February 05, 2007 (the date of publication in Russian)
THE CHANCE OF THE "EASTERN PROGRAM"
Gazprom and Rosneft should undertake joint endeavour of developing new oil and gas provinces
Gazrom and Rosneft, the two most powerful corporations of Russia's fuel and energy complex, have signed an agreement on strategic cooperation for the period till 2015. Its text includes only general framework provisions; still, the two state-run companies are bound for partnership. In this year, the competition between them is going to continue; in year 2008, we'll see which of them the dominating force in the tandem is.
For the first time, the possibility of such an agreement was discussed in public by the heads of the two corporations, Alexei Miller and Sergey Bogdanchikov, in June 2006, on the eve of Rosneft's IPO. Obviously, their joint declaration was supposed to convince investors of promising perspectives of Rosneft's assets of natural gas, not only oil. At the same time, Mr. Bogdanchikov claimed that his company is going to sell the whole of the extracted gas to Gazprom.
ROSNEFT HAS NOTHING TO LOSE
In accordance with the signed agreement, Gazprom will purchase the whole amount of Rosneft's natural gas, extracted from the deposits of Western Siberia, linked to the gas transport system (GTS). Rosneft is obliged to extract an amount of gas from those gas areas not smaller than the 2006 output. Amounts, conditions and terms of sale of gas, extracted by Rosneft from non-GTS-linked deposits, are to be determined by additional agreements.
In year 2006, Rosneft extracted 13.562 billion cub.m of gas, while its West Siberan daughter companies, Purneftegaz and Yuganskneftegaz have produced respectively 4.4 billion and 1.5 billion cub.m. Most of this amount is comprised of casinghead gas (CHG). From this amount, Rosneft directly distributed less than 1billion cub.m to consumers, the rest being sold to Gazprom and its affiliate traders. Thus, Rosneft will not lose anything if the whole of its West Siberian gas is purchased by Gazprom.
Rosneft's major problem lies in the development of Harampur gas area, with a potential amount of extraction reaching 27 billion cub. m per year. This gas deposit is not linked to the gas transport system, though the distance to be covered does not exceed 130 km. Meanwhile, Gazprom's top officials refuse today to link this deposit to the GTS, claiming that the Urengoy-Surgut-Chelyabinsk pipeline does not have any free capacities. By 2012, when a number of Gazprom-developed gas areas are going to be depleted, such a possibility will emerge, they say. Accepting those arguments, Sergey Bogdanchikov already promised to the President that by 2012, Harampur would be launched.
It is noteworthy that Rosneft tried to reach accord on Harampur years before, when Gazprom was yet chaired by Rem Vyakhirev. At that time, the sides did not arrive to a compromise: Gazprom agreed to purchase the whole amount of gas at the GTS entry, but Rosneft was not satisfied with the price. As a result, Rosneft's leadership started negotiations with Itera Corporation, then-major supplier of Ukraine, on deliveries of Harampur's gas to newly independent states. Those negotiations failed, as Itera would like to share not only delivery but also extraction of "blue-sky fuel", and for Mr. Bogdanchikov, such conditions were unacceptable.
In 2001, Alexey Miller was elected Gazprom's CEO. Shortly afterwards, Gazprom and Rosneft announced a plan to establish a joint venture for developing five gas provinces, namely Harampur, Shtokmanovskoye, Prirazlomnoye, Vynga-Yakha and Yety-Pur. This initiative also failed. Eventually, Gazprom launched Vynga-Yakha and Yety-Pur independently, through the facilities of Noyabrskgazdobycha (Noyabrsk Gas Extraction Co.), and later purchased Rosneft's shares in Shtokmanovskoye and Prirazlomnoye.
As a result, Sergey Bogdanchikov found himself alone with the problem of Harampur. Obviously realizing the complicacy of the situation, he declared that Harampur's gas will be used for production of synthetic liquid fuel to be distributed both inside and outside Russia. In the new agreement with Gazprom, Harampur was not mentioned at all. Rosneft's press release contained a vague provision: "the amounts, conditions and term of non-GTS-linked deposits will be determined by additional agreements". This suggested that the talks were supposed to continue. Meanwhile, Rosneft is being urged by the Ministry of Natural Resources to bolster it work in the gas reservoirs of Harampur. Last year, the Ministry directly recommended to start developing Harampur jointly with Gazprom.
WITH CHG, IT'S EASIER
According to the signed agreement, Rosneft and Gazprom will develop cooperation in procession of the extracted raw materials; in purchase and distribution of natural and associated gas, in production and distribution of electric and thermal energy, as well as construction of industrial facilities and infrastructure. In use of CHG, the plans of the two corporations are more precise. Rosneft and Gazprom's Sibur Holding are going to jointly increase the capacity of South Balyk Gas Refinery up to 3 billion cub. m (from today's 1.1 billion). YUKOS, the earlier owner of Yuganskneftegaz, neglected utilization of CHG, and today, Rosneft is faced with this task, as the Natural Resources Ministry is insisting.
At the Priobskoye gas area, Rosneft may also unify its operations with Gazprom's daughter company – this time, GazpromNeft. Today, GazpromNeft is planning to build a plant for refinement of 2billion cub.m of CHG per year, as well as a steam-and-gas power plant designed to supply both the former facility and the adjacent area of the Khanty-Mansi Autonomous District with electric energy. This electricity is needed not only by Gazprom but also by Yuganskneftegaz. Therefore, the two companies could cooperate in construction of the power plant.
GazpromNeft is also planning to cooperate with Sibur Holding in construction of a gas refining plant in Vyngapur, near Noyabrsk. Its capacity is going to reach 1.9 billion cub. m. GazpromNeft is ready to supply the plant with 1-1.5 cub. m of CHG, while the rest may be provided by Rosneft. Within 2-3 years, GazpromNeft is planning to increase CHG extraction to 5 billion cub.m. (in the past year, this amount comprised 2 billion cub. m).
THE PROSPECTS OF THE EAST
The agreement suggests implementation of joint Gazprom-Rosneft projects in exploration and development of oil and gas deposits. In this process, the two sides are supposed to share the projects in the proportion 50 to 50. At present, this looks not more than a declaration, as the two corporations have never undertaken anything of this kind. On the contrary, the two state-run companies used to challenge one another in license auctions.
The document also suggests cooperation of the two companies in implementation of gas processing and gas chemical industrial projects in East Siberia and the Far East. According to Gazprom's representatives, gas refinement and gas chemistry should serve as the basis of the "Program of implementation of a unified system of gas extraction and transport, regarding the perspectives of export to China and other countries of the Asia-Pacific Region". This blueprint, prepared by Gazprom, is going to be approved by the Russian Government in this year.
Gazprom's Deputy CEO Alexander Ananenkov emphasizes that the development of gas processing and gas chemistry is one of the basic principles of the "Eastern Program". It suggests implementation of a high-advanced conversion of gas. For this purpose, new gas processing plants are going to be built in four areas of extraction, namely: Sakhalin, Yakutia, Krasnoyarsk Kray, and Irkutsk Region. Ethane, propane, butane, helium and other factions will be produced here from raw materials.
In their turn, gas chemistry facilities will produce a range of synthetic materials from the gas factions. Today, Russian industry is lagging behind in production of ethane products. While US petrochemistry exploits 9.2 million tons of ethane per year, Russia uses only 400,000 tons. Meanwhile, a ton of ethane is estimated in $80-100, the same amount of ethylene makes already $600-700, and polyethylene – $1200-1300. The figures speak for themselves.
In development of oil and gas provinces of the East, Russia should use a new, progressive approach, free from earlier miscalculations and considering a far higher level of technological equipment of the relevant industries as compared to 1960s-1970s. We need not only extraction of raw materials but also production of goods with a high added value. Therefore, it is gas refinement and gas chemistry which are to constitute the basic reserve for development of industries in Russia's East.
It is obvious that only Gazprom has got a sufficient potential to implement the Eastern Program in a full scale. Therefore, the corporation's involvement in all the four centers of new gas extraction is a priority of national policy.
SPACE FOR PARTNERSHIP
Rosneft, which is active in exploration of oil and gas deposits across East Siberia and the Far East, will inevitably play an active role in implementation of the "Eastern Program". The Eastern strategy considers establishing of four large-scale centers of extraction and refinement: Sakhalin Isle, Yakutsk, Krasnoyarsk, and Irkutsk. Rosneft's assets in Sakhalin include Sakhalinmorneftegaz, which has extracted 1.07 billion cub. m in 2006; a 20% share in Sakhalin-1 project, (0.759 billion cub. m), 51% in Sakhalin-4, as well as in Sakhalin-5, and a license for exploration in the Venino block (Sakhalin-3).
Gazprom has been actively involved in exploration in Krasnoyarsk Kray. Gas deposits of Sobino and Omorino, as well as Beryamba province, is developed by (daughter) Krasnoyarskgazprom Stock Company. Beside that, the corporation has acquired a right to use the reserves of the Tether area, 50 km away from the Sobino deposit. Slavneft, a 50% ownership of GazpromNeft, has got licenses for the Kuyumba, Tersko-Kamovskoye, as well as Korda, Baikit and Tukolana-Svetlanino deposits in Krasnoyarsk Kray.
In Irkutsk Region, Gazprom is developing the Southern Kovykta province. In addition, the corporation has struck agreements with Itera and Irkutsk Oil Company on purchase of the whole amount of gas extracted in Bratsk, Markovo and Ayan deposits in Irkutsk Region. On Sakhalin Isle, Gazprom has acquired a major stake in Sakhalin-2, intending also to overtake Sakhalin-3 (challenging Rosneft also in this case). Besides, Gazprom owns a license for exploration in Lopukhovo block (Sakhalin).
DALTRANSGAZ AS A LITHMUS PAPER
Thus, Gazprom and Rosneft are bound for cooperation in Eastern Russia. However, the corporations haven't yet found a common language. This is especially obvious in the example of Daltransgaz (Far East Gas Transport Co.). This enterprise was established for distribution of gas across the Far East from the deposits of Sakhalin-1. Daltransgaz is co-shared by the Khabarovsk Kray Authority (47.24%), Russia's state Property Agency (27.63%), and Rosneft (25%). Its assets include the Sakhalin- Komsomolsk-Khabarovsk gas pipeline, completed in 2006.
Gazprom's interest to Daltransgaz is associated with its plans to increase the transit capacity of the Sakhalin-Komsomolsk-Khabarovsk pipeline, extending it to Vladivostok. This issue has alreadey become a subject of an agreement with Primorsky Kray's Governor Sergey Darkin. In order to fill the pipeline, the corporation is going to purchase the whole gas, extracted on Sakhalin.
This means that Gazprom is offering equal conditions to Rosneft and Lukoil. Both companies may extract gas, but both are obliged to sell it to Gazprom, though for an acceptable price. In this way, Gazprom secures its dominating influence at the gas market. Obviously, Rosneft is ready to yield to such conditions in Western Siberia. However, in East Siberia and the Far East, Rosneft is reluctant to accept the role of a junior partner – though according to the current legislation, suggesting Gazprom's monopoly for export of natural gas, Rosneft's space of maneuver is restricted; though Rosneft would hardly be interested in gasification of eastern regions of Russia.
Most probably, the contradictions between Rosneft and Gazprom will last until Vladimir Putin makes his final decision on his successor. However, the President's efforts to establish an optimum balance between the competing groups in his Staff are already bearing their fruit: it is obvious that the agreement between the two rival companies was initiated on the supreme level of power. In any case, the two corporations will have to cooperate in development of Russia's Eastern regions after 2008 as well.
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