Exports from Russia to International Markets Konstantin Simonov Paris May , 2009

Main Challenges Risk of Production Decline Construction of new pipelines to Asian markets Сombination ot this factors: possible U-turn of Russian Export Policy

Risk of Production Decline

Construction of new pipelines to Asian markets

Сombination ot this factors: possible U-turn of Russian Export Policy

First Al arm S ignal

Decline in Oil Production

Decline in Oil Production The decline in oil production started before world oil prices started going down. In H1 2008 oil output eased back by 0.37% and by 0.57% as a result of the whole year The first four months of 2009 do not give reason for optimism. Oil production dropped 1.1% in Q1 2009 compared to the same period last year However, in April the daily oil output added 0.5% compared to March 2009. And the April 2009 oil production advanced by 1.4% to 40.32m tons compared to April 2008. But this growth is rather fragile Oil exports in Q1 remained at the 2008 level: 51m tons

The decline in oil production started before world oil prices started going down. In H1 2008 oil output eased back by 0.37% and by 0.57% as a result of the whole year

The first four months of 2009 do not give reason for optimism. Oil production dropped 1.1% in Q1 2009 compared to the same period last year

However, in April the daily oil output added 0.5% compared to March 2009. And the April 2009 oil production advanced by 1.4% to 40.32m tons compared to April 2008. But this growth is rather fragile

Oil exports in Q1 remained at the 2008 level:

51m tons

Different Excuses High taxes Low oil price on world market No good fields for investment

High taxes

Low oil price on world market

No good fields for investment

Europe or China? Russia can export oil to China only by railroad now 2008: decline in oil export by 6.5% Energy minister Sergey Shmatko believes an 8% decline in oil production is a possible scenario Diversification of markets = gradual escaping form European market Source: Neftegazovaya Vertikal

Russia can export oil to China only by railroad now

2008: decline in oil export by 6.5%

Energy minister Sergey Shmatko believes an 8% decline in oil production is a possible scenario

Diversification of markets =

gradual escaping form European market

China vs. Europe 2008: leaving the European market that was immediately filled up with other producers Now there is hope on China – a 20 year contract on supplies of 300 m tons of oil through a new oil pipeline (with the option to prolong the contract on oil supplies by railroad that expires in 2010) In the situation of decline in oil production the Chinese contract is not diversification but gradual replacement of the European market. E specially taking into account that the timeframe of putting East Siberia deposits (Talakan, Vankor) into operation is lagging behind the schedule New gifts: Zero Mineral Resources Tax rate for Eastern Siberian fields; Zero export duty rates for oil from Eastern Siberian fields

2008: leaving the European market that was immediately filled up with other producers

Now there is hope on China – a 20 year contract on supplies of 300 m tons of oil through a new oil pipeline (with the option to prolong the contract on oil supplies by railroad that expires in 2010)

In the situation of decline in oil production the Chinese contract is not diversification but gradual replacement of the European market. E specially taking into account that the timeframe of putting East Siberia deposits (Talakan, Vankor) into operation is lagging behind the schedule

New gifts: Zero Mineral Resources Tax rate for Eastern Siberian fields; Zero export duty rates for oil from Eastern Siberian fields

China vs. Europe The decision to build the Purpe-Samotlor pipeline: 43 km, € 1 bln The route will make possible to send 50 million tonnes of oil to fill ESPO No oil for both export directions At the end of 2008, the Ministry of Natural Resources named 11 companies systematically violating the terms of their licence agreements in Eastern Siberia, first of all in terms of prospecting operations. Besides, so far there are no pipelines that would link the fields with the trunk line Rosneft and CNPC have already begun preparations for the construction of the refinery in Chinese territory as part of developing a joint venture that they decided to set up as far back as several years ago. The capacity of the refinery will amount exactly to 15 million tonnes a year, investment in the project will total $3.4 billion

The decision to build the Purpe-Samotlor pipeline: 43 km, € 1 bln

The route will make possible to send 50 million tonnes of oil to fill ESPO

No oil for both export directions

At the end of 2008, the Ministry of Natural Resources named 11 companies systematically violating the terms of their licence agreements in Eastern Siberia, first of all in terms of prospecting operations. Besides, so far there are no pipelines that would link the fields with the trunk line

Rosneft and CNPC have already begun preparations for the construction of the refinery in Chinese territory as part of developing a joint venture that they decided to set up as far back as several years ago. The capacity of the refinery will amount exactly to 15 million tonnes a year, investment in the project will total $3.4 billion

ESPO vs. BPS-2 Transneft is more interested in BPS-2 project. Transneft will start it in June The loan Transneft will get from the People’s Republic substantially exceeds the preliminary cost estimate of the spur to China. The pipe to the Chinese border will cost about $600 million, while the loan will amount to $10 billion. This means that Transneft can spend part of the money on the BPS-2 project. The first drawdown from the People’s Republic the monopoly expects to receive before the end of May

Transneft is more interested in BPS-2 project. Transneft will start it in June

The loan Transneft will get from the People’s Republic substantially exceeds the preliminary cost estimate of the spur to China. The pipe to the Chinese border will cost about $600 million, while the loan will amount to $10 billion. This means that Transneft can spend part of the money on the BPS-2 project. The first drawdown from the People’s Republic the monopoly expects to receive before the end of May

ESPO vs. BPS-2 Source: Smart Money Source: Transneft

Gas Exprot: the Same Future?

Gas Business: Difficult Times Source: Central Control Directorate Source: Central Control Directorate, Gazprom

Gas Business: Difficult Times January-April: export 53,3% April: export 65,6% January-April: export to far abroad 43%2% January-April: export to FSU 61,1%

January-April: export 53,3%

April: export 65,6%

January-April: export to

far abroad 43%2%

January-April: export to

FSU 61,1%

Europe is the Main Foreign Market Source: Neftegazovaya Vertikal

Eastern Plans Source: Gazprom

Struggle for European Market It will be impossible to avoid Ukraine until 2020 – so we need to solve this problem If we want to preserve our share on European market we must leave the Chinese and Indian markets for CAS and Iran Fast development of LNG business

It will be impossible to avoid Ukraine until 2020 – so we need to solve this problem

If we want to preserve our share on European market we must leave the Chinese and Indian markets for CAS and Iran

Fast development of LNG business

Thank you! www.energystate.ru

Thank you!

www.energystate.ru