"“We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried.” "

Chinese premier Wen Jiabao 12th March 2009

""We have a financial system that is run by private shareholders, managed by private institutions, and we'd like to do our best to preserve that system."

Timothy Geithner US Secretary of the Treasury, previously President of the Federal Reserve Bank of New York.1/3/2009

Tuesday, November 21, 2006

Russian gas supply problems loom over Europe....

Vagit Alekperov , CEO of LUKoil who proposes more than he performs was boosting the pre Saddam contracts in 1997 Lukoil led agreements in 1997 to drill at the West Qurna field, which is one of the most promising in Iraq and has an estimated reserve capacity of 4 billion barrels.

Endlessly peripatetic Alekperov plans another trip after Iraq adopts the new law governing the oil industry, expected by the end of December. Iraqi President Jalal Talabani said last year that LUKoil had been dealing "with Saddam, not with Iraq" and that Moscow would have to improve relations with Iraq if it wanted Russian companies to be successful there.

On the day when oil touched $55 a barrel yesterday, its lowest level since mid 2005, due mainly to fund selling across commodity markets as concern of an economic slowdown in the US gathered pace (29% down on July's record $78.4.) Alekperov was also promoting investment in the Iranian Azadegan oilfield, which has estimated reserves of 26 billion barrels.

Asked about the problems of US involvement due to the Philips Conoco stake (now just under 20%) in LUKoil he said ....." We are a Russian company and we operate according to Russian legal principles" and that there were no restristions on Russian investment in Iran.

How Russian they are was made very clear when it was reported that LUKoil has ceded State controlled Gazprom majority stakes in a planned joint venture with Gazprom's oil division, Gazprom Neft (SIBN.RS), for new projects in Russia . It was noted that this was first announced on Thursday, the day after the senior Gazprom executive responsible for developing the company's oil business, Alexander Ryazanov, unexpectedly left his position at the head of Gazprom Neft.

Alekperov told Dow Jones newswires that giving Gazprom the controlling stake won't mean Lukoil will lose control of its existing oil fields. This development simply demonstrates the state's growing grip on the lucrative gas / petroleum / hydrocarbon industry which has been an object of President Putin and his St pertersburg pals since assuming office.

"Gazprom is our big brother; the big brother must have 51%," Alekperov told journalists on Friday and said that he didn't think the loss of Ryazanov would affect the companies' ability to work together. Ho.Ho.

Whilst it is unclear why Ryanazov (it has been stated his contract had expired) has departed Gazprom Neft ,speculation persists that Gazprom's executive board, mainly St Petersburg based folk dominated by Gazprom Chief Executive Alexei Miller saw Ryanazov, a man with much experience in West Siberia as taking too independent a line. Vremya novostei, on November 16th, said his departure signalled a process of consolidating Gazprom's financial resources ahead of the inevitable pre-election infighting among the Russian president's inner circle.

Sergei Blagov considers how his departure is related to the looming gas shortages in Russia identified recently by the International Energy Agency (see Lord |Patel's previous FCUKED posts) and the need for massive investment to maintain levels of production.

Last month the Russian Industry and Energy Ministry said the country could face a natural gas shortage of 4.2 billion cubic meters (bcm) in 2007 and suggested nearly double gas prices for industrial consumers, rising from $45.3 per thousand cubic meters (tcm) up to $80/tcm. Unless adequate measures are taken, Russia's gas shortage could reach 8.4 bcm in 2008, 27.7 bcm by 2010, and 46.6 bcm by 2015, the ministry said in a report released on October 19.

The Industry and Energy Ministry said it would be necessary to invest up to $600 billion by 2011 in order to sustain its gas output levels in the long term.

This reflects major disagreements in and between key Russian ministries about gas pricing. Russia has basically two strategic routes ;

1. Produce more gas and increase exports / reduce domestic consumprion
2. Limit exports until production has increased sufficiently and the energy crunch passes.

Low gas prices encourage high consumption rates domestically and with customers, especially in ex Soviet states such as Georgia, Ukraine and Byelorussia this and discourage investments in expanded gas production.

A decision on gas prices, which remain regulated by the Russian government, is expected at a cabinet meeting in late November well in advance of the 2008 presidential election (Kommersant, November 16).

If the Russian Industry and Energy Ministry's plan for an immediate price hike is accepted, Gazprom is expected to sell 60-90 bcm of gas at US$80/tcm, thus raising its 2007 sales by US$2-4 billion. The remaining domestic supplies of 210-240 bcm (60% ish of current production) are planned for delivery for the domestic energy sector and retail customers at US$51.80/tcm. Production costs range from US$6/tcm for more accessible gas fields and as high as US$20/tcm at the Yamal Peninsula in the Arctic. (Compare Norwegian Statoil' s Arctic gas costs)

Ryazanov went to Dushanbe discussing joint projects with Tajikistan's President Emomali Rakhmonov where Gazprom is spending $7 million to explore Tajik gas deposits this year and plans to spend $12 million in 2007 in gas fields with an estimated 100bcm in the Sarikamysh, Rengan, Shaambary, and Sargazon fields(RIA-Novosti, November 10) which will help boost future supplies.

At the same time he was in control of gas supplies to Ukraine and Belarus - where negotiations are at a critical stage. On November 17 Gazprom and Byelorussian staffs met to discuss the price of Russian natural gas for Belarus in 2007 what Gazprom described as "free-market prices for natural gas supplies to Belarus." which translates from the Russian as higher gas prices. On the table at present is a proposal supply around 20 bcm of gas to Belarus this year, at a price of US$180-200/tcm in 2007, a massive and unpopular increase from the current US$50/tcm. Watch this space.....

Ukraine Gas prices for Ukraine are also unsettled, Russian Prime Minister Mikhail Fradkov met, Viktor Yanukovych, and both sides indicated plans to sign an agreement to supply 55 bcm of "Central Asian" gas to Ukraine in 2007 at a price of $130/tcm, up from $95/tcm earlier in 2006. Watch this space ........

Russia has 25% of the world's gas reserves (29 trillion cubic metres) and is committed to export more than 2.5 trillion cubic meters over the next 15 years. Depletion of Gazprom's production facilities has been estimated at some 60%, and key fields are believed to be equally exhausted.
As Gazprom has no significant gas fields that could be developed quickly and cheaply (hence need for Tajik gas) ,these projected sales look increasingly doubtful as the International Energy Agency have been anxious to identify and publicise.

All this of course impacts on EU (and more selfishly UK) energy security... a subject of constant remark by FCUKED for the last 5 years,which it appears has finally appeared on the radar of the Whitehall mandarins. Even top spook Dame Pauline Neville Jones remarked on it when she was wheeled out on BBC's Newsnight last night (again !!) to discuss the the alleged assassination by Putin's men of an ex KGB operator who turned his back on the Motherland.

The hard faced bitch glossed over the looming UK energy supply and security problems however and made soothing noises to suggest that her chums in the purlieus of St James's had the problem well in hand. (Ah! the effortless Rolls Royce minds of the mandarinate) It would be fascinating to see discuss with her how our crumbling nuclear industry, fast disappearing natural gas and oil, the worldwide scranble for LNG import / export facilities and vanishing and hugely expensive coal industry can plug any gap left by an implosion oif Russian gas supplies - or a massive rise in global prices led by Russia acting like a gas fired OPEC.

If you want a detailed, sensible, authoritative case of the problems Lord Patel brought your attention to the Institute of Civil Engineers report on this years ago here.

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