” — Alexander Novak, Minister of Energy of the Russian Federation.

“Whatever the impact of sanctions was, it was short term, and Russian production continues to grow, and we see the global technology flows,” — Daniel Yergin, Vice Chairman, IHS Markit.

Russian energy sector remains highly competitive in the global markets

“Russian industry is competitive: the test of it is that it sells its oil,” — Daniel Yergin, Vice Chairman, IHS Markit.

“To date, Russia has the answers to all challenges [to the energy sector]. Our strategy for energy development implies all those directions, we are in a very favorable geographical position between Europe and Asia, we have the opportunity to supply energy resources to various countries, we aim at diversification, development of relevant infrastructure, development of modern technology, increasing the market share of liquefied natural gas; we aim at developing cooperation with other countries, we actively participate in the implementation of projects worldwide; we are an open country that is ready to provide the conditions for attracting investment into our country, including the energy sector,” — Alexander Novak, Minister of Energy of the Russian Federation.

“Speaking about competitiveness, <…> the cost of extracting our resources is quite low and very competitive, we have huge reserves and large deposits, which extraction cost allow us to be competitive; we have diversified energy supply routes, we have our modern technology, which we began to develop ourselves, often because we, as a matter of fact, were forced to do so by imposed sanctions on certain technologies,” — Alexander Novak, Minister of Energy of the Russian Federation.

“We continue to improve our technology in oil refining, to increase the depth of extraction, <…> to develop infrastructure. Transportation is developing: in 2017, railway transportation increased by about 4.5%, airway transportation by 20%. These indicators show that, despite the challenges that we face, despite the sanctions that have been imposed, our economy has actively overcome the difficulties, and we are ready to be attractive for investment into the Russian economy and the Russian energy sector in all areas, starting from extraction, exploration and processing, and participation in high technologies of equipment production, extraction technology, etc.,” — Alexander Novak, Minister of Energy of the Russian Federation.

“Competitiveness of our energy sector does not depend on the fact that over the past year we have been conducting joint actions, related to market balancing. This is where we have different goals: removal of surpluses accumulated over a number of years in order to ensure stabilizing the situation in the oil market from the standpoint of investment, prices, reducing volatility, ensuring the balance of supply and demand,” — Alexander Novak, Minister of Energy of the Russian Federation.

“There is no euphoria or any special feelings about the fact that Russian gas is supposed to be supplied to Boston today. That is not Russian gas any longer; Russian gas has been sold. Indeed, the molecules are Russian, but in fact it is the property of other buyers of Russian gas. This suggests that the market is global, and generally the LNG market is becoming more and more global. That is where we have absolute competition. Prices change, suppliers react swiftly: they supply to where a more favorable price is formed at the moment. That is absolutely normal. Cold weather in America, shortages of supply through the pipe, we know it too, the spot price has risen sharply; hence, the tanker was redirected. Tomorrow it will be headed in a different direction. There is no problem here. As the oil market is global, we will soon move towards the gas market becoming just as global in terms of pricing, and in terms of gas supplies, etc.,” — Alexander Novak, Minister of Energy of the Russian Federation.

“Russian gas is not only competitive in Europe. Russian gas is competitive in the Asia-Pacific region and elsewhere. Production cost is less than one dollar. Given that we now actively develop the Northern Sea Route, the transportation route to the Asia-Pacific region will be nearly two thousand kilometers shorter than through the Suez Canal. That increases competitiveness even further. We are ready to compete, we stand for fair, open competition. It seems to us that within the framework of international trade, within the framework of the rules that exist in the WTO, it is necessary to adhere to such rules. It will be better for the consumer, better for the energy security of our entire globe and the humanity,” — Alexander Novak, Minister of Energy of the Russian Federation.

Russian energy sector maintains a high level of investment attractiveness

“A very favorable situation has been created to attract investment recently. We now have a record low inflation of 2.5% in 2017. Economy growth was about 1.4–1.8%. We create the necessarily flexible tax system in order to ensure profitable extraction of deposits, development of oil and gas fields. The next stage is the already prepared draft law on the introduction of the so-called tax on added income, which would allow us to involve a large amount of West Siberian oil in development, our new fields, which are unprofitable for production today. We have the most liberal legislation in terms of repatriation of profits. And that is also a very important aspect for attracting investments into the Russian economy,” — Alexander Novak, Minister of Energy of the Russian Federation.

“A couple years ago, the total share of foreign investors in oil production in Russia was 25%; today, taking into account the attraction of new investors, new players, including those from the APR, we have already reached the figure of 31%. One third of oil production belongs to foreign investors,” — Alexander Novak, Minister of Energy of the Russian Federation.

“Investors are changing: new investors from other regions took the place of those investors who had been banned from participating in the Russian projects,” — Alexander Novak, Minister of Energy of the Russian Federation.

Petrochemicals and LNG for the Russian energy sector are the priority vectors for stimulating related industries

“We have a government programme for the development of petrochemicals, and we have a clear understanding until 2035, which factories will be built to process raw materials, and what will be produced. This programme is balanced from the standpoint of Russian consumption, and to exclude dependence on imports of polyethylenes and polypropylenes, and large-tonnage chemical products. We are even ahead of it,” — Alexander Novak, Minister of Energy of the Russian Federation.

“For Russia, the development of liquefied gas production is one of the key directions for development of the gas industry. Such decisions were made in 2013, when the country’s leaders decided to liberalize the export of liquefied natural gas. Our gas exports have always been monopolized,” — Alexander Novak, Minister of Energy of the Russian Federation.

“Oil and gas chemistry <…> exists to meet the world’s need for new synthetic products,” — Dmitry Konov, Chairman of the Board of PAO SIBUR Holding.

“Speaking about the development of petrochemicals in Russia, as I see it, in recent years, in part through the programmes that the Ministry of Energy conducts, through a sufficiently clear outlook on how it should develop – petrochemicals had a breakthrough. But they broke through primarily so as to satisfy the needs of other Russian industries for synthetic products. We were never facing the task of creating the petrochemical industry that would recycle all the molecules processed in the oil and gas industry, to make something out of them and sell it somewhere. I am sure that it is impossible,” — Dmitry Konov, Chairman of the Board of PAO SIBUR Holding.

“The presence of an additional product available for processing in the domestic market exponentially increases the use of such product by processors. It is happening; I am sure that the projects that are being implemented according to the plan for development of oil and gas chemistry will give this push,” — Dmitry Konov, Chairman of the Board of PAO SIBUR Holding.

“Our strategy is not only to produce large-tonnage polymers. We still depend on the imports of the final product. The main task is to ensure the production in Russia and the demand for products that will not be used as raw materials for chemical production, but rather the chemical industry itself needs to be developed in order to produce consumer goods ourselves,” — Alexander Novak, Minister of Energy of the Russian Federation.

“As for LNG exports, the legislation is liberalized, and it is possible to develop and attract private investments in order to develop this sphere. We see great prospects: increase in the share of production, supply and consumption of LNG around the world. According to our estimates, by 2035 the demand for gas will increase roughly by 1.3 trillion cubic meters, while the share of LNG will be the largest in terms of demand. Now the share is 32% in international trade, by 2035 it will exceed 50%. We have a task to actively participate in this process. Russia is the great gas power. Today we have almost 20% of the market in international trade, but the share of LNG is small; we will be working in this direction, attracting investors,” — Alexander Novak, Minister of Energy of the Russian Federation.

“Russia strengthened its position in the global LNG market. And that is not just the global market, it is the fastest growing energy market,” — Denis Khramov, Deputy Chairman of the Management Board, NOVATEK.

“The growth in LNG consumption in the world by 2030 will be 73% from the current 293 million tonnes of consumption last year,” — Denis Khramov, Deputy Chairman of the Management Board, NOVATEK.

“The current relatively low price for LNG that has formed in the world will be driving growth,” — Denis Khramov, Deputy Chairman of the Management Board, NOVATEK.

“Yamal LNG project was successfully launched. We plan to launch the second and third stages of the plant ahead of schedule in 2018 and 2019,” — Denis Khramov, Deputy Chairman of the Management Board, NOVATEK.

“The resource potential of Yamal and Gydan allows Russia to occupy a solid position in the natural gas market in general, and the LNG market in particular,” — Denis Khramov, Deputy Chairman of the Management Board, NOVATEK.

Russia is the key player in the global energy market, and the market balance largely depends on its actions

“Our company, and I among others, endorsed the [OPEC+] agreement, because we are well aware that it was a critical situation when the price of oil went below $30 [per barrel], and for us the $50 level was the target that the agreement was aimed at. We overcame $50, reached $60, and that was still not enough for producing countries, and already the $70 [per barrel] level is the benchmark that is being declared today. The situation that occurred in the middle of 2000s can be repeated, when the price popped from $9–$12 [per barrel] to north of $140; then there was the time of active investment in alternative energy, energy efficiency, and so we had the situation that we had, we had the price of $30 [per barrel] once again,” — Vagit Alekperov, President, Member of the Board of Directors and Chairman of the Management Committee, LUKOIL.

“Our sectors which show positive dynamics, objectively reflect the improvement of the situation in the economy. Speaking of energy sector, 2017 was the record year for our indicators: in the oil industry, we kept production at the 2016 level, because we had an agreement between the OPEC and non-OPEC countries; in the gas industry, the production growth was 50 billion cubic meters, we reached 690 billion cubic meters; in the coal industry, we also broke all-time records as we reached 410 million tons,” — Alexander Novak, Minister of Energy of the Russian Federation.

“The practice [of interaction with the OPEC and non-OPEC countries] has shown its efficiency, and even if we do not need to take joint actions in the market, we show our willingness, and we see the need to continue communication between the countries that have co-operated and are interacting with each other today. The meetings that take place, they show that it is effective: we exchange information, we can conduct research in various areas that can bring us positivity for our joint actions and positivity for the oil market. We are talking about some kind of informal or formal interaction of analytical, consultative nature. It will be useful for both exporters and consumers alike,” — Alexander Novak, Minister of Energy of the Russian Federation.

“The [OPEC+] agreement, which Minister Novak mentioned, is quite a historic one. We struggled for a phrase to describe it, and we called it the Vienna Group, because we can’t think of any other term right now for it. But what it does do, it represents the new reality, that Russia is the largest producer, plus Saudi Arabia, these two countries are the basis of it. It’s a much bigger market that requires this kind of dialogue and cooperation for stability. And it makes sense to have that, there should be a dialogue between producers of this scale,” — Daniel Yergin, Vice Chairman, IHS Markit.

ISSUES
The OPEC+ agreement affects the investment cycles of oil companies

“We have to have certain targets in front of us. The key indicator for us should be the surpluses that we see in the current market today. We were talking about almost 700 million barrels, it is 146 million barrels today, by April, most likely, it will all be balanced, at the current rate of decrease in the overhangs. Then it will already be necessary for the ministries to develop the mechanism to balance the market and to gradually divert from this situation,” — Vagit Alekperov, President, Member of the Board of Directors and Chairman of the Management Committee, LUKOIL.

“At the moment, we have not reduced our investment cycle; that is because we introduce new capacities today, but we stop these capacities, because we keep the level of oil production in accordance with the deal. If [OPEC+ agreement is] extended for another year, then we will have to revise our investment programmes, because it is unreasonable to set up the potential that is not involved in the economic processes,” — Vagit Alekperov, President, Member of the Board of Directors and Chairman of the Management Committee, LUKOIL.

“Last year, the discovered oil reserves were only 7 billion barrels, although traditionally the numbers would be from 20 to 70 billion barrels. So the investments in geological exploration have been sharply reduced; the next stage, the development, has been suspended: the last three years virtually no major project has moved to a new stage. That will lead to a sharp increase in the price of our product [oil] in the next 3–5 years,” — Vagit Alekperov, President, Member of the Board of Directors and Chairman of the Management Committee, LUKOIL.

Long-term investments from energy companies require a more stable and predictable institutional support

“Russia’s tax system allows the energy sector to develop. We have one drawback: frequent change of taxation rules in the oil industry. Stability of the taxation system, which can arrive with the tax on added income. I hope that this experiment, which begins in 2019, will develop rapidly, and we will be able to stabilize our tax burden through this system, and to have prospects for the development of major investment projects,” — Vagit Alekperov, President, Member of the Board of Directors and Chairman of the Management Committee, LUKOIL.

“We have made a major breakthrough in the Russian petrochemical industry in the last decade. We will not be able to make Russia a big player in petrochemicals globally without a special approach to price regulation or government stimulation,” — Dmitry Konov, Chairman of the Board of PAO SIBUR Holding.

“If we want to become a very large processor of hydrocarbons into petrochemicals, that would not happen naturally. That should be a particular government’s task, someone should support that with special stimulating measures,” — Dmitry Konov, Chairman of the Board of PAO SIBUR Holding.

SOLUTIONS
Foreign projects of the Russian oil and gas business increase its competitiveness and attract investment

“The oil and gas industry can not develop locally in one country; as a rule, it starts degrading,” — Vagit Alekperov, President, Member of the Board of Directors and Chairman of the Management Committee, LUKOIL.

“Today we are present in the global market with two purposes. We work in partnership with our colleagues: as a rule, they are the largest companies that typically develop megaprojects. So it was in Kazakhstan, Azerbaijan; today it happens in many countries, today we expand rather actively as part of the alliance in the Mexican Gulf, the Mexico’s shelf, in East Africa. That allows us to form new alliances, both technological and financial; we develop joint plans to finance the project… That gives us the opportunity to understand the new regions; our specialists get to know the geology of those regions, and that allows us to make extra money,” — Vagit Alekperov, President, Member of the Board of Directors and Chairman of the Management Committee, LUKOIL.

“Presence of the Russian companies outside of Russia today is naturally an opportunity to work in the global market, which is what is happening,” — Vagit Alekperov, President, Member of the Board of Directors and Chairman of the Management Committee, LUKOIL.

Maintaining fair competition in world energy markets is the key to success of the entire sector

“There is no question that the global oil market has become more competitive, because of the arrival of the US shale oil, which has a different kind of timeframe, a different kind of investment profile, a different kind of relation to capital markets, it can go up and down, but at the end of the day, it’s only 5–6% of the global market. But it’s forced to change in thinking about the market and adjusting to it,” — Daniel Yergin, Vice Chairman, IHS Markit.

“Shale oil will not solve all the problems. Yes, in short term it will cover the consumption increase, but it will not cover the consumption increase entirely,” — Alexander Novak, Minister of Energy of the Russian Federation.

“We do not accept, we do not understand, and we strongly disagree, when some people come out and say that it is not Russia’s gas that needs to be supplied to Europe, but some other gas, which is much more expensive, because Russian gas allegedly takes up the dominant position there. And in this regard, they pursue the political strategy of reducing the volume of Russian gas supply. But we have been reliably and safely supplying gas for 50 or 60 years, since the 1960s, to European consumers; we are reliable suppliers. We proved it with the entire history of our relations. And, of course, we count on our partners from the European Commission, who now actively oppose the construction and development of the relevant infrastructure, particularly the Nord Stream 2; they take any action so as to ensure that this gas pipeline is never built, so that there is only one infrastructure that is not diversified, not competitive, or so that only liquefied natural gas is supplied from a certain country. It is important to maintain competition, and consumers will benefit from this in terms of quality and reliability,” — Alexander Novak, Minister of Energy of the Russian Federation.

Technological development of the Russian energy sector must proceed in a timely and systematic manner

“There is a difference – to develop [technology] in order to benefit from this advantage and to replicate it is one thing; but to use it once, because we use it here, because there is a resource here and we understand that there is a market – we do not need that technology. There are other technologies, where we see situations similar to NOVATEK’s and invest in them, and we will protect them there, but we will not do it just once (as in my example), we will not waste money on it; we will better be building capacity, making money for the country, reinvesting in other projects, and we will be doing that for 5 years, rather than for 10 years we will be engaged in development of technology, so that it is reproduced once,” — Dmitry Konov, Chairman of the Board of PAO SIBUR Holding.

“One other pillar of competitiveness, which could be mentioned in regard to the Arctic LNG. Not only LNG needs to be scouted and produced: gas needs to be liquefied, it needs to be delivered. That is where the development of the Northern Sea Route, the development of navigation on the Northern Sea Route, the year-round passage of ice-class tankers—there are 15 of them already, gaining experience and competence in working at the Northern Sea Route, are the additional reserves for increasing competitiveness,” — Denis Khramov, Deputy Chairman of the Management Board, NOVATEK.

“Resource potential is not the only competitive advantage we have. Another important component is the technology. We pay a lot attention to that. The fourth stage of the Yamal LNG plant will be based on a self-contained liquefaction technology, which can be considered our own technology, it will largely use the Arctic climate, and it will produce about 1 million tonnes per year,” — Denis Khramov, Deputy Chairman of the Management Board, NOVATEK.

Further progress in the Asian markets is an important factor for the development of Russia's energy sector

“Development of the oil and gas industry in the eastern part of the country creates the basis (and apparently, we will see such projects in the next 5, 7, 10 years), creates the opportunity to develop petrochemical capacities aimed at the Asian market. What we see today basically is that the new, additional demand for these products will arrive from the countries of the South-East Asia,” — Dmitry Konov, Chairman of the Board of PAO SIBUR Holding.

“Development of the Russian energy sector in the Eastern Siberia and the Far East makes it possible to have a stronger competitive position closer to the main growing consumption market,” — Dmitry Konov, Chairman of the Board of PAO SIBUR Holding.