Russia 101014 Basic Political Developments

Progress for the Sakhalin – Khabarovsk – Vladivostok Pipeline

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Progress for the Sakhalin – Khabarovsk – Vladivostok Pipeline

Tue, 12 October 2010

At a meeting dedicated to the construction of the Sakhalin – Khabarovsk – Vladivostok Pipeline chaired by Gazprom Management Committee Deputy Chairman Alexander Ananenkov, it was reported that 956 km of the pipeline has now been welded, representing 71 per cent of the length of the first phase that will be to be completed.

Construction operations are now simultaneously underway at 12 sites in the Sakhalin Oblast, and in Khabarovsk and Primorsky Krais.

The meeting also discussed the issues related to constructing a new compressor station on Sakhalin Island and installing a gas pipeline from Vladivostok to Russky Island.

The overall project is being constructed in phases. The first will involve the construction of a 1,350 km long pipeline, which will have a capacity of 6 Bcm/a. The second phase will extend the pipeline’s length to approximately 1,800 km and its capacity to 30 Bcm/a.

The system will supply gas to consumers in Khabarovsk and Primorsky Krais, the Jewish Autonomous Oblast, and the Sakhalin Oblast. The gas will be sourced from Sakhalin I project in the mid-term.

Possible agreement between Romania and Russia in first quarter of 2011 on South Stream
Date: 14-10-2010
Gazprom and Transgaz might propose signing an Intergovernmental Cooperation Agreement between Romania and Russia on the South Stream project accomplishment, in the first quarter of 2011, if the results of the feasibility studies which are going to be made have positive conclusions, according to a press release of the Russian energy company.

The agreement will serve as a legal framework from the political and international point of view for the implementation in Romania of the South Stream pipeline project. 'In case of signing the Intergovernmental Agreement, the sides will make efforts to complete the necessary preparations at companies' level as soon as possible,' reads the press release.

During the meeting on Wednesday of Gazprom chairman of the management committee Aleksey Miller with the Romanian officials in Bucharest, the Russian company's chairman of the management committee and Transgaz general manager Florin Cosma signed a memorandum of intent for the preparation of the feasibility studies necessary for the South Stream passing through Romania. The two sides agreed to establish a common empowered group for achieving these objectives.

The South Stream pipeline cost may exceed 10 billion euros, announced Marcel Kramer, executive manager of the project promoted by the Russian group Gazprom, informs Reuters.

Everyone is now asking the same question: what will the cost of the project be? Some suggest the eight billion euro figure. I would say it will definitely be over 10 billion euros, Kramer told the international conference on 'Oil and Money,' organized in London.

Separately, in Bucharest, chairman of the management committee of the Russian group Gazprom Aleksey Miller said he did not have any doubts regarding the South Stream project financing or its completion on time. At the end of the meeting with the Romanian officials, Miller announced that Gazprom signed the contract that brings Romania closer to its involvement in the South Stream project.

'We have signed a document in order to make a technical and economic analysis of the hypothesis of a possible transit of the Romanian territory and after these analyses we can sign an intergovernmental agreement,' Aleksey Miller said.

The South Stream gas pipeline, designed to transport maximum 63 billion cubic metres of natural gas annually, will begin from Russia and, through the Black Sea, it will get to Bulgaria, where it will divide into two branches: one towards Greece and Italy and the second towards Serbia, Hungary and Austria, Agerpres reports.The project is seen as rival to the planned Nabucco pipeline, in which Romania already committed to participate. Nabucco is scheduled to deliver approximately 31 billion cubic meters of gas annually from the Caspian Sea to Central Europe via Turkey and Romania, bypassing Russia.Both projects are due for completion sometime in 2015.

Gazprom Says Interested In JV With Romania’s Romgaz
Russian natural gas monopoly Gazprom will send a team of experts to Romania to analyze the opportunity of a joint venture with local peer Romgaz, Gazprom’s president Alexei Miller said Wednesday. Miller met with Romanian officials in Bucharest to discuss the possibility of Romania joining the South Stream pipeline project. The meeting agenda didn't include the joint venture project, but the parties agreed for Gazprom to send a delegation to Bucharest in the coming future, Miller said.
Last year, Romgaz and Gazprom signed a memorandum to set up a joint venture that would target various projects in the natural gas and electricity sectors. Romgaz is Romania's largest natural gas producer and distributor. The company sold 35.7 million MWh of natural gas in the first half of 2010, up 19% on the year. Romanian Economy Ministry owns a 85% stake in Romgaz and it plans to sell a 15% stake after the company is listed on the Bucharest bourse in 2011.
GazpromNeft gets the leader status
Thursday, 14 Oct 2010
It is reported that GazpromNeft is appointed as Hunin 6 project leader in Venezuela. The decision on the status assignment was made by BOD of National Oil Consortium held by Gazprom Neft, LUKOIL, Rosneft, Surgutneftegaz and TNK-BP.

This status provides Gazprom Neft with the PetroMiranda coordinator powers.

This JV was formed by Russia and Venezuela in 2010 spring.

It is a technical expert of the project aimed to develop the above field. 60% in PetroMiranda are kept by Corporation Venezolana del Petroleo as PDVSA sub remained 40% being held by NKK.

The reserves of the field cover 52.6 billion barell, 14 wells being drilled by now.

Gazpromneft is ranked as the 5th oil producer in Russia. The Company and its subs keep 61 licenses on the development of the oil fields. It has 4.5 billion barrels in reserves.

(Sourced from AK&M)

Alexander Medvedev: There is no need to build the Great Wall of China on the gas market
October 14 2010

The European Union has recently taken a number of legislative initiatives indented to reform the gas industry. They include the Third Energy Package and the draft EU Regulations on the gas supply reliability. Alexander Medvedev, Deputy Chairman of the Gazprom Management Committee and Director General of Gazprom export told how badly they may impact the relationship currently existing among market participants and how these innovations will affect the Company's business in Europe in his interview to the Gazprom website.

Mr. Medvedev, what challenges will Gazprom face after the Third Energy Package comes into force?

Gas industry reforms in Continental Europe are determined not solely by this document, but by a whole set of legislative initiatives of the EU authorities including, for instance, the draft EU Regulations on the gas supply reliability recently endorsed by the European Parliament. One should consider these documents all together to understand the difficulties they may cause for business on the European gas market.

After implementation of the measures envisaged by the reformers we may face the problems both in operational activity and in property rights. Even if Gazprom manages to evade direct obligations to sell gas transmission assets in some countries and remains their owner, the Third Energy Package still deprives the Company of the access to managing these assets in the European Union.

It is obvious that depriving suppliers of the opportunity to manage gas transmission assets devaluates the investment they made in these assets. Here is the example. In the late 1990s when Russia experienced problems with convertible currencies Gazprom Group found an opportunity to build the Yamal – Europe gas transit pipeline across Poland used to supply gas to Germany, inter alia. Now we see an emerging threat that the asset management meant for reliable gas supply to our customers will be transferred to an independent operating company that will start acting on their own account. Thus, the pipeline owner turns into a financial donor obliged to execute investment decisions taken by an independent system operator!

We have to adjust the operational activity of Gazprom Group as well. The mechanism providing reliability of our existing long-term contracts and involving readiness of a supplier to maintain backup transmission capacities allowing to swiftly meet the demand in pursuance of the changing day-ahead nominations, is regarded as unfair competition under the new system. From now on, instead of the right to change their nominations several times a day, our customers will be entitled to it only once and on the day before supply. However, it will be very difficult to provide the envisaged reliability and flexibility of supplies without such backup capacities. I would like to stress that taking into account seasonality and extremely uneven demand throughout a day – reliability and flexibility are of paramount importance for the gas industry.

What risks does it bring to the European energy security?

The new gas market model patterned upon the Anglo-Saxon one has its own merits and demerits if compared to the existing model. It doesn't need long-term contracts since volumetric risks are relatively low on liquidity markets. However, without long-term price contracts the volume of gas coming to market starts depending on the price appeal. The gas will be available when the price is high. If the price is low, the volumes may outflow to more attractive markets or stored until better times. Hence, the reliability of European gas supply will be determined by the competition with other global gas markets, primarily, with Asian ones.

The development of gas transmission and storage capacities also runs some risks. The market witnesses that gas companies are most interested in developing the gas infrastructure which is cost-intensive and features a very long payback period; therefore, it is not pretty attractive for regular investors. However, these very companies will not be allowed to take part in such work: a sort of the Great Wall of China separates them from the infrastructure. Having no opportunity either to get reasonable income while the gas pipeline is operating or to take part in its operation, the suppliers will not wish to make such significant investments, they will start searching for more attractive markets and projects. Thus, the ongoing reform brings a real risk of the investment shortfall in the European gas industry – with all the consequences that come with it.

It is worth noting that a EU Member State that has implemented an asset separation principle resembling the Third Package – the United Kingdom – has already experienced problems with maintaining an appropriate level of gas supply during the past winter periods. Neither did the British liberalized market manage to provide enough incentives for investments in the new infrastructure.

Moreover, any copying without regard to local conditions may turn the merits of the Anglo-Saxon competitive market model into demerits and demerits into long-standing problems. Unlike, for instance, North America, Continental Europe doesn't have now and will not have in the foreseeable future thousands of independent producers and consumers. Thus, it is necessary to invent and introduce additional mechanisms that would ensure appropriate operation of the market dominated by bilateral oligopolies. The imagination of reformers leads them to creation of a centralized bulk procurement mechanism for the entire EU, but one can hardly call this proposal a market-based one.

Are there any guarantees that the property created in previous years and long-term Russian gas supply contracts will remain intact?

I have already mentioned a threat to property, now I would like to dwell on an institution of long-term export contracts pegged to oil and oil product prices.

They were subject to hard pressure by the European Commission regarding it as suppliers' competition restricting tool. Europe's domestic gas market is currently dominated by short-term contracts. The Third Energy Package is pro forma neutral to long-term export contracts pegged to oil and petroleum product prices. For some reason, exporters are experiencing problems with fulfillment of obligations under such contracts. These derive from refusal to extend exporters' long-term transmission contracts after their expiry, different terms of export and domestic gas purchase-and-sale contracts, as well as introduction of a new “use-it-or-loose-it” principle when contracting transmission capacities.

How will Gazprom's business activity in Europe change once the Third Energy Package is put into effect?

We suppose that the new rules of play can be only applied to the uncontracted gas volumes. As for the obligations undertaken under long-term contracts, they have to be strictly observed.

At the same time, the European Commission still has time to determine the final structure of the future gas market. By now the initiators themselves are not sure what it will look like. It is instructive to recall that the 2006 Group of Eight Summit formulated the global energy security as the integrity of secure supply and demand. We in Gazprom are confident that compromise decisions still can be worked out in cooperation with major gas suppliers from third-party countries. We are working towards resolving this issue.

How is the dialogue between Gazprom and Brussels evolving relevant to the energy market reforms and protection of Gazprom's interests? What is the progress on it?

We maintain a constant contact with various European institutions, both political and expert ones.

Gazprom Group and the Russian Government, on its part, are closely examining the implementation of the Third Energy Package. This is a necessary measure to make sure that the damage caused by this process to our Company's interests and the interests of our partners and consumers will not go beyond the bare minimum. I also hope that we will be granted the opportunity to make a significant contribution to updating the document.

European consumers insist on further revision of the contract terms and conditions, as well as the price formula claiming that the gas market has completely changed. How do you evaluate the necessity of these changes?

Under the global crisis conditions the gas market has undoubtedly evolved but not so drastically that the abolishment of the decade-proven, reliable and viable system of long-term contracts was needed. Besides, underway is the market revival amidst a gradual process of crisis overcoming.

Ensuring the balance of interests between natural gas purchasers and sellers is among the indisputable benefits of long-term contracts. Officially, everyone speaks in support of these contracts, but some purchasers, however, demand to upgrade them in such a way that is equal to a total destruction. There is a variety of options to perform such “modernization” including a complete transition to spot price indexation, waiver of the “take-or-pay” principle or adjustment of the contracted volumes and the basic price on an annual or, rather, on a quarterly basis if the link to the petroleum product-based formula is retained. As a result of these proposals, the contract “modernization” will entail an imbalance of interests that could be unfavorable for gas exporters and, therefore, considered by them as unacceptable.

When defending the link to oil and petroleum products in long-term contracts as the sole alternative to spot prices, Gazprom Group demonstrated flexibility in the relations with partners considering the unprecedented situation on the current European gas market. By adjusting the long-term contracts Gazprom's aim was to avoid a significant gap between the contract prices and the similar competitors' prices and, therefore, to facilitate an increase in gas off-takes. However, the contracts adjustment did not change their basic principles.

Is the gas price pegging to the oil price still necessary?

Long-term contracts with the link to petroleum products as the predominant feature still guarantee a balance of interests between the purchaser and the seller. Taking into account a high import dependence in Europe, linking the gas price to the “third” commodity – oil – will protect the consumer against possible price manipulations by the major supplier as none of the major gas exporters to Europe can influence the oil and petroleum product prices. Over the contract period that may reach 35 years the exporter's interests are not only protected by this link, but also the “take-or-pay” principle as well, which guarantees the minimum off-take amount under contracts. In this way, volumetric risks are assumed by the purchaser, which assures the return on the supplier's long-term investments. The purchaser's interests have an extra support through the contracting obligations taken by the supplier that incurs penalties if the day-ahead nominations are not met. The supplier also assumes the “make-up” gas obligations.

Has natural gas already become a separate exchange-traded commodity?

The gas pricing model based on the supply and demand doesn't function successfully on any of the global markets.

Even in the USA where, unlike Continental Europe, there are all preconditions to apply this model efficiently, the prices don't fully cover gas producers' costs. This also refers to shale gas producers. Only the oil link can retain natural gas prices at the adequate level that is convenient for producers.

How do the European customers fulfill their obligations on minimum contracted volumes off-take? Will the “take-or-pay” rule further change in European contract practice under pressure of crisis and gas oversupply on the market?

The “take-or-pay” principle remains a cornerstone of the long-term contract system, reliable and flexible gas market organization in Continental Europe. Gazprom Group acts to preserve this principle but at the same time shows flexibility and considers specific market conditions. Basically, every country has a different market but the situation is acceptable in general.

Our experts forecast that the current gas oversupply in Continental Europe will not last long: the pre-crisis level will be reached around 2012 while by 2020 the EU states will have to import more extra gas under declining domestic gas production. Our consensus forecast shows that the gap between demand and domestic gas production in the EU states will reach 380 billion cubic meters a year in 2020 and 440 billion – in 2030. Thus, the future challenge is not related to gas oversupply but to inevitable need of having additional volumes delivered in a reliable manner.

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