BRIEFING # 4
I’d like to thank the organizers for the possibility to speak for so dignified audience, for today the theme of energy and gas attracts great attention. And having participated in the processes that are going on in former republics of USSR, I have an opportunity to explain my vision on how this industry must develop in former USSR countries and first of all in Russia.
Our company “ITERA” was established in 1992. Since 1994 we have started to work in the gas sector. Speaking briefly, a large consignment of grocery and agricultural machinery was delivered in Turkmenistan. At that time Turkmenistan had just accepted his own monetary unit and could not pay off completely. So he proposed to pay by gas. Our company was interested. There were no companies working in the gas industry at that time and we became the first private company, which could organize the transportation and distribution of Turkmen gas.
Currently our group of companies provide with natural gas such countries as Azerbaijan, Armenia, Byelorussia, Georgia, Moldova, Latvia, Lithuania and Estonia. For many years we managed to cooperate in the gas sector with Kazakhstan, Turkmenistan, Uzbekistan and Ukraine. Since 1999 "ITERA" supplied with the natural gas one of the major industrial centers of Russia – Sverdlovsk region. You know that in that region the Russian strategic industry is based. And when we started working there the volume of consumable gas was 13 billion cubic meters. Five years later we managed to increase this volume up to 17 bln cubic meters according to their recent order.
During the period of our operation we have sold approximately 400 bln cubic meters of gas and we are very proud of this indicator, because there are so many gossips about our company. However it’s a really serious indicator.
Since 1998 ITERA has been developing its own gas production. Currently we are developing 6 gas fields in Russia, and 3 of them have already been put into operation. Five of them are in the Jamalo-Nenetz district – in the Western Siberia and one of them is in the Eastern Siberia, in the Irkutsk region. Our overall gas reserves is an access of 1,17 trillion cubic meters of gas. The total volume of gas production during the period of our investment in the gas industry of Russia amounts to 80 bln cubic meters of gas of our own production.
And in 2003 we close to having produced to 30 bln cubic meters of gas. During this period of time we invested more than 1.2 bln dollars in the gas industry of Russia. We are in downtown Moscow now, the capital of gas producing country – I’m proud to say that since 2003 “ITERA” has been producing gas in the USA, Illinois. Together with state-own companies “Zarubezhneft” and “Rosneft” “ITERA” started developing oil and gas fields of Turkmenistan shelf on the Caspian sea. President Nijazov signed the document to establish “Zarit” company, where “ITERA” has its share – 37%, “Rosneft” has 37% and “Zarubezhneft” 26%. Since June we had 15 licenses to carry out geological exploration in Kalmykia. It’s in the south of Russia not far from the Caspian sea.
We participate in building gas pipelines in Russia as well as in other CIS and Baltic countries. We have huge experience of building gas pipelines. We participate in national gas producers of Latvia, Estonia, Armenia, Georgia, where we own our gas grids.
"ITERA" supplies gas to consumers, it is its own gas as well as gas bought in Central Asia countries – Turkmenistan, Uzbekistan and Kazakhstan. I am proud to say that we are pioneers of first long-term contracts signed on the territory of the former Soviet Union. The first one to make a contract for gas production till 2007 with Azerbaijan. We are close to making a long-term contract in Latvia which will be valid till 2015. For gas supply to Georgia and Armenia we have similar contracts.
Along with gas production and distribution of hydrocarbons we are involved in diversifying businesses and we have got involved in petrochemistry and gas-chemistry, fertilizers, construction business and metallurgy.
Today there are more than 150 subsidiaries and affiliated companies making up the "ITERA" group, operating in the CIS countries, Russia, Europe and America. Nevertheless gas and energy are our main business. "ITERA" is among those companies who are called in Russia “independent gas producers”. Speaking about them being independent we mean that they are independent from “Gasprom”.
According to experts licenses of independent companies in Russia allow them to produce up to 14 trillion cubic meters of gas which is a huge volume. One third of all the prospected Russia’s reserves compared with aggregate gas reserves of Western Europe – they are twice as big. The share of independent companies in gas balance of Russia has been increasing. In 1999 "ITERA" as well as other independent producers produced in access of 33 bln cubic meters of gas, in 2001 it was 64 bln, while in 2002 it was in access of 72 bln cubic meters. Currently we are working within a framework of Russia’s gas production strategy. There is energy strategy document in Russia, which provides for growing share of production up to 17% by 2010, 20% by 2020. according to a number of experts, the volume of gas produced by independent from “Gasprom” companies may reach between 200 and 250 bln cubic meters.
Independent companies have proved that they are capable of investing in oil and gas prospecting and creation of related transport infrastructure. At the same time their contribution will depend on business environment and the speed of elimination of constraints impeding development of independent producers. One of such constraints preventing us from increasing volumes of production are gas prices. Today regulated prices are 55% lower those in the beginning of 1998. Current prices do not ensure standard profitability, capable of ensuring pay back for investments in prospecting and production. They don’t ensure revenues required to pay back credits.
It is abnormal situation where the most environmentally clean fuel is 4-5 times cheaper than oil, coal and other fuels. The equivalent of gas and oil in Europe and the USA equals the same unit. So the question is why here in Russia gas is 4-5 times cheaper than other types of fuel?
Pricing policies are particularly important in the context of changing geography of gas production. Production of gas based on convenient gas fields is close to its end. You know that here in Russia available layers are at the depth of 1.5 km – it’s Sinaman, the next layer is 2.5 km of depth – it’s Valanzhinskie fields. In order to stick with its commitments to Europe Russia will have to develop Achemovskie oil fields where gas will have to be produced in hard environmental and production conditions.
To produce more gas we’ll have to at least double our investments. That’s why it is really important to adopt Program for increasing gas prices within the next 5-10 years. With this gradual increase of controllable gas prices it will be necessary to increase the share of the Russian market in gas section traded at market prices.
Another contribution to the activities of independent gas companies will be providing them with the right of selling gas to profitable foreign markets. It is a question of the right to work in the same terms as “Gasprom”. Offer independent gas producers to enter western markets it will be necessary to change the existing inefficient system of transport tariffs regulations. Today those tariffs for private companies are so high they are unable to sell gas to consumers more remote than 1 – 1.5 thousand km from the gas-field. Our company for example is unable to transport gas to distances longer than 2000 km. If we delivered gas to Samara we will be under the break point in gas loss equal to some 2-3 dollars per thousand cubic meters.
Investments are only possible when they are guarantees of profits. One of such guarantees are the access to gas mains. Private companies must be guaranteed the access to the unified system of gas mains. Today only “Gasprom” has such access. As for independent companies their access is based on the residual principle. Helpfully in the nearest years legal framework will be set for independent companies to get such access. To do so it will be necessary to change the system which is based on licenses today.
One of the serious obstacles for the development of gas industry in Russia may be disproportion between gas production and gas mains capacity. According to “Gasprom” given the existing gas production volume growths problem may appear as early as 2006. To avoid this problem it will be necessary to install more than 28 thousand kilometers of new gas mains, which means that during the short period of time the biggest gas transport system should be increased by some 20%. To implement such an ambitious project huge multibillion investments will be required as well as participation of not only the government and “Gasprom”, but also private companies. Independent companies have necessary resources. If you remember in the beginning of my presentation I said in the past 3-4 years independent companies have proven that they are capable of building infrastructure and providing support to government-owned companies.
For this process to be a success it will be necessary to ensure capitalization and return of investment in order to create conditions for successful operation of new gas pipelines. It’s possible to establish consortiums with “Gasprom” or other types of joint ventures. Of course we can build by using our own resources only. However we are looking to do the same together with “Gasprom”. We could participate in capitals with our interest or work on a compensation bases. Moreover gas mains construction must be regulated by the government. We believe that this Program will be interconnected with the dynamics of this market growth. Independent gas producers expect that their interest will be taken into account in the documents which are being developed today. I mean those documents on reforming the gas sector. As you know gas sector reform will be considered by the government by the end of year. It was delayed several times. Hopefully this year this legislation will be passed. Thereupon independent producers hope that in the near term the question of the implementation of this reform will be clarified which will allow them to contribute more to the development of this market, the market ensuring supply of this environmentally friendly fuel.
To conclude I’d like to repeat that if "ITERA" failed to start doing this gas business with Turkmenistan we would never be able to continue this business in Russia today. Because Russia’s legal framework does not allow doing so. Only working with Turkmenistan and supplying gas to Ukraine, Caucasus, Byelorussia and the Baltic countries allowed our company to pioneer the investment in Russia’s gas sector and to mine its own gas.
Thank you very much.
Q. I have a question about your transition from Turkmenistan to Ukraine. Recently “Gasprom” has made significant long-term purchases of gas from both those countries about 70-80 bln cubic meters per year till 2007. How it will affect your business and how do you see your going forward?
“Gasprom” and Ukraine entered such long-term arrangements with Turkmenistan and there are 3 major purchasers of gas in Turkmenistan – ITERA, the “Gasprom” and Ukraine. Apart from purchasing gas from this November we start to produce gas on the shelf of the Caspian sea, we build gas pipelines, compressor stations and Turkmenistan pays us by gas. So the volume you’ve mentioned … everybody knows that average capacity of the pipeline Central Asia – Centre is no more than 40 bln cubic meters of gas. So for Turkmenistan to meet its engagements they have to build a new pipeline. If this is not the case the engagements will never be met.
Q. You suggested that it’ll be necessary for a lot of investments in the building gas pipelines network. I wonder does ITERAsupport the proposal put forward by the Ministry of economic development and trade to make a formal division between a transport activity and gas development of “Gasprom” in order to facilitate the participation of companies like ITERA in modernization of the gas pipeline network?
In any case there should be a mechanism in place providing for free access for all gas market participants. The fact, that today the “Gasprom” enjoys preferential treatment in terms of this access is not fair. So we would support any mechanism which would help other market participants to have free access to the gas transportation system. Whether we speak about separated system or setting up a government body which would accept our requests and provides equal access to transportation system. We welcome all this. However the form of this mechanism it’s something to be decided by the government, by experts.
I’d like to comment on your question too. You know in the West there is a point of view according to which the division of “Gasprom” is in fact a key goal of reform. Let me give an example of “Transneft”. It is long been independent, however the price of transportation of oil across the territory of Russia is about 35 dollars. It’s very high. I think, that the most important thing is not just this transformation – division or integration – but the clear regulations of this sector.
Q. When the possible WTO accession is discussed, we also talk about gas prices. So what is your assessment of the impact on your sector and your business in it in case Russia accede to WTO?
In my presentation I suggested that it’s abnormal to have a situation when Russia being a major gas power having government regulated prices for the gas sector and free market prices for oil sector. Let’s get back to the period prior to the elections Mr. Yeltsin as president. The gas price was pretty high at that time – about 50-60 dollars. But later on due to the several reasons, including financial crisis of 1998, it dropped to 15-18 dollars, and now is about 25 dollars. But in any case it’s abnormal. I suggested that thousand cubic meters of gas and the ton of oil produce the same energy equivalent (plus-minus 5%), but why gas should be 5 times as cheaper as oil? So if this is in line with WTO acquirements and it’s a market based requirements, we are for the market approach in the gas sector and for the free price.
Q. You said that you expect to see a decision made by the government in terms of transformation of “Gasprom”. Do you really expect this to happen by the end of the year?
I’d like to share my personal opinion with you. I try to stick to the following position in life – I never comment any actions taken by the government, because our company operates in 24 countries of the world. We are often asked to sponsor some sports teams. I do not digress from the topic of the question. I’m just getting to the answer. I would prefer to comment our own actions only and not actions by somebody else. The only thing I can tell you that unless this decision is made, our company for instance would not invest into the gas sector of Russia, because we have already invested over 1.2 bln dollars and would like to see some returns of this investment. So unless the reform goes ahead, I know that other independent producers would not be eager to “dig money in Siberia”. Gas producers use such an expression - “to dig money in Syberia”. So I think life should urge government to take this decision. Everybody’s expecting this decision.
Q. What is your view on the prospects of the prospects of the Trans-Caspian gas pipeline?
It’s my personal opinion. If the agreements which have been reached between the government of Turkmenistan and “Gasprom”, Ukraine… we have been involved in this project of development of gas transporting system “Middle Asia – Center” for number of years. If these facilities are build and the natural gas from Turkmenistan will get access to the pipelines in those volumes we have spoken about – 70-80 bln, in this case this project would not go ahead. However if the natural gas from Turkmenistan will have limited access to these pipelines and 30 bln could be exported whereas the demand in Europe would be higher, than this project may have a go ahead. Again the law of the market - if there is demand and if there is production capacity the only thing to do is to supply this gas and then this pipeline would be built. If the northern route is taken then this Trans-Caspian line will not be constructed because there is no such necessity and possibility. Still we are talking about billions of dollars, it’s a very expensive project.
Q. Nowadays there are many discussions about liquefied natural gas, that this technology seems to be on the rise and it’s likely to change some trends we observe today. What is your assessments for the prospects of this technology?
On behalf of my company I’d like to emphasize that we are interested in having more or at least several such projects in Russia. Let me explain why. The case is that we were invited to participate in working on some fields, but when our specialists assessed the fields they realized that they were too remote some thousands of kilometers away from major gas transportation systems. So this energy dialog between Russia and USA is on and America claimed that they are interested in Russian gas supplies to the USA. And the only way to provide such deliveries is to use liquefied natural gas. It’s impossible to construct a pipeline across the Pacific ocean or Atlantic ocean. I am sure that it’s a promising project. And we would be interested to take part in it. For instance as I said we work in a number of fields where it’s economically more efficient to build a factory for producing liquefied gas, then to build a pipeline.
Q. Do you plan to expand your operations in the Western Europe?
We would like to participate in the gas delivery to Europe. If we take say oil companies – the reform in the oil sector took place in 1995 and oil companies determined the portion of produced oil that would be sold in the CIS countries and in Russia, and the portion to sell abroad. We would be very interested in working in the same terms. “Gasprom”, for example, sells some 27% of produced gas to European market. We would also like 25-27% of produced gas to be sold in the European market.
Q. And what does this decision depend on?
On the decision of the government. It must be the reform which should attract independent companies, make them work and participate in the gas market development.
Q. Do you participate in the energy dialog with Europe?
At least we try to attend all summits, meetings and conferences relevant to this issue to have an opportunity to express our point of view.