energy security and sustainability: russia’s role in … security and sustainability: russia’s...

Energy Security and Sustainability: Russia’s Role in the New Energy Equation

Ruslan NickolovVice President, Economics, Competitor Intelligence, Investor RelationsTNK-BP Management19 February 2007

© THK-BP presentation name

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Indivisible Energy Security: Common Responsibilities, Risks and Benefits

Factors contributing to current high price environment:– Shortage of output capacity; – Shortage of deep-conversion refining capacity;– Heightened above-ground risk.Issue is not lack of new resources, but ability to deliver them, as they are: – concentrated in a limited number of regions with high political risks;– located far from the main markets;– take considerable lead time to develop. New global energy security architecture - key principles: 1. based on a long-term, reliable and environmentally sustainable energy supply;2. maintains prices affordable to both exporters and consumers; 3. ensures sustainable access to traditional sources of energy; 4. promotes energy saving;5. develops alternative energy sources;6. helps avoid conflicts and counterproductive competition for energy


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• significant oil reserves

• largest gas reserves in the world

• track record of almost 50 years of delivering reliable energy supplies to Europe

• Russia has delivered almost 40% of global supply growth since 2000

Russia is an Increasingly Important Part of Global Supply Chain


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Recent developments in Russian energy generated anxiety among consuming countries• Rosneft acquires Yugansk …and maybe more• Gazprom is growing into a dominant force in a number of energy sector segments• Exxon Mobil lost claim to Sakhalin-3• Shell-led consortium sold 50% of Sakhalin-2 to Gazprom … at a market priceBut …more importantly • Primorsk is now delivering 60+ mtpa of crude to world markets• Rosneft now has 15%+ equity in global capital markets and will conform to their rules• Ring-fence on Gazprom’s local stock is gone• Electricity reform continues at pace now spilling over into gas sector• Russia continues to meet all supply contracts (oil and gas) to EU markets• Conoco-Phillips now owns c.20% of Lukoil• TNK-BP continues building a sustainable business model while transitioning to greenfields• Transneft is building the East Siberia - Pacific Ocean Pipeline• Gazprom is building new Baltic pipeline system Nord Stream• Russian Equity market has been and likely to continue being one of the global leaders

Russia’s Story - More Complex than Meets the Eye


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• Investment into new production • New market access• Investment in infrastructure to ensure access to new

growth markets• Investment in spare capacity• Investment in technology to enhance productivity of

production and refining• Investment in people and development of industry skills• Energy efficiency and conservation

• Nuclear energy and alternative energy

Key Challenges Russia’s Energy Sector Needs to Address


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$17trillion in new investment required through 2025 to sustain world economic growth. Stable and transparent investment conditions – a priority both for

Russia and Western nations- Balance between protecting state interests and stimulating economic development- Stability of contracts and rent sharing - Clarity on environmental and social impact requirements- Tax incentives to develop high-risk/high-cost greenfield projects- Transparent and non-discriminatory licensing regimes - Variety of business models to coexist in energy sector to ensure industry efficiency Reciprocity – a critical element of energy securityIt stimulates a functional interdependence between producers and consumersReciprocal transparency enables to plan demand, supply, investments and deliveries.Reciprocal market access and openness to investment foster greater energy securityCross-border capital flows, openness to investments and absence of protectionism • Openness of producer nations to investment into their upstream sector• Openness of consumer nations to investment in their refining, marketing and retail

Investment Climate as a Factor in Energy Security


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National companies now control most of new reserves on global scene• Russia’s energy sector is characterized by presence of major state-owned players • At least for now, the age of privatizations is over:

a) high prices have removed the need for external financing;b) operating capabilities of national oil companies have grown;c) technology ownership has shifted to oil service companies.

Private sector players have unique skills in many areas such as:• secondary recovery, • deep-water production, • unconventional oil, • LNG/GTL and alternative energy. Major private oil firms can offer tough-to-replicate market, trading and infrastructure linkages “Access game” is not a one-way street: • private oil firms can too open access to deals otherwise unattainable to NOCs due to

their technical and commercial complexity. • presence of international oil companies sends a signal to international community that a

country is really opening up to foreign investment

“Access game” is not a One-Way Street


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Develop a differentiated and highly tailored commercial offer based on:

• deep understanding of the resource holder; and• strong sense of self-awareness

Key rules for a successful partnership strategy:1. bring everything to the table;2. play integrated across the value chain;3. display geographic/markets flexibility; 4. consider asset swaps as a way to create strategic options for all partners;5. build meaningful local content that fits into overall commercial framework; 6. ensure high standards of environmental, health and safety protection.

Succeed by doing what others can do in a demonstrably superior wayi.e. by ruthless cost efficiency and superior operational effectiveness

Required:a single set of fair and transparent rules that applies to all players

Private-Public Partnerships: How to Succeed

Appendix 1. Macro context

19 February 2007


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Brent Oil Prices (Historical Context)

Ave 1986-99 $17.8/bbl Ave 2000-2003 $26.70/bbl

Ave 2004 $38.27/bbl

Ave 2005 $54.52/bbl

Ave 2006 $65.14/bbl

0

10

20

30

40

50

60

70

80

90

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

US$

/bbl


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Brent Oil Prices (Outlook)

50

55

60

65

70

75

80

Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Dec-10

49.5

58.6360.0959.5159.39

40

45

50

55

60

65

70

75

80

1Q07 2Q07 2007 2008 2010

Min-Max range Average

IPE Brent futures curves Petroleum analysts’ consensus forecas

IPE futures are in contango till the end of 2008 and then flat at $60/bbl to the end of 2010

Analysts’ consensus predicts a decline to $49.5/bbl by 2010


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World Oil Consumption Growth 2005Oil vs GDP

0

1

2

3

4

2002 2003 2004 2005

% p

.a.

World Oil Consumption Global GDP

By Region

-0.5

0.0

0.5

1.0

1.5

-25

0

25

50

75

Europe

USAChina

Other Asia

FSU

Rest of World

Mln

b/d

Mill

ion

t/yr


13

800

900

1000

1100

1200

1300

1400

ktd

- Rus

sia

100

150

200

250

300

ktd

- TN

K-B

P

TNK-BP + 50% Slavneft RF w/o Sakhalin Russian Federation

14.0%

6.5%12.9%

11.0%

8.9% 2.4%

15.0%

7.3%14.0%

2.2%

0.5%

1.2%

11.7%

8.9% 2.3%1.8%

RF w/o Sakhalin growth rates

Note: TNK-BP 2006 growth rates are adjusted for the sale of SaratovNG and Udmurtneft

2003 20052004 2006

Russian Production in 2003-2006: Growth is Slowing Down


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Changing Competitive Landscape

1.82

1.451.62

1.32

0.30

0.660.51 0.47 0.43

0.23

0.230.89

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Lukoil TNK-BP Rosneft Surgut NG Gazprom Gazpromneft Tatneft Slavneft Yukos

Russian Liquids Production in 2006

Note: Lukoil’s production includes minority interests in affiliated companies, but not its overseas output; Rosneft’s production includes 50% Udmurtneft

Gazpromneft’sproduction including

equity share in Slavneft

Equity share in Slavneft

Source: CDU

Appendix 2. Dynamics of Russia’s oil export

19 February 2007


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Russia’s oil distribution by channels: Refining throughput is growing

Source: Petromarket

Export crude by pipeline

Export Railway, River and MixedTransport

Refinery Throughput

Own Use & Losses

Total production178

9

Mtpa

185190

195 208 2201010

10 11 11

470459421

380348

481

150 161177 209 219 219

16 27 48 47 32 28

2001 2002 2003 2004 2005 2006


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Transneft export capacity: new opportunities are coming

Transneft capacity assesssment, Mtpa

0

50

100

150

200

250

300

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Areas for increasing of Transneft capacity: • Further expansion for Primorsk is possible to overall 120-130 mtpa by 2010

pending government approval on the back of export duty conflict with Belarus;• Eastern pipeline will start functioning in 2009;• Other projects are still in place such as usage of Russian quota in CPC.

Source: TNK-BP


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Ukraine & Кazakhstan

Belarus

Druzhba

Black Sea ports

Ventspils, Butinge &MazhekiuPrimorsk

1642 54 62

27 19 1614

13 845 47 50

5152 4954 52 58

6162 63

12 1415

1819 21

12 1922

2318 16

2001 2002 2003 2004 2005 2006

Crude export by pipeline is stabilised in 2005-2006…

Source: Petromarket

150 161177

209219 219


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Caspian Sea ports

Rail to Europe

Rail to China

Far East and Sakhalin ports

Arctic ports

Black and Azov Sea ports

Baltic Sea ports

Non-Transneft

Mtpa

6 9 13 148

2

2

8

1710

8

7

2

610

5

45

4

3 3

3

52

2

4 6

8

10

1

1

4 2

1

1 2

33

4748

27

16

28

2001 2002 2003 2004 2005 2006

… and export decreases via marginal channels

Source: Petromarket, TNK-BP


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Russian refineries’ throughput and capacity are rising

…overall crude capacity utilisation increased from c. 81% in 2005 up to c.84,7% in 2006 vs c. 68% in 2004

What has driven the throughput growth ?

• High refining margin globally• Increased export of oil products driven by

benefits from crude refining in Russia68%

81%

84,7%

2004

2005

2006

Russian refineries throughput has grown to 220 million tn in 2006 from 208 million tn in 2005

and…


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Increasing export of Russian refined products

• Production growth in 2006: – Gasoline up 6.8 %– Gasoil up 6.8%– Fuel Oil up 4.4%

• Local demand growth in 2006– Gasoline up 6.6 %– Gasoil up 6.9 %– Fuel oil up 7.8%

• Export growth in 2006: – Gasoline up 7.6%– Gasoil up 6.7%– Fuel Oil up 2.6%

Source: Reuters

Local demand has not grown as fast as refining output, so Russia is forced to export

26,1 26,4 28,2 25,6 27,122,1 20,4 22,0

4,4 5,55,9

29,832,8

31,3 36,237,1

29,0

36.2

2004 2005 2006 2004 2005 2006 2004 2005 2006

Gasoline Gasoil Fuel oil

Mtpa

Domestic consumption Export


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Product Quality Changes – driving Russian oil industry improvement

• New requirements from 2009 - Euro-3 specifications:• Gasoline: 150 ppm sulphur, 42% aromatics, 1% benzene• Diesel: 350 ppm S, 11% polycyclic aromatics, improved lubricating

properties

• New requirements from 2010 - Euro-4 specifications:• Gasoline: 50 ppm sulphur, 35% aromatics, 1% benzene• Diesel: 50 ppm S, 11% polycyclic aromatics, improved lubricating properties

• Other elements of the European market changes: – Gasoline surplus is set to grow– Gasoil / diesel shortfall is also growing

TNK-BP readiness for the new international requirements• LINIK:M-grade, Gasoil 50 ppm and 10 ppm• Ryazan refinery: Ultimate, Gasoil 50 ppm, 10 ppm


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Introducing technical efficiency for Russian refineries…

Russian industry should be targeting its development to the world standards in all areas and positioned to be competitive in the global market.

To achieve this goal, four specific strategic themes should be addressed:

• HSE – to develop to world standards on HSE performance • Operational Excellence - to improve operational performance to a

level competitive with the world-wide industry benchmarks. • Commercial Focus – to use “whole-chain” commercial focus to

maximise financial performance. • Development - to position for the long term by developing people,

assets and portfolio in advance of industry restructuring.


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Challenges for the Russian Oil Industry regarding export

The future market calls for increased and improved refining:

• To meet increased local specifications – desulphurisation• To meet European specifications – deep desulphurisation • To reduce the fuel oil yield

Producing new grades calls for new logistical solutions such assegregation of products at all stages (especially for 10ppm sulphur), refinery, railcar, pipelines, ports.

In order for this to happen …– Russia should ensure it’s tax system continues to incentives domestic

refining.– Need to have the right environment to invest in upgrading their refineries

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