RUSSIA: Rivals may divert Siberian energy exports

Analysis

Eastern Siberia comprises Krasnoyarsk Krai -- including Evenk Autonomous Okrug (AO) -- Irkutsk Oblast and the Republic of Sakha-Yakutia. It has substantial energy reserves -- up to 2 billion tonnes of potential oil reserves and 6.6 trillion cubic metres of natural gas. These are yet to be developed -- current levels of oil and gas production are negligible and for local use only, mainly for the lack of the necessary infrastructure of pipelines, roads and power lines.

However, a new consortium comprising gas giant Gazprom and oil companies Rosneft and Surgutneftegaz was formed in late December with the aim not only of developing the area, but pushing out competitors. Rival oil firms Yukos, TNK-BP and Slavneft (owned by Sibneft and TNK-BP) are already present in the region. They had planned to export its energy resources to China and elsewhere in Asia. The new consortium aims primarily at satisfying domestic demand for oil and gas. With government support, this may change the future configuration of energy flows in East Asia.

Eastern strategy. The agreement is a logical continuation of the eastward move of state-owned Rosneft and state-controlled Gazprom. Rosneft has interests in Russia's Far East region, where it has stakes in Sakhalin's offshore projects. Gazprom announced its 'Eastern Strategy' in December 2002. This envisages Gazprom's overall coordination of any gas pipelines and exports in Eastern Siberia as well as the gasification of the region and the Russian Far East.

Over the past year, the three companies have lobbied hard to win government approval for their plans to take control of the region. In February 2003, President Vladimir Putin spoke in favour of putting all key oil and gas fields in Eastern Siberia under one licence. Surgutneftegaz, an oil firm that is privately owned but well connected to the Kremlin, became an ally of Rosneft and Gazprom after the Ministry for Natural Resources transferred the licence for the Talakan oilfield from embattled Yukos to Surgutneftegaz in late October 2003 (see RUSSIA: Yukos arrest may hold up foreign investment - October 27, 2003).

Interests. The key oil and gas fields of the region are in sparsely populated and little-developed areas north of the main roads and the Trans-Siberian and Baikal-Amur Mainline railways. The reserves of the largest fields are listed in the table. Until very recently, the two key players in the region seemed to be Yukos and TNK-BP:

• Yukos has held licences for oilfields in the Yurubcheno-Takhomskaya area of Evenk AO and for the Talakan oil field in Sakha-Yakutia. In 2000, as regional governments have a say in licence distribution for natural resources, Yukos put up Boris Zolotarev, then vice-president of subsidiary Yukos-RM, for the gubernatorial elections in Evenk AO. Zolotarev was elected and supported Yukos's projects to develop the fields for future export. Yukos also proposed to build a 2,400 kilometre (km) oil pipeline from Angarsk in Siberia to Daqing in China by 2005-06 (see CHINA: Beijing ponders Russian reliability post-Yukos - November 25, 2003). The pipeline would supply China with oil from Yukos's fields in Tomsk Oblast (the easternmost region of Western Siberia) and later from Evenk AO and Sakha-Yakutia.
• TNK-BP, which is a key shareholder of Rusia Petroleum (with a stake of 63%), is believed to be planning to build a 4,000 km gas pipeline from Kovykta to China and South Korea. These two countries are interested in gas from Eastern Siberia as it is cheaper than liquefied natural gas from South-east Asia and the Gulf. Kovykta's huge reserves make it possible to extract up to 40 billion cubic metres (bcm) of gas a year (6% of Russia's total). TNK-BP plans to export 20 bcm of gas a year to China and further 10 billion to South Korea (see CHINA/RUSSIA: Hurdles remain to pipeline ambitions - August 26, 2003).

Development needs. The new consortium believes that the region's energy resources should be developed jointly for maximum efficiency because of the huge investment needed. According to some estimates, geological prospecting and initial drilling will require capital investment of at least 2 billion dollars per year. Construction of roads, power lines and pipelines, and bringing in workers may push the bill to 7-8 billion dollars per year. The consortium plans to use a unified system of gas and oil pipelines, often running parallel to each other, to minimise costs. Gazprom will operate the gas pipeline network in the region; Transneft, Russia's state-owned oil pipeline monopoly, will operate the oil pipelines.

The consortium's participants have only a limited presence in Eastern Siberia -- Surgutneftegaz has been granted a temporary licence by the Ministry for Natural Recourses. The Chayanda and Sredne-Botuobinskoye fields in Sakha-Yakutia are not licensed; auctions are expected in 2004. Gazprom's longstanding interest in participating in the Kovykta project was always rejected by the project's shareholders (TNK-BP, the Interros group and Irkutsk Oblast regional administration). However, this may change, as the regional government may support Gazprom in the hope of solving the problem of the local fuel and electricity supply.

Exports vs domestic consumption. The key difference between the strategies of Yukos and TNK-BP, and of the new consortium, lie in their views of the market for East Siberian oil and gas. While the first two are willing to stake on China's growing energy demand, the consortium is not as convinced. In oil, the consortium favours Transneft's government-backed project to build a pipeline from Angarsk to Nakhodka, Russia's terminal on the Pacific. This would open the markets of Japan, South Korea and China to Siberian oil. However, a major constraint on the 4,000 km project is its cost, estimated at 6-8 billion dollars. It may take five years to complete across mountainous terrain.

In natural gas, the new consortium wants to supply Russia's easternmost regions first, before making any commitments to exports. The Russian Far East, connected to the rest of the country only by the two railways and by air, suffers chronic winter fuel shortages. Gazprom wants to build a gas pipeline from Irkutsk eastwards to the Maritime (Primorye) Krai to provide the region with cheap and reliable fuel supplies. Both Moscow and regional governments back the move: Irkutsk Oblast Governor Boris Govorin recently called for domestic supply in the region to take precedence over potential exports.

Outlook. After the recent change in direction in the Kremlin's policy towards greater social justice (see RUSSIA: Putin plans social reforms in second term - November 17, 2003), it is clear that Putin and the government are likely to be well-disposed towards the consortium. With its political connections and the close alignment of its plans with the government's social programme, it may now win the licences for the East Siberian fields that are due to be distributed in 2004.