“Kommersant”: “The Salekhard line”
In late September, Prime Minister Vladimir Putin organised a presentation ceremony for global oil and gas majors in Salekhard, North-West Siberia, acquainting them with gas projects on the local Yamal Peninsula. Still this was not the most important thing. It appears that the event was organised in order to proclaim a new line in the sphere of exploitation of natural resources.
Everybody came.
The CEOs of most leading global oil and gas companies came to Salekhard, which included the heads of the biggest companies in global fuel and energy, such as E.ON AG Chief Executive Officer Wulf Bernotat (Germany), Mitsui's Masami Iijima (Japan), Mitsubishi's Yorihiko Kojima (Japan), Royal Dutch Shell Plc's Peter Voser (United Kingdom - Netherlands), Statoil's Helge Lund (Norway), James Malva of ConocoPhillips (United States), ENI SpA's Paolo Scaroni (Italy), Total's Christophe De Margerie (France) and Muhammad Hassan Marikan of Petronas (Malaysia). Representatives of South Korea's Kogas, France's GDF SUEZ and ExxonMobil also attended the event.
Most members of the Russian government were also there. This turn-out seemed impossible and almost unthinkable. But, most importantly, Vladimir Putin also came. It appears, however, that such a large group would not have gathered without him.
Such high representation levels seem typical only of major global investment or oil and gas forums. For instance, many of these top managers attended the 24th World Gas Conference on October 5-9, 2009 in Buenos-Aires. Although individual CEOs of global companies frequently visit major forums and presentation ceremonies organised by former Soviet republics, including Azerbaijan, Turkmenistan and Kazakhstan, they virtually never turn out in force.
Why did so many CEOs of the global fuel and energy sector visit Salekhard?
They were shown a carrot.
The CEOs of the global fuel and energy sector were shown a region where Moscow invites them to work, they were briefed on cooperation terms and were also shown a carrot in the form of a favourable tax regime.
A total of 11 natural-gas and 15 oil and gas-condensate deposits have been discovered on the Yamal Peninsula and the nearby continental shelf. Their explored and preliminary estimated gas deposits (ABC1 + C2 categories) total about 16 trillion cubic metres, while long-term and predicted gas resources (C3-D3 categories) are estimated at nearly 22 trillion cu. m. Gas-condensate deposits (ABC1 category) are estimated at 230.7 million tonnes and 291.8 million tonnes, respectively.
Up to 360 billion cu. m. of gas annually can be produced on the Yamal Peninsula. The Bovanenkovskoye deposit, containing 4.9 trillion cu. m. of gas (ABC1 + C2 categories) is the largest such deposit on the Yamal Peninsula. Initial gas reserves of the Kharasaveiskoye, Kruzenshtern and South Tambeiskoye deposits are estimated at about 3.3 trillion cu. m. of gas. Russian energy giant Gazprom owns licences for the development of the Bovanenkovskoye, Kharasaveiskoye, Novoportovskoye, Kruzenshtern, North Tambeiskoye, West Tambeiskoye, Tasiiskoye and Malyginskoye deposits. NOVATEK, whose 20% stake belongs to Gazprom, owns a licence for developing the South Tambeiskoye deposit. However, only the Bovanenkovskoye and South Tambeiskoye deposits are likely to be developed in the upcoming decade.
Foreign companies who were invited to cut up this cake will have to pay cash for these sweet slices. They will also have to provide access to technology, place orders at Russian enterprises, facilitate access to their sales markets and share their own assets. All these terms were set forth by Vladimir Putin.
Those who agree should expect tax benefits. "I consider it possible to examine the issue of creating tax breaks during the recoupment of investment channeled into the development of new gas deposits, including here on the Yamal Peninsula," Prime Minister Putin said.
Government representatives say lower severance tax could be charged on gas producers. According to analysts, this is not a very generous gift because current gas severance-tax rates are just 147 roubles per every 1,000 cu. m. Other incentives, including favourable gas-export duty rates, property-tax breaks and special investment deductions on profit tax, could prove more substantial.
Expectations were not justified
Foreign companies did not learn anything new from the prime minister and government members, because all this has already been offered before. Similar terms were proposed to those involved in developing the Shtokman gas-condensate deposit in the Barents Sea, northern Russia.
Moreover, foreign oil and gas majors know about the Yamal Peninsula's natural resources. They are aware of the adverse local weather conditions and climate.
"Despite the meeting's extreme transparency and its high representation levels, we did not notice any substantial news," Alfa bank analysts say.
Although foreign companies probably wanted the Russian side to be more specific on various projects, they did not receive such information.
In his concluding speech, Vladimir Putin indicated the reason for bringing all of them together. "We have gathered here to show the level of transparency of the Russian economy and government," Putin said.
Expenses strategy
It is unclear whether transparency will facilitate the development of the Yamal Peninsula's natural resources. The government has repeatedly tried to exploit the region, which is considered Russia's gas treasure chest.
It has been known for decades that the Yamal Peninsula abounds in hydrocarbons, primarily natural gas, and that all the main regional deposits were discovered during the Soviet period. However, it seemed inappropriate to develop the Yamal deposits at a time when the West Siberian fields facilitated expanded production. The issue of developing Yamal became highly important in the past 15 years when output at existing oil and gas giants began to fall.
On January 14, 2002, the Gazprom Board called the Yamal Peninsula a region of strategic corporate interest, and the main site of deposits development until 2010 and thereafter. Gazprom and the Yamal-Nenets Autonomous Area administration drafted a programme of comprehensive industrial exploitation of the Yamal Peninsula's deposits and the adjacent continental shelf. The programme prioritised the development of the Bovanekovo deposit's Senoman-Aptian layers.
In June 2002, Deputy Gazprom Board Chairman Alexander Ananenkov told an annual general meeting of corporate shareholders that the Nadym-Pur-Tazovsky region would remain the primary production area until 2010, but that the Yamal Peninsula's resources would begin to be developed during that period. In August 2002, Gazprom CEO Alexei Miller confirmed these plans at a meeting with President Vladimir Putin. Miller even noted that Yamal deposits would yield the first 15 billion cu. m. of gas in 2007, and that annual output would be expected to reach 60 billion cu. m. by 2010.
All these plans remained on paper. Russian pipelines do not pump any gas from Yamal. Gazprom delayed exploiting Yamal's deposits because it was busy commissioning new deposits in the Nadym-Pur-Tazovsky region, primarily the largest Zapolyarnoye deposit that annually yields 100 billion cu. m. Gazprom also moved to regain control over production units lost in the Roaring Nineties.
This delayed the start of the Yamal campaign. The delay will cost the company billions, if not tens of billions of dollars, because all works and materials are now far more expensive than five to seven years ago, even in conditions of the crisis-era "discount."
There are plans to transport Yamal gas via five or six trunk pipelines measuring about 1,100 km long to Ukhta and then from Ukhta to Gryazovets, from Gryazovets to Torzhok, from Gryazovets to Yaroslavl and from Ukhta to Pochinki. The new pipelines for pumping Yamal gas from Bovanenkovo to Ukhta will measure over 2,500 km. Mikhail Korchemkin, head of East European Gas Analysis consultancy, says it will cost $50 billion to complete the new Bovanekovo-Ukhta pipeline network now being constructed by Gazprom.
Gazprom has spent a lot on the Yamal Peninsula since 2002, without starting hydrocarbon production.
The 572-km-long Obskaya-Bovanenkovo railway measuring 525 km to Bovanenkovo station is currently being constructed. This is Gazprom's main achievement today. A total of 472 km of track has been laid to date. The railway comprises five stations, 12 sidings and 70 bridges with a total length of over 12 km. Commercial traffic between Obskaya station (the zero km) and Bovanenkovo station (the 525th km) is scheduled to begin in January 2010. Traffic between Bovanenkovo station and Karskaya station (572nd km) is to commence in September 2010.
Gazprom estimates the cost of the railway-construction project at 130 billion roubles. Although the meeting in Salekhard proposed that transport monopoly Russian Railways buy this railway from Gazprom, the company lacks the required assets for doing this. Under a possible provisional option, federal funding will be allocated in any particular form, making it possible to buy the railway. Or the state will reimburse Gazprom for the expenses incurred.
Joint working groups
Only two projects have been launched on the Yamal Peninsula while infrastructure construction is still underway. Gazprom continues to develop the Bovanenkovo deposit containing almost 5 trillion cu. m. of gas. Due to the crisis, the company has delayed commissioning the deposit from 2011 until the second half of 2012. At first, it is intended to produce about 15 billion cu. m. of gas annually and to expand subsequent production to 115 billion cu. m.
Apart from Bovanenkovo, another project, namely construction of the Yamal SPG liquefied natural gas (LNG) production plant, is being actively discussed. Technically speaking, the project which will utilise resources of the South-Tambeiskoye deposit is not implemented by Gazprom. NOVATEK bought a 51% stake in the project from companies owned by businessman Gennady Timchenko in late May 2009 and also has a three-year option for buying Timchenko's remaining 23.9% stake in Yamal SPG for $450 million. Gazprom owns another 25% stake in the company. Moreover, Timchenko's companies own an 18.2% stake in NOVATEK.
Gazprom is actively involved in the project as a NOVATEK shareholder owning a 20% stake in the company. According to previous plans, the South-Tambeiskoye deposit was to have been developed starting with 2025. Still it appears that the project will be launched in the near future. In August 2009, project co-owner Gennady Timchenko visited Yamal in order to specify the LNG plant's location.
NOVATEK CEO Leonid Mikhelson confirmed that the company was currently selecting a design institute and the LNG plant location, and that the issue would be tackled by a joint working group involving Gazprom.
A site in north-west Yamal is the most appropriate in terms of logistics, Mikhelson said.
Looking for a favourite
In 2008, when the crisis had not yet affected the oil and gas sector, Gazprom did not plan to involve partners in Yamal projects. Prime Minister Putin is now telling foreign companies that Moscow expects them to join in. Analysts are confident that this is an indication of the fact that Gazprom lacks the technology and funding needed to develop the Yamal deposits. Alexander Nazarov, a senior analyst with Metropol brokerage, said foreign companies would be invited to implement the LNG project and some hydrocarbon-production projects stipulating the sale of 25-50% stakes. Moreover, foreign companies can facilitate gas sales in conditions of crisis when Europe, the main Russian-gas consumer, scales down its purchases.
Bank of Moscow analysts say it will take $44 billion to develop Yamal until 2015. Still it is unclear whether Gazprom will invite foreign companies to take part in the project. The choice of such companies also remains unclear. Gazprom declined to comment on the issue, citing the lack of specific information. Quite possibly, Gazprom will not involve anyone in the Bovanenkovo project but will use the potential of foreign companies in some new project, such as the adjacent Kharasaveiskoye or Kruzenshtern deposits, because it owns the licences for their development. Gas production could commence there only after 2015, if the company starts developing them today.
The choice of Gazprom's partners remains unclear. Although ENI has good chances, the chances of Germany's E.ON and Wintershall, part of the BASF concern, are slightly better. First of all, Gazprom and German companies have jointly implemented several gas-production projects in Russia. The AchimGaz joint venture involving Wintershall is developing sector 1A of the Urengoi deposit's Achimov seams. Moreover, BASF and E.ON each own 25% stakes in a project to develop the Yuzhno-Russkoye gas-condensate deposit. Second, Germany is Gazprom's largest partner and has the largest gas market in Europe. In late October, Alexei Miller said E.ON was interested in jointly developing deposits on the Yamal Peninsula. Royal Dutch Shell and Total also rank among the most probable candidates, due to be involved in the projects.
But Gazprom will, most likely, establish a consortium, the way it did at the Shtokman deposit. Most importantly, the development of Yamal ranks among ambitious projects which cannot be independently implemented by Russia. This answers the question why Putin gathered the global oil and gas majors in Salekhard in September.
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The call on foreign companies to assist in developing Yamal deposits shows that Gazprom is ready to renounce the idea of independently developing all deposits because the crisis has undermined its financial potential.
Kirill Martynov
