"I believe that by the end of the decade Russia will be proven to have 50 per cent more hydrocarbon reserves than what Saudi Arabia has today," said Paul Collison, global emerging markets oil and gas strategist at Brunswick UBS.
By Arkady Ostrovsky in Moscow and Carola Hoyos in London Published: April 29 2004 21:04 / Last Updated: April 29 2004 21:04
In the spate of bad news that hit the shareholders in Yukos, Russia's embattled oil company, one important announcement by the group last month went almost unnoticed.
Following an external audit by DeGoyler & McNaughton, the US auditors, Yukos reported a significant increase in its proved reserves. Under the strict standards set by the Securities and Exchange Commission in the US, Yukos's hydrocarbon reserves increased from 11.2bn barrels of oil equivalent (boe) at the end of 2002 to 13bn boe at the end of 2003.
At the same time TNK-BP said its current reserves of 6.1bn boe could rise to 9bn boe in the short term and could go up to 30bn boe in the longer term.
Altogether, analysts' research suggests, Russia's oil reserves could prove to be three times higher than previously thought, making it one of the world's most attractive sources for reserves replacement.
According to the BP Statistical Review, Russia has 60bn barrels of proven oil reserves and natural gas reserves equivalent to 280bn barrels of oil. However, auditors and analysts say there is strong upward pressure on these figures.
Research by Brunswick UBS, the Moscow arm of the Swiss bank, shows that Russia's proved oil reserves alone could increase from 60bn barrels to 180bn barrels as companies revise their reserves. On current estimates, this would put Russia into second place in the world in terms of oil reserves after Saudi Arabia, which is estimated to have 300bn barrels of oil and oil equivalent.
So far Saudi Arabia has only agreed to let international companies explore for natural gas. The state oil company Saudi Aramco is unlikely to stand still in the coming years and western companies are still pining for a crack at its oil, which means it is likely the kingdom's reserves will also grow.
However, Russia and the Caspian are becoming increasingly important counterweights to the Middle East. European and US leaders are wooing the Kremlin for strategic supply deals to lessen their dependence on oil from the Middle East. Companies, including ExxonMobil and ChevronTexaco of the US and Total of France are lining up to strike deals with their Russian counterparts.
"I believe that by the end of the decade Russia will be proven to have 50 per cent more hydrocarbon reserves than what Saudi Arabia has today," said Paul Collison, global emerging markets oil and gas strategist at Brunswick UBS.
Lord Browne, chief executive of BP, agreed that reserves would increase. "It does seem likely that there will be more reserves. I'm not sure if anyone really knows what the ultimate recovery will be of new technology put to use in old fields."
Analysts say strict rules applied by the US Securities and Exchange Commission mean Russian companies book fewer barrels than they have potential for. Martin Wierwiorowski, a general director for Russia and the former Soviet Union at DeGoyler & McNaughton, said: "We find that both under SEC and SPE [Society of Petroleum Engineers] rules Russian companies are able to book a relatively low percentage of their reserves when compared to their western counterparts."
However, Mr Collison argued that not only were Russian companies starting to manage their reserves better, but they were also doing more drilling and exploratory work which would allow them legitimately to book higher reserves with the SEC. "The trend in Russia is opposite to the one in the western world where a number of companies have revised their reserves downwards," he said.
Mr Wierwiorowski said at the end of 2002 Russian companies on average had booked about 18 per cent of oil in place under the strict SEC rules and 24 per cent un der SPE rules. This is about half the level booked by companies in western oil fields. However, anecdotal evidence from Russian companies say many of them are aiming to recover between 30 to 40 per cent of oil in place in the short term.
The Russian companies also have to cope with SEC rules preventing them from booking reserves which are beyond the area that can be captured by a producing oil well. Given the huge size of Russian oilfields, this means that companies are restricted from booking oil between wells that are widely spaced.
The SEC rules also do not allow Russian companies to book reserves which are expected to be produced beyond the expiry date of their current licences. Most Russian companies incorporated in the middle of 1990s were given 25-year licences, which will expire in the next 14-16 years.
When the Russian government renews these licences, Russian companies will be able to book more barrels. But Adam Landes, an oil and gas analyst at Renaissance Capital, a Moscow-based brokerage, says that even now by changing the wording of Russian laws to satisfy the SEC that these licences will be renewed, it will allow Russian companies immediately to book up to 70 per cent more reserves than they do currently.
However, Russian companies will ultimately need better technology and oil well management and more drilling and exploratory work to utilise their potential.
This may not seem pertinent at first glance but it is very much a part of ‘Unrestricted Warfare’.
The new Russian imperialist agenda is based on electricity - electricity supply being vital for the people to have a normal life. The political implications of the UES’s economic expansion are obvious. I have been collecting data on RAO Unified Energy System's (UES), Anatoly Chubais, damn can this guy move, very aggressive.
UES, under CEO Anatoly Chubais' "liberal imperialism" slogan, has been seeking to recreate Russia's monopoly on electricity production and distribution in former Soviet space.
UES has already bought stakes in electricity assets in Armenia, Kazakhstan and Georgia, and Chubais has said he wants to move into Bulgaria, Latvia, Lithuania and Slovakia. The power monopoly is also in talks to rent an international power grid that connects Armenia, Georgia, Iran and Turkey.
With U.S.-dominated NATO moving troops to Russia's borders, Moscow is countering by taking control of key infrastructure assets.
"Former Soviet states can't afford to ignore Russia's wishes," Weafer said. "At the end of the day, Russia can just turn the lights off. You can't run an electricity cable from Washington."
-Am
Russian Power Monopoly Seeks Bulgarian Facilities
Business: 25 May 2004, Tuesday. Russia's power monopoly Unified Energy System (UES) is keen on acquiring power facilities in Eastern Europe, including Poland, Romania, Bulgaria and Slovakia.
At the end of September last year the company's Board of Directors has greenlighted its participation in the tender for Bulgaria's seven electricity distribution companies.
According to UES executive board member Andrei Rappoport, the UES is holding a number of negotiations on the possibility of obtaining power assets in those Eastern European countries.
However he skipped to name the facilities of interest to Russia's power monopoly, pointing out that the projects are still "in the pipeline".
UES is currently also in negotiations over the power assets purchase in Turkey, Tajikistan, Kyrgyzstan and Moldova. Last year UES already bought power facilities in Georgia for USD 25 M, while recent audit estimated their current value at USD 72 M.
RUSSIA SEEKS TO USE ENERGY ABUNDANCE TO INCREASE POLITICAL LEVERAGE Igor Torbakov: 11/19/03
At the end of the 19th century, Tsar Alexander III liked to say that Romanov Empire had only two true allies – the Russian army and navy. At the outset of the 21st century, as Moscow strives to reassert its influence across the post-Soviet space, Kremlin officials might say they rely on just one trustworthy ally – Russia’s vast energy resources.
Russian business executives are acting as shock troops in the Kremlin’s latest bid to reestablish its controlling influence over former Soviet republics, confirming that economic considerations are exerting increasing influence over the policy-making establishment in Russia. The South Caucasus has emerged as the proving ground for a new Kremlin strategy that seeks to utilize Russia’s energy abundance to increase its leverage over countries in the "near abroad." If successful in the Caucasus, leaders of Russia’s economic and political elite have already indicated they intend to use the strategy to increase Russian influence in other regions, including Central Asia and Ukraine.
Russia’s electricity giant – RAO Unified Energy Systems (UES), in which the government has a controlling share -- has led the Russian charge so far in the Caucasus, acquiring large stakes in energy ventures in both Armenia and Georgia. It also has announced plans to export energy to Turkey and Azerbaijan. [For background see the Eurasia Insight archive]. The company’s CEO, Anatoly Chubais has been a leading advocate of the establishment of a Moscow-dominated "liberal empire" in Eurasia. [For background see the Eurasia Insight archive].
On October 22, Chubais visited Armenia to finalize the deal with Yerevan. The fact that Chubais -- who holds no official post in the Russian government, but who is a leader of a Russian political party – met with Armenia’s top leaders, namely President Robert Kocharian and Defense Minister Serzh Sarkisian, underscores the political dimension of Russia’s aggressive move into the Armenian energy market.
Talking to journalists in Yerevan, Chubais divulged some details of UES’s blueprint for future expansion. According to the Itar-TASS news agency, Chubais said that Armenia would soon be incorporated into a Russia-led energy-supply network comprising 10 former Soviet republics, including Georgia and Azerbaijan. He added that UES, which currently controls 80 per cent of Armenia’s power-generating capacity, wants to lease and repair high-voltage transmission lines leading from Armenia to Azerbaijan and Turkey. The aim would be for UES to export power to those two countries, despite the fact that both Baku and Ankara have antagonistic relationships with Yerevan. Chubais suggested that "political problems" should not preclude such exports, going on to hint that UES would not have difficulty in obtaining Azerbaijan’s agreement to the Russian company’s energy export plan.
Chubais indicated the Caucasus offers an ideal "bridgehead" for UES’s expansion into Turkey. He called Turkish market "fantastically attractive" in terms of wholesale prices for energy and development prospects. "The market is growing, promising a number of big projects, including some in the aluminum sector and other power-consuming industries," RIA-Novosti quoted Chubais as saying.
Russia’s near total control of Armenia’s energy market has caused understandable uneasiness among experts at some international financial institutions. The transfer to UES of more Armenian energy facilities would be "undesirable," World Bank official Gevorg Sargsian told RFE/RL’s Yerevan bureau on October 28. Sargsian stressed that "we have nothing against UES or any other foreign company," but the bank would prefer that other owners acquire power facilities that have yet to be privatized.
The political implications of the UES’s economic expansion are obvious. "Since we are not talking about the sale of cold drinks – electricity supply being vital for the people to have a normal life – Moscow is set to gain control over key economic sectors [in Armenia and Georgia], and over their overall existence in general," political analyst Yevgenii Arsyukhin wrote recently in the Russian government daily Rossiiskaya Gazeta.
Chubais publicly denies that his company seeks political gains. "We do economics, not politics," Chubais said in an interview with the Russkii Kur’er newspaper. However, talking to the newsmen after a recent session of the CIS Council on Electric Energy, Chubais offered blunt comments on the need to restore Russia’s undisputed supremacy in the post-Soviet Eurasia. "Russia should be strong. Period," he said. To shun a leadership role within the CIS, to try to "hide it," Chubais argued, would be tantamount to "hypocrisy."
All along the way during its acquisition binge, Russia’s political establishment has cheered UES. "Having once said that he is going to redraw the energy map of the world, Anatoly Chubais is steadily moving towards his objective," Anatoly Gordienko wrote in a commentary published in the Nezavisimaya Gazeta newspaper. "After it suddenly set up shop in Georgia, UES is now taking under its wing neighboring Armenia, putting out feelers with the aim to privatize energy sector in Ukraine and seeking to carry out its blitz in the republics of Central Asia."
To those skeptics who question the feasibility of UES’s expansion scheme, Chubais invariably responds with the following: "Don’t worry, we have long hands."
Editor’s Note: Igor Torbakov is a freelance journalist and researcher who specializes in CIS political affairs. He holds an MA in History from Moscow State University and a PhD from the Ukrainian Academy of Sciences. He was Research Scholar at the Institute of Russian History, Russian Academy of Sciences, Moscow; a Visiting Scholar at the Kennan Institute, Woodrow Wilson International Center for Scholars, Washington DC; a Fulbright Scholar at Columbia University, New York; and a Visiting Fellow at Harvard University. He is now based in Istanbul, Turkey.
BERLIN Russia is maintaining and even expanding its grip on energy supplies to Eastern Europe and the Baltic countries, holding the new European Union members in an uncomfortable dependence on their former master to the east, according to experts working in the region.
Through its natural-gas monopoly, Gazprom, Russia has spun a web of control over energy supplies extending from Estonia on the Baltic Sea to Bulgaria on the Black Sea.
The move is aimed partly at gaining more market share in Western Europe through the back door of the East. But it is also preventing a wide swath of countries from diversifying their natural gas and oil supplies, the experts say.
Even as Eastern states were moving out of the former Soviet orbit, Gazprom, the world's largest natural gas producer, was establishing a series of joint ventures and offshore trading companies in the region.
The joint ventures, in which Gazprom has invested $2.6 billion, allow the Russian energy giant to control the supply, sale and distribution of natural gas to the region, the experts say.
Because of that, the company, which supplies about 25 percent of Western Europe's natural gas, has been successful in warding off competition in the former East Bloc area: It is the sole supplier to Estonia, Latvia, Lithuania and Slovakia, and provides 91 percent of Hungary's gas imports, 79 percent of Poland's and nearly three-quarters of the Czech Republic's.
"Gazprom gains control through direct investments and subsidiaries," said Emmanuel Bergasse, administrator for Central and Eastern Europe at the Paris-based International Energy Agency, a multinational monitoring organization.
"Gazprom has substantial market power, from being the supplier of gas down to the customer. It is that chain it controls."
Gazprom declined to comment on its Eastern European activities, saying that all matters were covered in its 2003 annual report.
In a written reply to questions, a spokeswoman, Olga Moreva, said only, "Gazprom is satisfied with the financial performance of its joint ventures in the European region."
Gazprom has maintained its grip on the region despite calls by the European Commission for Eastern European countries to diversify their energy supplies, and despite the entry of several of these countries - the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia - into the European Union in May, a move that was supposed to lead to more competition and transparency.
"Enlargement is supposed to be a big challenge for Eastern Europe, in the sense of creating more competition," said Claudia Kemfert, energy expert at the DIW economics research institute in Berlin. "On the one hand, these countries do feel more secure now that they are inside the EU. But on the other hand, they feel insecure because of their dependence on Russia for their energy. The entry of these countries into the EU has not led to more competition or diversification of energy supplies."
Even if the Eastern European and Baltic countries wanted to diversify their energy sources, they would be unable to do so now for two reasons, according to Kemfert.
First, they lack money to modernize the sector, although the EU and the European Bank for Reconstruction and Development have provided some financing. Second, Gazprom has been able to block diversification through its network of joint ventures and subsidiaries because it had already locked in contracts.
"How can these countries diversify?" Kemfert said. "Of course the Baltic states do not want to be in the hands of Russia. But what can they do? Gas and oil comes from Russia. The point is that it is hugely costly to modernize these energy sectors. So if they can continue to get the gas and oil from Russia, maybe in the long term it is cheaper for them."
In any event, she added, President Vladimir Putin of Russia "and his monopolistic energy company" want to "dominate the market."
Gazprom has been expanding at home and abroad under the stewardship of Alexei Miller, a colleague of Putin's from St. Petersburg who has been chief executive officer since 2001.
The company, already an energy titan, expanded its empire two weeks ago by acquiring one of Russia's largest oil producers, Rosneft, a state-owned company. The merger gave Russia a controlling interest in Gazprom, increasing state ownership to just over 50 percent from 38 percent previously.
Gazprom holds nearly a third of the world's natural gas reserves and produces 90 percent of Russia's natural gas.
The company's tax payments make up a quarter of the national government's tax revenues. Last year, it had revenues of 780.6 billion rubles, or $26.7 billion, and net profit of 142 billion rubles, a rise of 270 percent in profit over the previous year. Gazprom also operates the country's natural gas pipeline grid, giving it immense power over competitors wanting to enter the domestic gas market.
In the East European and Baltic region, Gazprom now has at least 23 big joint ventures. Many of the joint ventures are involved in gas distribution and transportation, among them Slovrusgaz in Slovakia, in which Gazprom has a 50 percent stake; Europol Gaz in Poland (48 percent); and Eesti Gaas in Estonia (30.6 percent).
According to a report by Ewa Paszyc for the Center of Eastern Studies in Warsaw, Gazprom has used these offshoots to maintain control of distribution in the post-Soviet era.
"Gazprom establishes a holding or a joint venture with a local gas pipeline operation creating a transit monopoly for Russian gas," Paszyc wrote. "Then it gradually exploits formal measures (terms of gas contracts) and nonformal means (personal connections, pro-Gazprom lobbies) to gain the deciding vote."
This allows Gazprom to dictate the terms and fees for transporting gas across countries and retain its status as a monopoly in these markets, according to Paszyc.
In 1998, for example, Gazprom, after several attempts, took over the shares of Topenergy, a Bulgarian company dealing with commercial distribution of gas in Bulgaria. Until then, Bulgargaz, the state-owned gas company, had owned Topenergy.
Companies that have resisted such ventures or takeovers have had to pay a heavy price. When Transneft, Russia's state-owned pipeline monopoly, was prevented in 2002 from buying a controlling stake in the port on Ventspils, Latvia, the largest in the Baltics, Russia imposed a blockade. It suspended shipments to Ventspils to force the port authorities to sell a stake to Transneft.
The opacity of these joint ventures and offshore companies could have implications for the security of energy supplies.
"The problem is that there is little transparency in these offshore companies," said Bergasse of the International Energy Agency. "This is not how business is done inside the EU. There is the issue of security of supply. If you buy gas from an offshore trading company, it could disappear. Who will then take over the supply and the obligations that go with it?"
Furthermore, he said, Gazprom's network of joint ventures across Eastern Europe is interfering with the European Commission's aim of diversifying energy supplies to EU countries.
"Gazprom's stated aim is to extend its dominant position, with obvious consequences for European energy diversification," Bergasse said.
Some Russians involved in the energy sector are skeptical about what value the joint ventures bring to Gazprom.
A report issued by Hermitage Capital Management, Russia's largest equity investment fund, with assets of $1.5 billion, including shares in Gazprom, said Gazprom did "not seem to be receiving significant profit from its investments in these joint ventures."
"I have raised the same question about the role of these joint ventures in Eastern Europe," said Vadim Kleiner, the head of research at Hermitage. "Are there any economic returns from these investments for Gazprom, and if not what is the business rationale for spending such money?"
The answer, experts say, is that Russia is less interested in profitability than in what Gazprom's ventures in new EU member states provide in terms of location and connections: an excellent launching pad for Gazprom to extend its presence in Western Europe.
"Russia wants to sustain its market position in the whole of Europe and especially in the ex-Soviet bloc countries," said Agata Loskot, Russian expert at the Center for Eastern Studies. "Of course its activities in the new EU member states can be helpful in the expansion into Western Europe."
Russia has its eye on winning more market share in Western European markets. According to the European Commission, the executive arm of the EU, Russia now supplies 44 percent of the natural gas and 18 percent of the crude oil imported by the 25 member states.
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