Russia’s energy expansion plans

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of PLC.

As the world turns against nuclear power and the prices of fossil fuels rise, Russia is proactively expanding its oil and gas projects through tax cuts and cooperation with Western companies, says Ivan Matiyeshyn.

Ivan Matiyeshyn is the co-founder of the Ukrainian Foundation for Democracy “People First”.

“On the eve of Vladimir Putin’s inauguration, Russia’s leadership has carried out a number of actions aimed at the improvement of investment attractiveness of oil and gas assets. An updated and improved economic image of Russia has been shown to the West’s investors and political establishments.

Today, practically all declared Russian projects on the development and exploitation of new oil and gas deposits need considerable financing. But investment projects have started to gradually lose attractiveness for foreign investors.

Attracting them back has become a top-priority for the Russian authorities. To this end the government has made concessions. Notably, a number of tax privileges have been introduced in the form of a cancellation of the export duty and a reduction of tax on mineral extraction.

In particular, the Russian government has granted tax privileges to the Shtokman gas project. This became known during Putin’s meeting with heads of the France’s Total and Norway’s Statoil, which own shares in the project.

Before the project had acquired these privileges, it had started losing its attractiveness for foreign investors but by taking this step the Russian authorities appear to have played their cards well. By granting privileges they have accelerated both the Shtokman project and the ‘Yamal-SPG’ project, an effort to exploit what may be the world's largest gas reserves in northern Siberia. The Russian leadership has repeatedly declared plans on simultaneous introduction of both Yamal and Shtokman liquefied gas into the market.

Both projects are artificially adjusted to the common denominator – privileges in exchange for investments and technologies. However, it is still not clear up to now what target market the projects will be aimed at. A question of competition with other SPG-projects also remains open.

A special interest among the last initiatives of the Russian leadership is aroused by the signing of the agreement on strategic partnership between Russia’s Rosneft and ExxonMobil in the United States. Energy cooperation between these companies can herald a new stage in Russia-US relations.

The agreement provides for an exchange of assets in the North American and Russian Arctic regions. Partners will create two companies for the conduct of a geological exploration in the Karsk and Black seas on the territory of Russia. In return, Rosneft will get access to deposits in the Gulf of Mexico, Canada and Texas.

The topmost component of the agreement for Rosneft is access to advanced technologies, especially in the sphere of extraction of hard-to-reach oil. Besides, the appearance of the foreign company means recognition of economic attractiveness of the shelf. The alliance with ExxonMobil will also positively affect the capitalisation of the Russian company.

A political component is added here as well. Russia has demonstrated an improvement of the business climate at the international level. In due time ExxonMobil carried on negotiations on purchasing a control stake of the Yukos company.

However, after the case of Yukos and imprisonment of the co-owner of the company Mikhail Khodorkovsky, the main assets of the company ended up in hands of Rosneft.

The world's energy map is changing. After the Fukushima disaster in Japan, development of atomic engineering is up in the air, and the trend of liquefied natural gas is gathering pace. Under-deliveries of gas volumes, especially during peak winter periods, have become a tradition. All this compels Russia to react adequately to these changes. In Europe, as a basic consumer of Russian natural gas, the question of diversification of suppliers is as critical as ever.”