Konstantin Simonov’s speech presentation at The International Conference "Russian Oil and Gas: New Trends and Implications". London, UK, March, 29, 2011.

1. National Energy Security Fund
Foreign Investment in
Russia’s Hydrocarbon
Sector
Konstantin Simonov
Chatham House
London
March, 29
2011

2. Typical Presentation of
Situation in Russia
• Russia is the land of “resource
nationalism”
• Restriction of operating conditions
for foreign companies
• Increasing the role of state
companies
National Energy Security Fund

3. The Real Meaning
of Famous Law
• Dmitry Medvedev’s presidential term in office began with a
symbolic act: practically simultaneously with his
inauguration the new law “On Procedures of Implementing
Foreign Investments in Commercial Organizations of
Strategic Importance in the RF” came into force
• The matter was probably that while oil prices were high
Vladimir Putin tried to make it clear to nonresidents that
they could be just junior partners of Russia’s large state
firms or majors with state participation that had preferential
rights to acquire licenses of new projects on favorable
conditions. It was important for Putin to fix the one-stop
principle – he personally headed the commission for foreign
investments in strategic sectors showing that if
nonresidents wanted to work in the oil and gas sector they
had to come to him
National Energy Security Fund

4. Sakhalin-2: Case of Resource
Nationalism?
• Gazprom bought 50% plus 1 share in the project
from Shell, Mitsui and Mitsubishi for more than
$7bn
• Shell, Mitsui and Mitsubishi are still minority
shareholders of Sakhalin-2
• All issues related to violations of the environmental
legislation were certainly settled
• Moreover, SE immediately managed to increase
Sakhalin-2’s budget from $12bn to almost $20bn
• Meanwhile, the Sakhalin-1 project every year has
serious problems with approval of the project
budget in contrast to Sakhalin-2 that avoids them
National Energy Security Fund

5. Downstream Nationalism
• Favorite topic of Putin was asset exchange. He
was ready to allow nonresidents into the
Russian production sector only following the
“upstream in exchange to downstream”
principle. Putin had a strategic task to enter the
final user market where the highest profit
margin is charged
• But gradually it became clear that the scheme
was collapsing. Actually Putin failed to achieve
substantial success. In the gas industry nobody
wanted to transfer significant assets to
Gazprom
National Energy Security Fund

6. Psychological Confrontation
• Some kind of psychological confrontation between Putin and
nonresidents started. On one side, Putin understands there are very
few places in the world where costs of production of hydrocarbons
are low and political risks are minimal. Resource nationalism
rapidly spread around the planet; political risks in countries rich in
oil and gas also increased, while the economic crisis, new kinds of
fuel and energy efficiency policies did not substantially reduce the
world demand for hydrocarbons. The oil spill in the Gulf of Mexico
at a BP platform vividly demonstrates that easily retractable oil
reserves are running out; companies are ready to produce oil in
rather complicated conditions. Access to deposits is an expensive
privilege. And Russia is not the worst place for investments
compared to Latin America, Africa and Central Asia
• On the other side, reserves of cheap hydrocarbons are reducing in
Russia too. Production is gradually moving to northern and eastern
regions; oil and gas production costs are becoming substantial
National Energy Security Fund

7. 2010: Bad news
• ConocoPhillips’ withdrawal from
LUKOIL’s share capital
• E.on withdrawal from Gazprom’s
share capital
National Energy Security Fund

8. BUT! 2011: Real U-turn
+ +
+
+
+
National Energy Security Fund

9. What is Russia’s Need?
• Investment
• Technology
• Share of risks
• Market outlet
National Energy Security Fund

10. Instead of what?
• Tax benefits
• Investment to infrastructure
• Liberalization of domestic gas market
National Energy Security Fund

11. Exchange of Shares
• Interpenetration with foreign
companies
• Putin would like to organise deals
involving an exchange of assets and
shares in Russian companies for s
hares in foreign majors. It is also a
question of political stability
National Energy Security Fund

12. Privatization
• In the period from 2012 to 2015 the
government is ready to sell up to 15% of
Rosneft shares. After 2015 Russia’s
participation in Rosneft’s capital may be
reduced.
• In 2011 a 25% minus one share stake in
Sovcomflot
• A 25% minus one share stake in Russian
Railways will be sold soon
• Zarubezhneft, Aeroflot and Sheremetyevo are to
become private in 2011-2015
National Energy Security Fund

13. BP-Rosneft-AAR Case
Two big surprises
• State is trying to involve BP to new
project in Russia but private business is
struggle against it! We can also
remember Khodorkovsky who abolished
PSR in Russia
• Private businessmen is publicly
struggling with Putin – and there is no
“doctor”
National Energy Security Fund

14. Live after Libya …
National Energy Security Fund

15. … and Fukushima
Increasing of gas consumption in "No nuclear" scenario
250
210,9
200
150
103,2
100
68,8
41,1 37,1 33,9
50 22,5 17,8
0
USA France Japan Russia South Germany Canada China
Korea
National Energy Security Fund

16. Thank you!
www.energystate.ru
National Energy Security Fund