international partnership and the future of russian oil
TRANSCRIPT
International Partnership and the Future of Russian Oil and Gas James Henderson May 2014
Structure
Current issues for the Russian oil sector
Areas of IOC par�cipa�on
Challenges for foreign partners in Russia
Some thoughts on addressing the risks
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The oil sector underpins Russia
The oil sector makes by far the largest contribu�on to Russian budget revenues, dwarfing the gas sector
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2010 2013 2015 2020 2025 2030
Prod
ction (m
mbp
d)
General Scheme (High) General Scheme (Low) EIA
Russia’s oil production outlook
Maintaining Russian oil produc�on above 10mmbpd is becoming more challenging IOCs will be important contributors of technical experience, management exper�se and financing for difficult projects Partnership is vital to the future of Russia’s oil (and gas) sector
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Source: Ministry of Energy, General Scheme of Development of Oil industry to 2020, EIA International Energy Outlook 2013
Enhanced recovery at
existing fields
Arctic offshore
Tight Oil
East Siberia
Black Sea and Barents Sea
Russia has an oil tax problem
Russian oil produc�on would already be in decline if tax concessions had not been made to specific types of projects Produc�on must not be allowed to fall below 10mmbpd or the tax revenues problem will be compounded
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Tax concessions have underpinned stable oil output
Source: Mitrova 2014
The Russian gas sector is adapting to a new role SUPPLY SOURCES: 2002 2008 2012 2013
Gazprom production 522 550 487 487 Non-Gazprom production 73 114 169 181
Central Asian imports 34 68 29 33 TOTAL 629 732 685 701
MARKETS: Russian gas demand (UGSS) 412 462 465 461
Exports to CIS countries 89 89 63 57 Exports to Europe (physical Russian gas) 129 159 139 162
LNG Exports to Asia 0 0 14 14 TOTAL 630 710 681 694
Source: Gazprom
Gazprom and gas sector have had to balance poli�cal and commercial objec�ves, but this is becoming increasingly difficult
Gazprom has lost a significant amount of control over the Russian gas matrix
Russian gas sector will need to generate more budget revenues while adap�ng to increasingly compe��ve global market
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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
Is Russia becoming the global gas swing producer?
China Shale Gas
Source: WEO 2013
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2012 2020
bcma
Gazprom Independents Total Demand
Russia’s oversupply of gas
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0.0
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12.0
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
mmbp
dA short history of IOCs in Russia
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Competition for ROC equity –
IOCs not wanted
Technology and finance needed -
Offshore and tight oil JVs
Technology and finance needed – JVs
and initial PSAs
Soviet Period
Privatisation Increased
State control Consolidation
Major governance issues and
economic crisis – IOCs not interested
Consolidated ROCs - Limited equity sales to IOCs
Corporatisation
IOC activity in Russia in 2014
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Black Sea Exploration
Yamal LNG
Tight Oil
Barents Sea Exploration
South Kara Sea Exploration
Sea of Okhotsk
Sakhalin production and development
Laptev and Chukchi Sea Exploration
Arctic partnership
East Siberia JV
Tight Oil
19.75%
16%
Equity stakes
Gas
Brown�ield recovery through EOR Difficult to recover reserves account for 62% of Russian total
IEA es�mates that EOR could account for 500kbpd of output by 2030
Enhanced waterflooding techniques and reservoir management already in use Water cut averages 80%
Ter�ary methods gradually being introduced as tax incen�ves increase
Interna�onal techniques brought by IOCs and service companies
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Russia’s oil is getting more difficult
Reserves Production
Source: E&Y
Tight oil developments for medium term Expecta�ons for unconven�onal oil are running high Largest prospec�ve resource base in the world
The Bazhenov shale is current focus
Exxon, Statoil, Total and Shell all have JVs with Russian companies
Produc�on es�mates range up to 1.5mmbpd by 2030
Many issues need to be resolved Tax, service industry capacity, technology, funding
Commercial environment not conducive to fast development
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2015 2020 2025 2030
kbpd
Rosnedra RF MoE
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2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E
mm m
etres
mm m
etres
Drilling (LHS) Horizontal (RHS)
Output expectations from shale oil
Drilling set to increase sharply
Source: OIES
Source: Rosnedra, RF MoE
Arctic exploration – long-‐term upside Arc�c explora�on set to begin in August 2014
Rosne� the leader, with huge acreage posi�on
JVs signed with ExxonMobil, Statoil and ENI
South Kara Sea the ini�al focus, with IOC involvement vital Technology Experience Funding
Huge commercial and geo-‐poli�cal significance
Vital for Russia’s long-‐term produc�on profile
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West Siberia, 147.9
Other Russia, 120.6
Alaska, 77.9
Greenland, 51.7
Other , 53.2
Russia owns 60% of Arctic resources
1mmbpd of output estimated by 2035
Source: E&Y
Source: USGS analysis
Black Sea is an area of increasing strategic importance, with exploration and pipeline activity
Russia
Ukraine
Turkey
Russia’s involvement in Black Sea explora�on has become a more sensi�ve issue
The South Stream pipeline will become a major strategic asset partly funded by European companies and causing fierce debate with the EU
South Stream Pipeline
Eastern partnership becoming a greater focus, with export sales and �inance the key drivers
Development of Russia’s eastern regions a domes�c priority
Asia to become a vital source of extra export revenues
Oil produc�on and exports set to rise based around ESPO pipeline
Gas export deal with China to catalyse eastern gas programme
Foreign partnership focused on Chinese and Japanese companies
IOCs involved in Sakhalin and could have a greater role to play as region developed
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0
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1000
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kbpd
Other
Irkutsk Oil
Slavneft
SurgutNG
TNK-‐BP
Rosneft
ESPO Capacity
Eastern oil production to fill ESPO
Eastern gas programme to cost $80-100bn
LNG developments – technology, marketing and �inance all needed from foreign partners
LNG has become a priority in the gas sector as Russia seeks to confirm its role as a global player
Interna�onal partnership is vital to the development of new LNG schemes
Gazprom is facing a challenge from domes�c peers with IOC support
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Yamal LNG – 16.5mmt CNPC - 3mmtpa Negotiations with European and Asian traders
Sakhalin 1 – 5mmt SODECO – 1mmtpa Marubeni – 1.25mmtpa Vitol – 2.75mmtpa
Sakhalin 2 – 10mmt Various Asian buyers Potential for 5mmt expansion
Vladivostok LNG – 10-15mmt
Chayanda
Kovykta
38bcma to China
Pechora LNG – 2.6mmtpa ?
Leningrad LNG – 10mmtpa ?
Gazprom
Novatek
Rosneft
S-K
-V
Shtokman - 15mmtpa in Phase 1?
Financing of projects will be a key issue Development of Russia’s emerging regions implies huge capital expenditure
Project financing will be a necessity
A spread of interna�onal lending, IOC equity investment and state support will be needed
Banks will always be more prepared to lend if partners have credibility and experience
Poli�cal uncertainty clearly a key risk – IOC presence can offset this to an extent
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-‐50%
-‐30%
-‐10%
10%
30%
50%
70%
90%
-‐40.0
-‐20.0
0.0
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40.0
60.0
80.0
Rosn
eft
Gazp
rom
LUKO
IL
Nov
atek
Net
Deb
t/Eq
uity
US$
bn
RR Debt Non-‐RR Debt Net Cash Net Debt/Equity
Major ROC debt positions – Rosneft’s burden is heavy
Almost $2 trillion of investment needed to 2035
Source: IEA WEO 2011
Source: Company IFRS accounts
Russian Business Environment – The “Triangle of Tension”
Poli�cs
Managed Tension
Vested Interests Business
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Russian Business Environment
…… characterised by complexity and ambiguity: Fac�onal and fragmented; managed tension between fac�ons; trade offs but not always connected business and interests Tenacity – determined and persistent Confronta�onal and aggressive Conflict and mistrust are the norm Unconven�onal business model – not linear and not transparent ‘Win lose’ is preferred outcome …..the partnership model in Russia is compe��ve -‐ specifically compe��on for knowledge 18
Theoretical context for FDI in a weak state environment
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Ownership
Internalisation
Location
Local Knowledge
Foreign Partner
Host Country
Domestic Partner
Joint Venture Theory
Weak State / Local Knowledge Theories
Bargaining Theories
FDI in Resource Sector Theories
Key Themes from Case Studies and Interviews Key themes from 1990s included: Foreign partner brought a combina�on of technology, management skills and money
Domes�c partner brought access, assets and local knowledge Transfer of knowledge tends to be a one-‐way process DP local knowledge is an asset to a JV but also a key risk for the FP In any conflict over JV issues the DP normally wins
Interviews from 2000s confirmed that: The business environment for interna�onal partnerships in Russia has not changed drama�cally over the past decade
Ins�tu�ons remain weak and dominated by key individuals Business outlook remains rela�vely short-‐term as faith in reliability of laws and regula�ons remains low
Status quo unlikely to change soon, as it benefits the domes�c elite Local knowledge and influence remain vital commodi�es Interna�onal skills and work-‐force not always welcome, which can undermine foreign partner posi�on
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Survey of partnerships provided objective con�irmation
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Rank Score
Initial Control Final Control
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Rank Score
Initial Control Confidence
FP initial and final control
FP control and confidence
Foreign partners in 33 joint en��es surveyed
Confirmed that domes�c partner learning took place and was encouraged
FPs learning iden�fied through change of control over key responsibili�es No significant change iden�fied
Remained strong in original areas, made no progress on local knowledge issues
No gain in confidence either Related to internal partnership issues as no change in external environment
However, there was a range of FP performance around this average
More local knowledge = more success Overall Model explains 61% of FP success FP success = K + (0.46 x Increase in Local Knowledge) + (0.32 x DP Success) – (0.31 x State Influence) For every 25% increase in FP Local Knowledge his chance of success goes up by 12%
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Joint Venture Model explains 58% of FP success in JVs FP success = K + (0.63 x Increase in Local Knowledge) + (0.31 x DP Success) For every 25% increase in FP Local Knowledge his chance of success goes up by 16%
The Corporate Model makes a significant contribu�on to FP success on its own Joint en��es using a corporate model are sta�s�cally more successful than normal JVs, but no other factor makes a significant contribu�on
Managing Risk and Protection -‐ Principles
What you see is not what you get What is really happening vs. what you are being led to believe Understand interfaces and mo�va�ons – the real drivers Always triangulate poli�cs, business and vested interests to build an integrated picture (be�er than 75%)….and develop a response Persistence is key to protec�ng yourself
Bo�om line: Difficult to manage and/or nego�ate if you don’t understand the drivers and what is really mo�va�ng a decision 23
Foreign Entities in Russia – Common Mistakes
Over-‐reliance on intermediaries who promise understanding of, and access to, key decision makers but who cannot deliver Overconfident senior leadership who underes�mate the level of complexity and ambiguity Misunderstanding/ misinterpre�ng the signals due to poor intelligence – send and receive capability Quality of human resources you have on the ground in Russia – do they really have insight into what is happening? Lack of persistence in protec�ng and defending yourself Complacency and arrogance once you have established a foothold
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Key Moments in the History of TNK-‐BP
BP buys 10% in Sidanco
1997 2011 2003
BP increases Sidanco stake to
25% TNK-BP formed
Shareholder dispute resolved
and TNK-BP stabilised
2008
TNK-BP buys BP Intl assets
(Vietnam/ Vzla)
Sakhalin exploration agreements with Rosneft
Arctic Cooperation Agreement
with Rosneft
BP participates in Rosneft
IPO
Strategic Alliance with Rosneft announced
2012
BP announces potential sale of its 50% stake in TNK-BP
Rosneft purchases
100% of TNK-BP from AAR
and BP for $55bn
Strategic Alliance with
Rosneft lapsed
AAR / TNK-BP minorities
litigation
2006 2001
Shareholder dispute with
AAR at TNK-BP
2007 2010 2013
Bob Dudley leaves Russia
Everything revolves around Foreign Partner Relevance 26
The “7 Rs” Engagement Strategy
Relevance Relationships
Reality
Rigour Reciprocity
Renewal
Resourcing
Protection Proactivity
Conclusions Never underes�mate the degree of complexity and ambiguity or be complacent – Russians have a strong sense of when and where a partner is weak – and they will fully exploit it Russian partnership model is compe��ve, specifically compe��on for knowledge In a weak state environment balance can only be maintained if a FP gains local knowledge It is vital to understand the business and poli�cal environment and your partner’s key drivers as fully as possible This requires an integrated engagement strategy – 7Rs Model to ensure con�nuing relevance and balance in the rela�onship
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