Gazprom, Russian plans and that niggling worry...

Reading the piece that Leanan has in Drumbeat about the continuing cost increases for natural gas in Ukraine, following the agreement last year with Russia on sustained deliveries, I was struck with the contrast to an earlier item on anticipated costs for natural gas in the UK. In the Ukraine costs are going to be going up another 40%, while in the latter the wholesale price of gas in the UK has dropped by more than 50% since June, and this is projected to extend into the future. With that thought in mind, and given that part of the supply for the UK will likely increasingly come from Russia, I thought I would have another little look at what is going on with Gazprom.

In the Ukraine the agreement last year almost doubled the natural gas price (raising it to $95 per thousand cubic meters (tcm) . Belarus just signed a deal that will cost them $100 per tcm, while Georgia is now paying $235 per tcm . The price that Belarus pays, however, is given as $70 in cash and $30 in shares of the Belarus pipeline company Beltrangaz. Over the next four years the price will rise to the European price (currently the one that Georgia is paying) and by that time Gazprom will own half of the company.

Incidentally Gazprom is still continuing to expand, Rigzone is carrying a story that they are now exploring for oil and gas in Tajikistan. Now hands up if you know where that is! I suspect that a better familiarity with the countries that lie East of Georgia is going to become useful in the years ahead. For those who don’t know, it is right hand down a bit from Turkmenistan, lying north of Afghanistan, and on the Chinese border. I would insert a map to show you where, but have unfortunately not yet learned how to do this with our new format, so can only direct you to those that you can find at the map collection of the University of Texas.

And, while that source of supply is some time away, Russia’s Economic Development and Trade Ministry has projected their production and export targets for the years through 2010.

It said Russia's 2010 natural gas production will increase to 722 billion cu m in 2010, following 655 billion cu m in 2006, about 668 billion cu m in 2007, 683 billion cu m in 2008, and 705 billion cu m in 2009.
It forecast gas exports of 202.5 billion cu m in 2006, 200.8 billion cu m in 2007, 208.5 billion cu m in 2008, and 218.4 billion cu m in 2009.

The ministry said oil production will grow to 512 million tonnes in 2010, following 480.4 million tonnes in 2006, 492 million tonnes in 2007, 500 million tonnes in 2008, and 507 million tonnes in 2009.

It expects crude oil exports of 251.5 million tonnes in 2006, 262 million tonnes in 2007, 269 million tonnes in 2008, and 274 million tonnes in 2009.

However the Minister, German Gref also noted that Russia will be changing the market rules.

Due to such factors as the Russia's annual oil production on the level of 470 million tonnes, 35 billion tonnes of available reserves (the second place in the world) and total annual oil export on the level of 260 million tonnes (2 place in the world) and well as the fact of being the largest oil/oil products supplier for the European market (30% of the market), Russian oil companies are able to exert no influence on the price policy and even do not have the right on transparent pricing rules.

These facts explain the decision about necessity and importance of a new oil marker and, as a result, formation of a new price indicator fairly reflecting the global demand and supply on Russian export oil.

To solve this task we took the first step and offered a new product (Russian Export Blend Crude Oil - REBCO) to the international market. The new brand is to replace the existing stereotype Urals and should have quite a new pricing basis unlike Brent quotations.

NYMEX as the most authoritative global hydrocarbon exchange, which trade turnover exceeds $60 billion, was chosen to be the place for the pilot triggering of the new REBCO brand. The first trades were held on October 20, 2006.

The operation of the Russian exchange in St Petersburg and daily trading in REBCO oil in rubles will be launched before the end of 2007.

And lest you think that Gazprom is not also raising some questions at home, the interview ends with the following:

It is no secret that the main deposits of Gazprom JSC located in the Nadym-Purtazov region show the decline in production. Large funds are spent to maintain the appropriate gas production level. In 2005 Gazprom's gas output made approximately 0.4 %. The RF Ministry of Economic Development many times drew attention to the fact that within the last years the company's investment strategy provided investing of only 30% of total investments in production, whereas the development of deposits located on Yamal Peninsula requires nearly $70 billion. The major funds are invested in the development of infrastructure projects, mainly export-oriented ones.

To my mind, the problem with gas production stagnation in Russia should be solved using complex measures.

It is necessary to introduce energy-saving technologies on entities (first of all on Gazprom itself that consumes 53 billion cubic metres) and calculation of gas consumed by population and the housing and utility complex.

Furthermore, it is necessary to create conditions so as to ramp up gas recovery of independent producers, whose potential is limited now by both the existing system of contracted access to the unified gas supply system and throughput capacity of this system as well as lack of the home market development strategy of Gazprom (out of 70% of funds invested in development of the transport infrastructure only 30% are spent on expansion of internal infrastructure capacities).


Note that for those who can’t remember the conversion (and being at home, that includes me) if you divide the tonnes by 50 you can roughly convert to barrels a day, i.e 250 million tonnes is around 5 mbd.

for a good map of the region check out the CIA world factbook here:

Here's their map of Tajikistan with neighbours:

On the CIA site, click the Asia reference map... the JPG is a little small... but the PDF is nice and gives you the ability to zoom in.

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I think that you multiply tonnes by about 7 (depending on the gravity of the oil) to get barrels (we are comparing weight to volume).

Note that Russian oil exports in 2006 are down, versus 2005:

OOOhhhh, the conversion for tons/barrel

1 barrel per day (b/d) = 50 tonnes per year (approx.)

More here

This article from "Oil of Russia" magazine seems pretty sobering regarding future Russian oil production and is at odds with the EDTM's forecasts. It's Lukoil's magazine though, and reads as a poorly-disguised plea for lower taxation.

The statistics of the last 60 years show that Russia's oil-producing industry has been subject to the classical laws of phased development. According to these laws, the industry had already completed its buildup stage in the years before 1975 and moved on to the level of producing approximately 400 to 500 million tons per year. At this level, the volume of oil produced in Russia has been held constant for approximately 30 years; now, however, there are signs justifying the assertion that the stage of stable oil production has ended, and we are entering a new phase in which the volumes of oil produced will gradually decline.

And later:

Starting in 1945, the systemic decline in the rates of oil production growth has been approximately 2% every five years, and is now leading to an inevitable transition to the stage of negative yearly growth in production. Our linear and polynomial forecasting models, constructed for extreme cases with a high correlation coefficient of 77–92%, show that rates of production growth could be negative as early as the 2005–2010 interval. In 2011, the two forecasting models meet at negative rates of approximately 6–7% production growth annually.

One of the main reasons for the decline in the volume of oil production is the increasingly difficult geological and technical conditions in the development of oilfields. This progressive worsening of conditions has led to an increase in the amount of labor involved in recovering oil reserves. In fact, since 1990s every newly produced ton of oil has been more labor intensive than the previous one.

Reserves are getting more and more difficult to recover. As the statistics show, there has been (since 1990) a doubling every ten years in the labor intensity in oil production.

I don't understand the point that's made several times that an increasing oil price leads to a decline in production growth rates, e.g. this bit:

High world prices for oil (more than $30 per barrel since 2004) are merely accelerating the systemic trend toward the decline in average annual rates of growth in the production of oil. Throughout the last 35 years, the rise in the price of Urals crude (more than $30 per barrel) has led to a decline in the average annual rates of growth in oil production.

With a price of more than $30 per barrel for Urals crude, there is obviously an additional increase in oil companies' operating and tax costs that forces them to shut down increasingly less productive reserves of oil. As a result, higher rates of production decommissioning lead to a drop in overall volumes of oil production.

Can anyone explain this? Seems counter-intuitive to me, but maybe I'm misunderstanding what he's saying.

That only makes sense if the $30/barrel cost for Urals crude is the per barrel marginal cost of extraction. If so, then there is obviously an additional increase in oil companies' operating and tax costs [?] that forces them to shut down increasingly less productive reserves of oil.

Producing the Urals oil is expensive enough to force them to shut down other fields that are less productive. Anyway, this is my reading of what they are saying.

As far as I can recall there is an export tax in Russia which increases progressively with the world oil price. So a high world oil price minus high export tax could make marginal wells uneconomic.

OK, that would explain the tax part of the costs, which I did not understand.

obdacher - Thanks, that would certainly explain things. Not sure about the rationale for such a tax structure though...

[BTW - for those of you new to TOD, Dave Cohen did a comprehensive Feb 2006 piece on Russian oil production and reserves which is essential reading. He didn't take an official stance on future Russian production, but in his concluding remarks offered the opinion that production would be in the 9 to 10 mbpd range until 2010 and thereafter would decline fairly slowly]

The export duty is only part of the problem. Another part is oil extraction tax. This tax is based on the international price of oil but must be paid even on the amount sold internally at much lower price. So, the more the international price of oil, the less profitable is internal sales. Many old wells are abandoned due to this problem.

I believe Putin did say over the last few years that taxes and tariffs would be adjusted to ensure that Russia always had enough oil "for home use" versus export. The Kremlin is attempting to manage its resource base, though we might not like how they are doing it.


it is necessary to create conditions so as to ramp up gas recovery of independent producers, whose potential is limited now by both the existing system of contracted access to the unified gas supply system and

A quote from an article I found after Turkmenbashi died

Gazprom Squeezed

Finally, the emerging contours of competition for access to energy resources in Central Asia are another cloud on the horizon for Gazprom. Gazprom's short-term strategy envisages a major increase in purchases of Central Asian gas. Vladimir Milov, from the Institute for Energy Policy, explained in a briefing at the Carnegie Endowment in Washington, D.C., on March 16 that Gazprom will have no means to offset declining domestic gas production beginning in 2008, and by 2010 will be purchasing 100 bcm of gas from Central Asia. Gazprom is counting on Turkmenistan to provide the bulk of that gas, with purchases slated to go to 70-80 bcm a year as early as 2007-08.

I expect Russia and Europe wii lean hard on the whoever becomes the new ruler to cancel any plans they have to export gas to China.

Here's an article I stumbled across in an article from the Jan. 3 edition of The Economist

Gazprom’s decision to hike prices for the former Soviet Union is driven by a looming gap between the gas it can produce or buy from Central Asia, and the gas demanded by its customers at home and abroad.

Its nice to see an established journal agree with peakers on some issues.