Russia’s International Energy
Diplomacy
James Henderson
December 2017
2
Energy at the core of Russian diplomacy
India
Turkey
China
Europe
Saudi Arabia
3
Russia’s exports by product
• The share of energy is large, but declining
• Oil, gas and refined products account for 54%, down from 71% in 2013
Russian economy remains closely tied to oil revenues
• The Russian economy has always been very reliant on oil and gas revenues
• GDP has been tightly correlated to the oil price (as has the Russian stock market)
• Political power is closely tied with the ability of the oil and gas sector to fund social and
military spending
0
50
100
150
200
250
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Index2006=100
Russian GDP (Current US$) Oil Price
Oil is a key commodity for revenue generation and so it’s
political power is limited
5
Source: Russian Customs Service
Dramatic decline in 2015-16 obviously due to fall in oil and gas prices
Russian Budget Revenues and Share of Oil & Gas
0%
10%
20%
30%
40%
50%
60%
0
50
100
150
200
250
300
350
400
450
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
%Oil&Gas
US$billion
Total Revenues Oil & Gas Revenues % Oil & Gas
6
Europe remains Russia’s largest export market for oil, gas and coal
Russia the biggest supplier of oil…
• Russia has been the largest supplier of oil imports to the EU for the past decade and provided
more than 30% of non-indigenous supply in 2014
• Russia and Norway are the largest exporters of gas to the EU – Russia accounts for 31% of
demand and two thirds of imports (excluding Norway)
• Russia overtook South Africa as the largest external supplier of coal to the EU in 2006 and now
provides 29% of imports
0%
5%
10%
15%
20%
25%
30%
35%
0
100
200
300
400
500
600
700
2010 2011 2012 2013 2014 2015
RussiashareofTotalDemand
BCM
Europe Production Russia Other Russia share
…and gas to European market
European gas supply sources
7
Russia has the largest share of imports to EU28
Russia’s share of EU28
oil imports
• Russia overtook South Africa as the largest external supplier of coal to the
EU in 2006 and now provides 29% of imports
• Russia has been the largest supplier of oil imports to the EU for the past
decade and provided more than 30% of non-indigenous supply in 2015
• Russia and Norway are the largest exporters of gas to the EU – Russia
accounts for 45% of imports while Norway accounts for 30%
2.0%
2.1%
2.2%
2.3%
3.3%
5.4%
8.3%
44.5%
29.9%
2.3%
1.7%
2.2%
2.3%
3.9%
6.3%
7.6%
43.0%
30.8%
Other third countries
Nigeria
Libya
Tunisia
Switzerland
Algeria
Qatar
Russia
Norway
2014 2015
26%
26%
27%
27%
28%
28%
29%
29%
30%
30%
31%
31%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
%ofEUoilimports
EU28 Gas Imports
8
Russia’s economic relationship with the EU is of vital
importance
• Russia’s relationship with the EU remains its most important trading interaction by far
• Exports of mineral fuels dominate that relationship, accounting for more than three quarters of
revenues
• Clearly the dependency is two-way, other than in the very short term
Eurostat 2014 data
-75
-50
-25
0
25
50
75
100
EU-28
Malta
Luxembourg
Cyprus
Ireland
Belgium
Lithuania
Italy
Spain
Portugal
Greece
Austria
Hungary
Germany
Slovakia
Finland
France
UnitedKingdom
Slovenia
Croatia
Latvia
Bulgaria
Netherlands
Sweden
CzechRepublic
Poland
Romania
Denmark
Estonia
Turkey
Macedonia
Albania
Montenegro
Serbia
Kosovo
BosniaandHerz
Iceland
Norway
-550
-575
9
European energy import dependency
European energy import dependence (%)
• Overall import dependency is mainly related to hydrocarbons
• It has risen from c.45% in 2000 to 53% in 2014
• Norway also has a significant net export trade in hydrocarbons
• More than half the EU countries are dependent on imports for more than 50% of
their hydrocarbon needs
10
EU reliance on coal imports – demand located in
producing countries
• In general the countries with a higher exposure to coal in their energy economy
are less reliant on exports
• This implies a higher level of domestic production and a lower security of supply
risk
• The major exceptions to this would appear to be the UK and Slovakia
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
BE
BG
CZ
DK
DE
EE
IE
EL
ES
FR
HR
IT
CY
LV
LT
LU
HU
MT
NL
AT
PL
PT
RO
SL
SK
FI
SE
UK
IS
NO
ME
MK
RS
TR
Coal as % total cons % coal imports
11
Coal is a global commodity – EU becoming less
important
• Coal prices are set in a global market and appear fungible between regions
• The Russian export price moves in line with global trends, although at something
of a discount
• The EU’s share of the global market is in decline, and so prices will increasingly
be related to the Asian market
• Although coal is diminishing in importance, any countries remaining reliant on it
could be more exposed to potential security of supply risks
Comparison of coal export prices ($/t) Share of global coal demand
12
Oil and gas the major issues
-450000
-400000
-350000
-300000
-250000
-200000
-150000
-100000
-50000
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
EUROmm
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
Coal Oil Gas Overall
EU28 EU34
Energy import dependence by fuel Energy trade balance (euro mm)
• More than 85% of the EU28’s oil needs are imported (falling to 75% if Norway is
included)
• Two thirds of gas consumption is also imported (47% with Norway)
• Rising commodity prices have cause a sharp rise in the region’s energy import bill
• From Euro100bn in 2002 it reached a peak of Euro380 billion in 2011 (c.3% of
EU28 GDP)
13
Europe’s oil and gas sources and its dependency
on them
• The EU is the second most import dependent region for oil and gas (behind Japan
and Korea)
• According to the IEA, dependency is set to rise above 80% overall by 2035
• Only one region (USA) sees a decline in dependency, highlighting the supply risks
Europe’s sources of oil and gas Regional dependency set to rise
14
Russia’s oil export system – pipes and ports remain largely westfocused,
but ESPO now providing diversification
Western pipeline system
East Siberia Pacific Ocean Line
15
EU dependency on oil imports
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
BE
BG
CZ
DE
EE
IE
EL
ES
FR
HR
IT
CY
LV
LT
LU
HU
MT
NL
AT
PL
PT
RO
SL
SK
FI
SE
UK
IS
ME
MK
RS
TR
% total cons. % Imports
-100%
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
BE EE LV PT SK SE ME ES FR DE LT AT IT HR RO CY DK
%iimportdependency
• EU oil dependency is high at 85% overall, with many countries at 100%
• Only two countries in Europe, Denmark and Norway, are net exporters
• The dependency vs. share of consumption ring shows a much greater level of
reliance on oil to meet energy demand in many countries
EU oil dependency Dependency versus share of consumption
16
EU has multiple source of oil imports
• EU countries have diversified
their sources of oil supply
• Russia is a major component,
but the Middle East, Africa,
Central Asia and Norway also
have significant positions
• Oil products come from
multiple sources, depending on
refinery locations
• The majority of imports are
seaborne – Russia accounts
for the majority of pipeline
imports
• Exposure to Middle East and
North African crude has been
the major risk over the past 30
years
Oil Product Imports to EU (123mm tonnes)
Crude Oil Imports to EU (575mm tonnes)
17
The oil market is too liquid to allow for much
political influence
18
Russia is the largest gas exporter in the world
19
The first Soviet gas to Europe in 1968
• First gas flowed only 2 weeks after the Soviet invasion of Czechoslovakia
• Contract signed with Germany in February 1970
• France followed in 1972, with Finland and Eastern Europe shortly afterwards
20
The main buyers of Russian gas
• Almost one quarter of Russian gas exports go to Eastern Europe, where
dependency is high due to the Cold War legacy
• Of the West European countries, Germany clearly has the most significant
concerns over Russian gas supply
Poland, 5%
Czech Republic, 2%
Slovakia, 2%
Bulgaria, 2%
Hungary, 3%
Austria, 3%
France, 6%
Finland, 2%
Germany, 26%
Italy, 13%
Netherlands, 5%
Turkey, 15%
UK, 12%
Other, 6%
Source: IEA, 2015 data
21
European Gas Production Outlook
• European gas supply has been in decline for a decade
• UK gas production in particular has fallen sharply, and Netherlands production
outlook is now in decline because of issues at Groningen
• Norway is at capacity and has indicated that it has very little room for increasing
production in an emergency
• The outlook is therefore inevitably one of increased dependence on imports
European gas supply/demand outlookEuropean gas production
0
100
200
300
400
500
600
700
2000
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
bcm
Demand (OIES latest) Production Import requirement
-
50.0
100.0
150.0
200.0
250.0
300.0
350.0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
bcm
Denmark Germany Italy Netherlands
Poland Romania United Kingdom Norway
22
European gas import dependency
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
BE
BG
CZ
DE
EE
IE
EL
ES
FR
HR
IT
CY
LV
LTLUHUMT
AT
PL
PT
RO
SL
SK
FI
SE
UK
MK
RS
TR
% total cons. % Imports
• Gas dependency is the most extreme of all the fuels in the European energy
balance – Europe imports 324bcm out of total demand of 485bcm (ex-Norway)
• The majority of countries rely on imports for more than 50% of demand
• Reliance on imports is high in countries that rely on gas to meet a very significant
part of their energy requirement
• The majority of imported gas is delivered by pipe, reducing diversification
opportunities
-200.0%
-150.0%
-100.0%
-50.0%
0.0%
50.0%
100.0%
EE
EL
LV
LT
LU
PT
SL
FI
SE
MK
ES
TR
FR
BE
IE
SK
IT
CZ
AT
DE
RS
HU
BG
PL
UK
HR
RO
CY
MT
DK
NL
NO
%importrequirement
European gas consumption versus importsEuropean gas dependency by country
23
Falling Production + Increasing Demand
= Increasing Import Dependence
• European gas reserves are “running out” and
production will decline in future
• Constant/increasing demand (but not since
2007) means that..
• An increasing proportion of Europe’s gas will
need to be imported
EU/OECD projections are that European
import dependence will increase from
around 33-50% today to 66-80% in 2020-30;
Is this a major security problem?
24
 EU Energy policy – the three objectives
Treaty on the Functioning of the
European Eunion
New Art. 194 on energy:
Union policy on energy shall aim, in a
spirit of solidarity, to:
• Ensure the functioning of the
internal market;
• Ensure security of supply;
• Promote energy efficiency and the
development of renewable forms
of energy;
• Promote the interconnection of
energy networks
Security of
Supply
Internal market
Sustainability
Objectives:
20-20-20 by
2020
Gazprom’s long term take or pay contracts with European
customers to 2030
25
Even at 70% ToP, Gazprom’s average annual sales
exceed 100 Bcm/year until the mid-2020s
Source: ERI RAS in Henderson
and Pirani (OIES 2014)
26
The price of Russian gas varies dramatically across Europe
• Gazprom prices its gas very differently across Europe and the CIS
• The EU commission has begun an investigation into this pricing policy
• In reality it would appear that Gazprom is acting as a “discriminating monopolist”,
pricing its product relative to the alternatives in each country
• This points to the fact that diversity of energy supply is the only way to counteract
a powerful market player such as Gazprom
27
Pipelines carrying Russian gas exports to Europe
Ukraine still carries around half of Russian gas exports to Europe.
Security of transit across Ukraine remains at risk as no sustainable
solution has been achieved to both Ukraine’s security of supply and
security of transit problems
Source: OIES
Source: Argus
0%
10%
20%
30%
40%
50%
60%
70%
80%
0
20
40
60
80
100
120
140
160
180
200
2008 2009 2010 2011 2012 2013 2014 2015 2016
%Ukrainetransit
bcm
Ukraine transit Total Russian exports* % via Ukraine
The Russian ‘southern route’ pipelines:
Turkish Stream, South Stream lite, anything else?
• Ukraine by-pass routes with clear political connotations
• However, commercial reality and EU regiulation has intervened
• Gazprom has been forced to flip flop its plans as it tries to find a way
to make its Black Sea plans work
• Turkey hardly appears a more reliable partner than Ukraine
Source: OIES
Source: Platts
What are the real possibilities to reduce Russian
gas deliveries to Europe
• Long term contractual consequences – 00s of billions of € at
stake
• European production: Dutch cap in place since January 2014;
Norwegian plateau then decline; all other conventional gas in
decline
• European unconventional gas?????????
• North Africa: crisis and decline
• Southern Corridor: 10 Bcm maximum by 2020
• LNG from a variety of sources (including North America): will
depend on global demand and price
29
Russian volumes look secure for at least 10 years
The Energy Union Strategy and the Security of Supply Package:
provisions relevant for Gazprom (1)
– More urgent implementation of the TEP and the Network Codes (NCs), with
more powers for the EC (and possibly ACER)
• including in respect of legacy capacity contracts but with transitional
measures e.g. CAM NC and (draft) Tariffs NC
– Infrastructure and supply standards:
• simultaneous considerations of capacity & flows for more optimal use of
existing infrastructure which suggests more consistent and persistent
application of Congestion Management Procedures in respect of existing
(including transit) contracts
– More restrictive approach towards 3rd country suppliers including via
information exchange:
• mandatory ex-ante assessment by the EC of all IGAs – likely to succeed –
but of no significant relevance as the IGAs are becoming obsolete
• mandatory ex-post notification and assessment by MS and EC of gas supply
contracts – unlikely to succeed
30
A concerted strategy attempt to increase EU resilience in the emergency
(possible) & reduce dependence on Russian gas (unlikely)
Ukraine crisis – reverse flow potential to catalyse
interaction with Europe
• Reverse flow opportunities from Slovakia, Poland and Hungary can provide a
grounds for dispute with Russia in the Stockholm Court of Arbitration
• Longer-term they also provide a basis for price renegotiation with Russia
32
LNG is globalising the gas market
• LNG is starting to create a global market for gas
• It is still driven by long-term contracts, but differing pricing mechanisms and
contractual terms are starting to evolve
• Ultimately this can provide diversity of supply, although it may also mean higher
prices in Europe as Asian demand grows
• Ultimately security of supply will be found through a globally competitive gas
market environment
W. Canada shale
US shale
Argentina
shale
Brazil
pre-salt
E. Siberia
Sakhalin
Queensland
CBM
N. / N.W.
Australia
E. Africa
Offshore
W. Africa
N. Africa
E. Med.
Middle
East
N. Sea
Barents
Sea
Yamal
W.
Siberia
SE
Asia
Caspian
Europe
Asia
Russia faces many competitive threats, including LNG from the US, Africa and the
Middle East as well as possible new pipelines from the Caspian and Iran
China
Shale Gas
-500
-400
-300
-200
-100
0
100
200
300
400
bcm
Americas OECD Europe E.Europe/Eurasia Caspian OECD Asia
Non-OECD Asia Middle East Africa Latin America
20352011
Global gas trade flows
Source: WEO 2013
China’s Silk Road strategy provides potential for co-operation and
competition with Russia
Oil
OilGas
Gas
Gas
LNG
• Questions over Chinese demand and production remain
• How reliant will Chinese authorities want to be on imported gas?
• Can Russian gas compete commercially?
• Will China want to limit its political exposure to Russian sources of energy?
Where does Russia fit into the Chinese gas market?
Central Asia
2020: 40bcm
2030: 85bcm
Russia East
2020: ?
2030: 38bcma
Russia Altai
2020: ?
2030: 30bcm?
Burma
2020:12bcm
2030:12bcm
China Domestic
2010: 100bcm
2020: 175bcm
2030: 260bcm
LNG
2010: 10bcm
2020: 70bcm
2030: 120bcm
Russia Far East Pipe
2020: ?
2030: 20--30bcma?
Russia LNG
2020: 20bcm
2030: 50bcm?
Price at entry
to China
Transport
to Shanghai
Price in
Shanghai at
City Gate
Transport
back to
Xinjiang
Net back price
at Altai
pipeline entry
point
US$/mmbtu US$/mmbtu US$/mmbtu US$/mmbtu US$/mmbtu
Turkmen price in West China 5.42 4.48 9.90 4.48 5.42
Russia East Siberia Gas 5.60 2.50 8.10 4.48 3.62
Asia Spot LNG (Sept 2016) 5.65 0.00 5.65 4.48 1.17
Average LNG imports (July 2016) 6.01 0.00 6.01 4.48 1.53
Qatar LNG (July 2016) 6.42 0.00 6.42 4.48 1.94
US LNG (SRMC HH $3/mmbtu) 5.95 0.00 5.95 4.48 1.47
Myanmar imports 6.41 1.85 8.26 4.48 3.77
Benchmark Import Price 7.18 2.70
China domestic price (Shanghai) (Nov 2015) 10.72 0.00 10.72 4.48 6.24
Average Overall Benchmark Price 3.14
• Low gas prices are raising
questions about
economics of exports
• Is Power of Siberia deal
still viable?
• Can Altai pipeline
compete?
• How much LNG?
• China currently
oversupplied
Outlook for Chinese gas market remains unclear
0
50
100
150
200
250
300
350
400
450
500
Demand Supply High Supply Mid Supply Low
bcm
2012 2020 2025 2030
• Gas demand growth slowing due to economy
and prices
• Pricing strategy needs to encourage supply as
well as demand
• Environmental pressure remains catalyst for coal
replacement
• Supply outlook unclear because of shale gas
uncertainty
• China also pursuing renewable options as a
domestic source of energy
China demand and supply estimates
Estimated price of
Power of Siberia gas
at current oil price
Estimated price for
Altai gas to compete
at current oil price
• The opening of the ESPO in 2009 has catalysed a shift in the direction of Russia’s oil exports
• A further dynamic has been Rosneft’s need for financial support, which has been provided by
pre-payment deals with CNPC and Sinopec
• Russia has become the largest crude exporter to China and ESPO crude has become very
competitive in the Asian market
• Russian producers are attracted by the premia which ESPO crude has consistently
commanded over Urals Blend
• Russia has some concern over the strength of China’s bargaining position, highlighted by
pricing disputes and a reluctance to complete infrastructure in NE China
Eastward shift is bringing dependence as well as diversification
Crude oil exports by destination
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
2009 2010 2011 2012 2013 2014 2015
kbpd
Druzhba+CPC Western Ports Other Transneft West
Non-Transneft West China Pipe China Other
Kozmino Bay Sakhalin
Rosneft production committed to pre-payment deals
0
100
200
300
400
500
600
700
800
kbpd
CNPC $6bn loan CDB $25bn loan
CNPC c.$60bn prepayment Sinopec $10bn prepayment
Russia in competition with Saudi Arabia
• Russia has overtaken Saudi Arabia as the largest exporter to China, the world’s largest net oil
importer
• Saudi market share has fallen consistently and the Kingdom has been forced to respond by
competing harder in other regions
• Russian concern has been aroused by an increase of Middle Eastern crude in Europe, especially
Saudi contracts with East European buyers
• Discounts have been offered to secure new buyers – essentially a quasi-price war
0
200
400
600
800
1000
1200
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
mmbpd
Saudi Arabia Angola Russia Iraq Iran
China oil imports by country
Air base
Naval presence
QIA owns
c.1% of
Rosneft
Russia in the Middle East – A Tangled Web of Relationships
• Until 2016, Russia’s relationship with OPEC had featured a series of unfulfilled promises
• The Doha meeting in April 2016 marked something of a turning point, although Russia again
failed to deliver an agreement
• Necessity proved to be the mother of invention in November 2016, however, and Russia
played a leading role in the OPEC/Non-OPEC production cut
NATURAL GAS PROGRAMME
Russia’s relationship with OPEC – finally cooperation
0
20
40
60
80
100
120
140
160
US$/bbl
1998/99
2001/02
2008/09
April 2016
Nov 2016
The history of Russian discussions with OPEC
• Russia and Saudi Arabia seemed a long way apart after the Doha meeting in April
2016
• However, a series of inter-governmental meetings and agreements on lower level
technical co-operation provided a foundation for further talks
• Necessity became the mother of invention in November 2016, when both parties
wanted to prevent the oil price falling below $40 per barrel
• A short-term plan to stabilize oil prices has become something of a longer-term
need to convince markets that an OPEC/Non-OPEC pact can endure
– Not clear that the Russians really saw the co-operation lasting so long
• Initial motivation for Russia had been to secure the economy until beyond the
Presidential elections in 2018
• However, co-operation with Saudi Arabia and OPEC has now become part of
Russia’s broader Middle East strategy
NATURAL GAS PROGRAMME
Russia and Saudi Arabia – long-term commitment
or a marriage of convenience?
• Visit by King Salman to Moscow Energy Week in early October
• Differences over Syria and Iran apparently put to one side
• $2 billion military deal agreed, including anti-aircraft missile systems
• Oil and gas sector agreements focused on petrochemical and downstream, as well
as development of technology and R&D programmes
– Sibur and Saudi Aramco to study petrochemical projects in Russia and Saudi Arabia
– GazpromNeft signed MoU on technical co-operation with Saudi Aramco focused on development of oil
and gas fields, educational programmes and downstream activity
– Possibility of LNG cooperation – Novatek’s Arctic LNG-2 project mentioned
• Road map of action plan to end of 2018 agreed between Novak and Khalid al-Falih
• $10 billion of spending planned via a joint platform involving the Russia Investment
Fund and the Saudi Public Investment Fund
NATURAL GAS PROGRAMME
Nevertheless, the mood music is positive
The Arctic provides a potential area of bargaining power for Russia
• The Kremlin has clear geo-political ambition in the region, which goes beyond commercial logic –
control of the northern sea route is a core strategy and Soviet military bases are being re-opened
• China has expressed interest in investing in the Northern Sea Route – will Russia use this as a
means to extract extra value from energy deals?
• Militarisation provides a geo-political tool with other litoral states, and can be based our oil
industry infrastructure
The Northern Sea Route set to become the “Cold Silk Road” to Asia
Russian military presence in Arctic expanding
• Russia has established six new military
bases north of the Arctic Circle
– 16 deep-water ports planned
– 13 airfields to be built in total
– 10 air defence radar stations
• Long-range surface-to-air missiles and
supersonic anti-ship missiles have been
deployed as part of national defence force
• Northern Fleet to be increasingly based in
the Siberian island chain in the Arctic Seas
• Arctic motorized rifle brigade formed in
2015, based in Murmansk and Arkhangelsk
– A second brigade planned for Yamal-Nenetsk
region in 2016/17 as part of Arctic Military
Command
• NATO and US have responded by
conducting military exercises in the region
– Arctic Challenge (with Sweden and Finland) - 2015
– ICEX - 2016
Prirazlomnoye field in Pechora Sea
Russia dramatically expanding ice-breaker fleet
• Russia currently constructing 14 new
icebreaking vessels
• The LK60 will be the most powerful
icebreaker in the world
– Can break through 3 meter ice
– Will be based in Murmansk with Rosatomflot
• LK25 will be the most powerful diesel
icebreaker, for use in 2 meter ice
• Ministry of Defence is building 4 new
vessels, with the first to be launched in
2017
• GazpromNeft has ordered a vessel for the
Ob Bay, while five other icebreakers are
also under construction for use in oil
industry
• Russian fleet currently 40, and will exceed
50, while US has 6 icebreakers
The nuclear powered LK60 ice-breaker
0
10
20
30
40
50
60
No.ofIcebreakers
Current Planned
Russia leads global icebreaker fleet
Source: USGC Office of Waterways and Ocean Policy, 2014
Arctic Development – A Perfect Storm
0
20
40
60
80
100
120
140
02-Jan-12 02-Jan-13 02-Jan-14 02-Jan-15 02-Jan-16
US$/bbl
Breakeven price range for Arctic Oil
Sanctions
imposed on
Russia
Exxon deal
with Rosneft
Shell Kulluk
accident
Norway 23rd
licensing round
Companies start to
withdraw from US
Arctic
US shale
production peaks
at over 5.5mmbpd
Cairn
downgrades
Greenland
Shell’s problems a bell-weather for the North American Arctic
• Shell has been the most important participant in the US Arctic offshore
• Significant operational problems have caused major delay and protest
– Noble Discoverer rig nearly ran aground in 2012
– Kulluk rig broke moorings and ran aground in late 2012/early 2013
– Drilling programme halted in 2013, and delay extended into 2014/15
– ConocoPhillips and Statoil subsequently delayed their own drilling programmes until accidents reviewed and
environmental regulatory processes confirmed
Shell’s Kulluk rig having run aground in January 2013
Yamal LNG is a key foundation for Arctic development
• Yamal LNG is a 16.5mmt LNG complex based in
northern Siberia
• It will be Russia’s largest LNG plant by 2020
• First gas will be produced and exported in late 2017
• The infrastructure includes a major port and an
international airport, financed by the Russian
government
• A key goal is to develop domestic LNG capability to
enhance Russia’s Arctic presence
Yamal LNG export routes
The Sabetta port provides key Arctic infrastructure
Yamal LNG development is progressing
China has significant Arctic aspirations, with Russia as a partner
• China became a formal observer in the Arctic
Council in 2013
• Shanghai based China-Nordic Arctic Research
Centre formed in the same year
• Clear aspiration to be a significant player in
strategic trade route to Asia
• Investment in Yamal LNG project cemented closer
ties with Russia
• Potential exploration joint venture with Rosneft in
Barents and Pechora Seas
• China Oilfield Services Limited to work with Rosneft
and Statoil in Sea of Okhotsk
• Gazprom and GazpromNeft may be set to cooperate
with CNOOC at two oilfields in Pechora Sea
Rosneft CEO Igor Sechin shakes hands
on partnership with CNPC which includes
Arctic licences
International oil company activity in Russia increasingly involves
Asian companies
Black Sea Exploration
Yamal LNG
Tight Oil
Barents Sea Exploration
South Kara Sea Exploration
Sea of Okhotsk
Sakhalin E&P
Laptev and Chukchi Sea Exploration
Arctic partnership
East Siberia JV
Tight Oil
19.75%
19%
Equity stakes
Gas
Vankor
Baltic LNG?
Udmurtneft
FEPCO
Petrochem
Plant
New Investment Areas
Offshore
Tight Oil
Arctic
East Siberia
LNG
Taas-Yuriakh
19.75%
51
Russia’s expanding relations with India
• Geo-political ties underpinned by energy
and investment
Russia
India
52
Russian diplomacy in South America
Russia
South America
Russia Offers
Investment in Upstream
Purchase of crude oil
Energy loans
Gas market expertise
LNG exports
Downstream investment
Military equipment
Russian Diplomacy
Venezuela
Colombia
Argentina
Brazil
Cuba
Costa Rica
Nicaragua
Chile
53
Lukoil was Russia’s major overseas representative
• Lukoil had broad upstream and downstream expansion in 1990s and
early 2000s.
Rosneft’s expanding international portfolio underlines Russian ambition
55
Gazprom – more limited overseas activity
Rosatom as a vehicle for expanding Russian influence
• text
Conclusions
• Energy is clearly an important tool of Russian diplomacy
• However, commercial reality means that geo-politics is also having to respond to
economics
• The oil market is global and liquid, and Russia must compete with powerful actors such
as Saudi Arabia
• Cooperation rather than outright competition is becoming
• Investment by foreigners in Russia, but also by Russia overseas, is becoming as
important as trade
• Arguably the thought of a Russian energy weapon is now out-of-date
– The future of hydrocarbons is becoming less secure
– The oil, gas and coal markets are now global in nature
– Russia is as dependent on revenues as customers are on energy
– Russia needs foreign investment to develop more remote and difficult regions