Oil, Gas and Politics
In mid-June Moscow hosted 21st World Petroleum Congress, with participation of the elite of the global oil and gas industry, including 400 top managers of the leading transnational corporations. A wide range of issues was discussed at the Forum. We have selected only those that directly relate to Russia, Kazakhstan and the future of the global petroleum production.
The Congress is held once per three years, starting from 1933, when the international forum of the oilmen took place in London for the first time. The initiator of the event is the World Petroleum Council, having the members from 69 countries, including Kazakhstan. The Moscow Congress was one of the largest events in its history. It was attended by 4 597 delegates from more than 80 countries of the world, and the number of visitors exceeded 20 thousand. At the same time, the WPC coincided with the Ukrainian crisis and introduction of Western sanctions against Russia. It turned out that the leaders of energy business are not going to simply break the business relations for the sake of global political trends. It is enough to say that the key speakers of the Forum included Abdallah Salem Al-Badri, General Secretary of OPEC, Maria van der Hoeven, Executive Director of the International Energy Agency, Robert Dudley, British Petroleum Executive Director, Helge Lund, Director of Statoil, Rex Tilerston, ExxonMobil Chairman, Dinesh Kumar Sarraf, Chairman and Managing Director of ONGC, Maria de Gracias Foster, President of Petrobras, Juan Suárez, Director General of Petroleos Mexicanos PEMEX and many others.
Focus on Russia
Given the venue of the Congress, it is not surprising that the main attention was focused on the prospects of the Russian oil industry, as a key element of the global energy market. Opening the plenary session of the WPC, Arkady Dvorkovich, Deputy Prime Minister of RF said that Russia is currently developing the energy strategy up to 2035. “The task that we set before the energy complex is as follows: extended production of oil reserves due to the accelerated geological exploration, emergence of new industries, mainly in the Eastern Russia, as well as the introduction of modern methods of increasing the oil recovery". The implementation of these plans in the next 20 years will require the investments, exceeding $ 1 trillion in the oil industry and $ 700 billion in the gas industry of the country.
As to the external trade, the Vice Prime Minister shares that Russia will not only maintain its presence in the Western energy markets, but the country will also mark its presence in the Asia- Pacific region. "Providing the global energy security means maintaining a fair allocation of risks between the exporters and importers of energy resources. We will continue to maintain the balance of interests of all the stakeholders in the global oil and gas market.
Continuing the discussion, Alexander Novak, Russian Minister of Energy, drew attention to the fact that presently, “a temptation to use the high geopolitical levers to change the balance of relations between the suppliers and consumers of energy resources is stronger than ever in the mature markets". The best example, according to him, are the processes, taking place in the European Space. So, in his view, the proposal of Poland to create a single European Institute for Centralized Procurement of oil and gas by Europe is a non-market option, reminding a return to the past of the Soviet Era. As "non-constructive" he described a rigid position of the European Commission regarding operation of the cross-border infrastructure projects with Russian participation-Opal, South Stream, Yamal-Europe gas lines, which will primarily improve the sustainability and security of supply of the energy resources to European countries. As a result, some of the South stream partners are experiencing serious political pressure now. For example, Bulgaria threatened to stop the financing from the EU funds.
Speaking of the gas conflict with Ukraine, the Head of the Ministry of Energy said: "It comes to a direct substitution of notions: an intention to be paid for the supplied product is considered as “escalation "of the crisis, and the client's lack of willingness to pay is designated as "an attempt to find a compromise". In my opinion, such a dialogue is not associated with the search for a compromise, it has quite different objectives”.
As to the economic sanctions against Russia, according to Mr. Nowak’s assessment, such measures impact both parties. "American and European companies have to suspend the profitable joint projects with Russian partners, to revise the investment plans, which in turn, affect the price volatility".
And yet, despite a massive pressure, our partner under the CU and EEA, has a quite self-assured government: "Russian oil and gas are absolutely competitive and liquid. Our energy companies find new markets in Asia. The European consumers are still able to distinguish good deals from unprofitable ones. In Russia the large-scale energy diversification processes are launched in selected areas and delivery types for the development of the internal energy market and creation of new industries and technologies. "
In conclusion, Mr. Novak assured his colleagues that Russia does not seek to dominate the global energy markets. Its task is to promote simple and understandable rules of allocation of resources at the national and international level, minimizing the policy impact on them. "I would like to highlight once again the readiness of the Russian Federation to actively participate in the formulation of agreed decisions on all the energy development issues".
The comments from the Forum’s foreign participants prove the stability of Russian oil in the global market During the Forum, Abdallah Salem Al-Badri, Head of OPEC declared that the cartel in person of Russia see an energy bridge between Europe and Asia.
In his turn, Helge Lund, Director of Statoil, said that in case of further conflict escalation between Gazprom and Naftogaz, the Norwegian concern will not be able to substitute the Russian gas supplies to Europe. Moreover, the Western oil corporations decided to strengthen the cooperation with Russia. For example, the top-management of the Germany’s Wintershall stressed out that German technologies are highly demanded in the Russian market. The company is a partner of Gazprom's Nord Stream and offshore part of the South Stream . It formed a joint venture Achimgaz, developping the most difficult sections of Urengoy field. The Total’s CEO Christophe de Margerie also informed about the establishment of a joint venture with Lukoil, which will develop the Bazhenovskoe gas field in Western Siberia.
The situation in the Middle East revokes much greater concern of the Congress participants. As shared the founder of the Cambridge Centre IHS CERA Daniel Yergin, author of the best-seller «Quest", the crisis in Iraq could become a serious problem for the global oil market, with unpredictable effects on prices."The issue of sanctions against Russia are mentioned in the talks, but the world sees many other events. Now all is overshadowed by Iraq. The question is whether Iraq will exist as a state. Growth in its supplies stabilized previously the global market, and now this factor is uneven. This is not just an issue of Iraq; it concerns the stability in the Middle East".
The Executive Director of the IEA, Maria van der Hoeven also believes that the greatest threat to the global oil production comes from Iraq now. In the case of complete termination of hydrocarbon exports (i.e. 2.6 million b/d) as a result of the armed conflict in the country, Brent price might increase up to $40-50 per barrel. This means that in order to recover the oil shortage, there are not enough free capacities, for example, the Saudi Arabia and then, the OPEC countries, have to use the reserves.
Shale Revolution Will Win?
According to the IEA, an important factor in the development of global market will be the shale boom, which will extend within the next five years beyond the United States. This is particularly true for Russia and Latin America. According to the IEA forecasts, by 2019 the oil production from the shale accumulations outside the United States reach will reach 650 thousand b/d. "This will be the beginning of changes that will strengthen in the subsequent decade. Then, it will be time to talk about globalization of the shale revolution,"-said Ms.van der Hoeven.
According to the IEA forecasts, the North America could become the world's largest producer, as well as a net exporter of refined petroleum products. The role of the main importer will be played by China- the country will get ahead of the United States the current year.
Much more modest forecasts are given by the IEA experts regarding the Arctic production-0.11 million b/d or 1.1% of the total production by 2035. This despite the fact that according to the Russia’s energy strategy, in 20 years the development of Arctic offshore might bring up to 5% of total oil production. The Agency's scepticism is based on the fact that the region is still poorly studied, and the foreign companies have limited access to the offshore projects.
In his turn, Robert Dudley believes that Russia is one of the four countries with most favourable shale development conditions. Algeria, China and Argentina have the potential for their development. However, the European countries shall not rely on the shale resources from his viewpoint. "There are different types of shales. The shale projects are different, not all of them are good. Development requires big areas. In this regard, I believe that the development of shale is problematic for the Europe".
Expert's forecasts are based on the latest BP Statistical Review of the Global Energy, presented by the company during the WPC. As it is mentioned in the document, 2013 year was marked by the wars, civil unrest and sanctions, which led to the disruption of oil supplies from the major producing regions. As a result, the countries with developing economies, the growth of energy demand is slowed, while the developed OECD countries observe a sharp rise in the consumption. As BP analysts say, the latter is connected to increased shale oil production, allowing to prevent sharp fluctuations in global oil prices.
Disruption of oil production in North Africa and in the Middle East was compensated by increased production in the United States. The production was also increased by other non-OPEC countries, including Russia, which set a record for production for the whole post-Soviet period, increasing the production for another 150 thousand b/d.
And yet, the greatest growth in oil production is connected to the shale fields. The first countries, able to arrange a large-scale development of these reserves, are the United States and Canada, which developed the technology that enables an access first to the gas and now- to the shale oil.
However, according to Mr. Dudley, the US shale oil reserves will not be enough to protect the world from the inevitable energy shocks. The world's demand in energy continues to grow, and only North America has the chance to achieve self-sufficiency in providing the energy security. The big players such as Europe, China and India will continue to depend on imports in coming years. The main issue in this case: who and how will be able to satisfy the growing energy demand. Even now the OPEC countries are already selling the energy resources in the domestic market cheaper than abroad, which leads to a general increase in the resource consumption by their population. The ability of Middle Eastern states to increase the export is quite limited.
In this regard, the international experts forecast that Russia will pay a leading role in the shale oil extraction. It shall be noted out that the views of the Russians seem to diverge in this area. For example, the Prime Minister of the Russian Federation Dmitry Medvedev, speaking to the participants of the Congress, said that the Western Siberia will produce up to 50 million tonnes of shale oil by 2020, and by 2035-500-550 million tons, which is equivalent to 10% of the total global market. However, his Deputy, Arkady Dvorkovich, drew attention to the multiple problems in this area, which primarily relates to the environmental damage and cost reduction. As he shares, now it is only the matter of pilot or "pioneer" projects.
Another aspect is to ensure access to the relevant technologies. According to Igor Sechin, President of Rosneft, the international regulations shall be revised in today's conditions to avoid monopolization and unnecessary restrictions on the ability to use the important know-how.
Vagit Alekperov, President of Lukoil is not likely to overestimate the shale oil potential. He sees much more possibilities to increase the country’s export potential by increasing the efficiency of oil refining at the expense of oil refinery modernization. According to him, already in 2018-2019, Russia will export about 70 million tonnes of diesel fuel. The proceeds will be almost equal to the income of Gazprom's gas supplies to the European market.
Our country had a remarkable presence at the Congress. The delegation, headed by Uzakbai Karabalin, included the top-managers of NC KazMunayGas, Joint Venture Tengizchevroil, E&P KazMunaiGas, KPO, Petrokazakhstan, NCOC, Mangystaumunaigas and etc. In addition to the National stand, which attracted a special attention of the visitors, a special ministerial session was held at the WPC, as well as a number of round tables and seminars
Speaking at the session, Mr. Karabalin outlined the prospects for the petroleum development in our country, taking into account the ongoing integration processes, as well as a possibility of long-term partnership with the foreign companies. For example, he informed that the Comprehensive Plan of Oil&Gas Development for 2014-2018 years was approved in May, stipulating the extensive measures from the part of Government for the further improvement of all the industry’s aspects. In this document, the Government gave a clear focus and priorities in the selected segments. As to the geology, it is fulfilment of Eurasia International Project. In the production area the priority is given to an increased oil recovery and sale of special road map for the extractive sector development. As to the transportation, the important issues are the enhancement of pipeline system features and as to the refining-upgrading the Kazakhstan’s refineries, development of the liquefied natural gas and petrochemicals.
Therefore, the principle of applying the advanced scientific innovation and a high level of automation shall be used as a basis of all the oil and gas processes: from geology to oil refining. According to Mr. Karabalin, considering the fact that the era of easily recoverable oil is completed, this factor becomes a key to the competitiveness.
In this regard, a great interest from the delegates of the Congress is focused on the ambitious Eurasia project. Speaking about this initiative, Mr. Karabalin said that today many experts of the industry consider the Gulf of Mexico and Caspian Sea region as the areas where it is possible to have super-giant fields at the depths, exceeding seven kilometres. According to their projections, it is realistic to discover dozens of large structures with total reserves up to 40 billion tonnes of hydrocarbons in the territory of three regions of Kazakhstan and neighbouring Russia. "We are currently considering the establishment of a consortium, including the leading global companies to develop these resources with use of the modern technologies... Drilling an extra deep (up to 15 kilometers) parametric well will be considered". Kazakhstan intends to invest $ 500 million in the implementation of the Eurasia Project and drilling is expected to begin next year.
Mr. Karabalin shared even less pleasant news with the audience in open and honest manner. In particular, he mentioned the future of Kashagan oil production. According to him, this project is unique not only due to the hydrocarbon reserves, also in connection with the complex challenges. Climate conditions in the northern Caspian Sea, specific features of oil-bearing formation, chemical composition of the hydrocarbons and the resulting technical problems already caused the delays in production since 2005. "Last year, when we launched the field operation, the wells worked well, as well as the most complicated equipment, based in the onshore part and in the artificial island. But all together we failed with the simplest cylindrical body - the pipes".
In present, the matter is the full replacement of the pipeline that will take time and, of course, this delay will seriously impact the domestic economy. "This year we expect to receive about 8 million tonnes of additional production. We don’t have it for today. But this does not mean that the industry had collapsed. We just not produced the expected volumes. Now we have to put up with it and to work well to ensure reliable and long-term next launch of the field operation".
And yet the problems with Kashagan didn’t darken the impression from Kazakhstan’s participation in the Moscow Congress. The international experts have repeatedly noted out that our country remains a significant player in the global oil and gas market and it has excellent prospects for strengthening the status. "The foreign partners show an increased interest in our achievements and future projects. I think we were able to show the advantages of our country, as well as desire for the further mutual work, cooperation and investments. New measures to improve the investment climate were really impressive for many investors, who pay even more attention to the business development in Kazakhstan",- said the head of the delegation, summarizing the results for three days, dedicated to the WPC.
It should be added that the next XXII World Petroleum Congress will take place in 2017, in Istanbul. By the way, our country also was interested in holding this large event, however, we ceded this privilege to Turkey. Let's hope that in 2020, the luck will be with us, since after the World Expo 2017 , the infrastructure of Astana city will be really ready for such a grand event.
Sergey Gakhov, Almaty-Moscow-Almaty