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RUSSIAN GOVERNMENT APPROVES LONG-TERM PIPELINE DEVELOPMENT PLANRussian Prime Minister Dmitry Medvedev has signed a decree approving the develop-ment plans for oil and gas pipelines through 2030. The list of planned major pipeline projects includes new lines for the transpor-tation of oil from fields in eastern Siberia to the ESPO pipeline, branch pipelines from ESPO to refineries in the Far East, petroleum product pipelines, gas pipelines for the Ya-mal megaproject, gas pipelines from fields in Ob Bay and Taz Bay in the Kara Sea to the Unified Gas Supply System, new branches of the Nord Stream gas pipeline, and pipelines to China. One notable omission is the South Stream gas pipeline, while a gas pipeline from the stalled Shtokman project has sur-prisingly been included.

Gas7 Russia and China see checkered flag waving to a gas deal10 Sinopec’s expanding presence in Russia12 Table – Gazprom gas supplies in H1 2013/2012

Corporations14 Rosneft will wait for fair current to China17 Table –Russian crude exports to China 19 Map –Eastern oil pipeline projects20 Rosneft is building up a gas kingdom22 Table –Rosneft offshore license areas23 Graphs –Rosneft gas production and share of Russian gas market24-25 Table –Rosneft consolidated gas reserves

Refining26 Surgut’s hydrocracker in Kirishi is pulling back light fuel oil from Europe27 Kirishi refinery at a glance29 Graph –Kirishi refinery production

Transactions31 Rosneft’s ex-CEO has launched his own oil business38 August M & A in doldrums due to holiday season39 Bashneft has sold a petchem unit to its parent company42 Table – M & A transactions in August

Briefs46 Regional47 Corporate

Statistics48 -56 July ‘13

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Table of Contents

POLITICAL AND BUSINESS INTELLIGENCE FOR ENERGY INVESTORS IN THE FSU

VOLUME XIX, ISSUE 9, SEPTEMBER 2013

On 19 August 2013, a government decree approv-ing the Ministry of Energy plan for pipeline ter-ritorial planning (oil pipelines and gas pipelines)

GOVERNMENT

By Ilya Kedrov

7

14

In This Issue:Russia and China close to gas supply deal

At the G20 summit in September Russia and China achieved a possible breakthrough in their drawn out negotiations over natural gas supplies. First, the two countries signed an agreement specifying that Russian gas exports to China would be transported via the Eastern route and the planned Power of Siberia gas pipeline. Second, China’s PetroChina pledged to invest $10 billion in the development of upstream natural gas assets in Eastern Siberia that would feed the pipeline.

Sechin waits patiently for Chinese contracts

Contrary to expectations, Russian state energy giant Rosneft and China’s CNPC failed to finalize two anticipated agreements during the early September G20 summit in St. Petersburg. The proposed agreements provide for the establishment of a joint Rosneft-CNPC fuel retail network in China and the joint implementation of hydrocarbon projects in Russia. In a separate arrangement, Rosneft appears to have offered China a share in Yakutia’s Taas Yuryakh Neftegazodobycha, in which the Russian company plans to increase its stake from the current 35.33 percent to full ownership. Two months ago, Rosneft signed a 25-year contract worth $275 billion to supply China with 365 million tonnes of crude, but the plan and other Rosneft activities are being undercut by Transneft. The Russian state oil pipeline monopoly wants Rosneft to agree on an expansion of Transneft’s ESPO Asian pipeline and to scrap the firm’s Far Eastern refinery project.

Surgutneftegaz may leave Europe without cheap fuel oil

Surgutneftegaz, Russia’s third-largest oil company, is currently preparing a double blow to European refineries: the planned launch of the long-delayed hydrocracker at the Kirishi refinery is expected both to cut motor fuel supplies from the Baltic plant to Europe in half and to turn Kirishi into a serious competitor in the Northwestern European oil product market. After being conceived over 20 years ago, the Kirishi hydrocracker project has finally triumphed over a whirlpool of political and socio-economic shocks with the rest of Russia. 26

RUSSIAN PETROLEUM INVESTOR

2 Russian Petroleum Investor • © Thomson Reuters 2013

RUSSIAN PETROLEUM INVESTOR VOLUME XIX, ISSUE , SEPTEMBER 2013

for the period through 2030 was published on the Russian government website. The corresponding decree was signed by Prime Minister Medvedev. The document provides information on the types, characteristics, and locations of significant pipe-line facilities. The document provided the routes and timing of construction of main pipelines, and includes branch pipelines, products pipelines and gas pipelines.

The list of the planned construction of oil pipelines encompasses several major projects: the second and third stages of the Zapolyarye-Purpe oil pipe-line, the Kuyumba-Taishet oil pipeline, branches from ESPO to oil refineries in Komsomolsk and Khabarovsk, the oil product pipelines known as “North” and “South”, the Bovanenkovo-Ukhta gas pipeline and Line III of Ukhta-Torzhok gas pipeline (both are parts of Yamal megaproject), a gas pipeline system from the fields of Ob Bay and Taz Bay in the Kara Sea to the Unified Gas Supply System, Line III and Line IV of the Nord Stream gas pipeline, and pipelines to China via Altai and via the planned Yakutia-Khabarovsk-Vladivostok route (known as the “Power of Siberia”). Notably, there is no South Stream pipeline-related project on the list.

MAJOR PIPELINE PROJECTSThe largest oil pipeline to be launched before 2016 is the 356–km long Zapolyarye-Purpe (2nd and 3rd stages) with a capacity of 45 million tons of oil a year. The 2nd stage of the Zapolyarye-Purpe

GOVERNMENT

RUSSIAN GOVERNMENT APPROVES LONG-TERM PIPELINE DEVELOPMENT PLAN(continued from p.1)

pipeline is scheduled for completion in December 2015 and the third stage in December 2016.

Zapolyarye-Purpe is part of the backbone of the main pipeline system Zapolyarye-Purpe-Samot-lor. Purpe-Samotlor, with annual capacity of 25 million tons and expandable to 50 million tons, was launched in October 2011. Zapolyarye-Purpe will connect the new oil producing regions of the Yamal-Nenets Autonomous Region (YNAO) and the Krasnoyarsk Territory to the main Eastern Siberia-Pacific Ocean (ESPO) trunk pipeline sys-tem. The resource base for the pipeline is being developed by Rosneft, and includes the deposits owned by the former TNK -BP, Gazprom Neft, Severenergia and LUKOIL.

The Zapolyarye-Purpe pipeline is to be built in three phases. The first stage is design and construction of a section from the small town of Tarko-Sale to Purpe village (both in the Purovskiy district of Yamal) with completion scheduled for the fourth quarter of 2014. The second phase is the design and construction of a section from Novozapolyarny village (in the Tazovskiy district of Yamal region) to Tarko-Sale; its completion is planned for the fourth quarter of 2015. The third stage presumes the construction of the section from the head pumping station (Tazovskiy dis-trict) to Novozapolyarny village, with completion in the fourth quarter of 2016.

The estimated cost of Zapolyarye-Purpe is RUB 120 billion. Previously, it was assumed that oil companies would fund the project through partic-

LIST OF OIL PIPELINES INCLUDED IN THE DEVELOPMENT PLAN OF THE FEDERAL PIPELINE SYSTEM

Decription Designed annual capacity

Total length, km Commission deadline

Stage 2 of oil pipeline Zapolyarye-Purpe~45 million tons of oil 358

December 2015

Stage 3 of oil pipeline Zapolyarye-Purpe December 2016Linear portion of oil pipeline Kuyumba-Taishet Up to 15 million tons 710 2016 гPipeline branch from ESPO to Khabarovsk Refinery (Alliance Oil Company)

Up to 6 million tons 27 2015

Pipeline branch from ESPO to Komsomolsk Refinery (Rosneft)

8 million tons 360 2016

Pipeline branch from Afipsky Refinery to Tikhorets-Novorossiysk-2


Bypass pipeline Kuibyshev-Unecha-2 outside Penza

n/a 89 2018

Capacity expansion of Caspian Pipeline Consortium

Up to 67 million tons n/a 2015

Source: Russian Federation Ministry of Energy

Russian Petroleum Investor • © Thomson Reuters 2013 3

RUSSIAN PETROLEUM INVESTOR VOLUME XIX, ISSUE 9, SEPTEMBER 2013

ipation in additional share issues by the project’s operator Polar, a subsidiary of Transneft. How-ever, according to Transneft head Nikolai Tokarev, it would be more effective for Transneft to finance the project via further tariff increases or other finance options by companies under their guaran-tee to fill the pipeline capacity. “The company has an opportunity to finance the project. Transneft is going to finance 30 percent of construction costs from its own funds and will borrow the rest. The pipeline is part of the ESPO network, and so under the terms of the supply contract with CNPC it may use Chinese credit,” explained Igor Demin, head of public communications and media rela-tions of Transneft.

In order to finance the project, on November 18, 2011 Transneft agreed on a new plan of pipeline construction with the companies leading the development of new deposits in the region, and Transneft received guarantees to pump agreed oil volumes. The decision to cover 30 percent of the cost of the pipeline sharply increased the invest-ment program of Transneft. In comparison with 2012, Transneft’s investment in 2013 increased almost by half to RUB 161.4 billion.

Transneft plans to build the linear part of the Kuyumba-Taishet pipeline, which is also going to ESPO, in 2016. The 710-km pipeline, with capac-ity of up to 15 million tons of oil per year, will be used for transporting oil from the Yurubcheno-Tohomskoye and Kuyumbinskoye deposits in the Krasnoyarsk region.

The pipeline Kuibyshev-Unecha-2, which passes the city of Penza, is part of the main oil pipeline Druzhba-2. The 89-kilometer section will be built in 2018.

Construction of the pipelines Kuibyshev-Tiho-retsk, Kuibyshev-Lisichansk and Kuibyshev-Unecha, all sections of the main export oil pipeline Druzhba-2, began in the 70s. The oil pipeline Druzhba-2 plays an important role in exporting Russian and Kazakh oil. The Druzhba pipeline begins in Samara (formerly known as Kuibyshev) and it is the destination point of the Atyrau-Samara oil pipeline entering Russia from Kazakhstan.

Another export-oriented project is the capacity expansion of the Russian section of the Caspian Pipeline Consortium (CPC) to 67 million tons before 2015. The existing route of the CPC will require eight new pumping stations as part of this expansion.

BRANCH PIPELINESThe territorial plan includes three branch pipe-lines: from ESPO to the Komsomolsk refinery (owned by Rosneft), from ESPO to the Khabarovsk refinery (owned by Alliance), both in Russia’s Far East, and from the main pipeline Tihoretsk-Novo-rossiysk-2 pipeline to Afipsky Refinery (controlled by Bashkortostan’s Neftegazindustriya).

Construction of the 360-km branch from ESPO to the Komsomolsk refinery is scheduled for comple-tion in 2016; capacity will reach 8 million tons of oil per year. Plans call for adding one head pumping station, two pumping stations and a crude oil delivery and acceptance point to the route.

The 27-km long single-line branch from ESPO to the Khabarovsk refinery will be laid from ESPO pumping station number 34 to the plant to increase the flow of oil to 6 million tons. Completion of construction and commissioning is planned for 2015.

A 70-km long oil pipeline branch from the Afipsky refinery to the Tihoretsk-Novorossiysk-2 pipeline will be built in 2015. This branch will increase the supply of oil to the refinery to 6 million tons per year; total deliveries to Afipsky refinery will thus increase to 12 million tons of oil annually. According to the plan, the branch pipeline will in-clude oil pumping station Novovelichkovskaya-3. Transneft has already carried out a tender for engineering studies to increase the supply of oil to Afipsky by 6 million tons. Engineering surveys should be carried out before 10 January 2014.

Afipsky is one of the largest plants in southern Russia, specializing in the production of heat-ing oil, fuel oil, straight-run gasoline, kerosene, and diesel fuel. This year, the refinery plans to increase oil processing to 6 million tons from the 4.8 million ton level of 2012. The capacity of the Transneft pipeline to the refinery was increased to 5 million tons. An additional one million tons of oil will be supplied to the plant by rail.

The owner of the Afipsky refinery - Neftegazin-dustriya - plans to build a second stage with a ca-pacity of 6 million tons, with the branch pipeline keyed to supplying it. This second phase of the refinery will process sour crude. Recycling of sour crude in Russia is one way to improve the quality of exported oil, hence the attention being paid to projects related to the Afipsky refinery.

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(continued from p.2)RUSSIAN GOVERNMENT APPROVES LONG-TERM PIPELINE DEVELOPMENT PLAN

In 2013, Trans neft will spend RUB 131.9 billion for the construc tion of trunk pipe-lines, for Za-polyarye-Purpe and Kuyumba-Taishet, the ex-pansion projects ESPO-1, ESPO-2, and others. Con-struction of Za-polyarye-Purpe will cost Trans-neft RUB 73.5 billion in 2013 alone. Investment for 2014-2015 is planned at RUB 325.3 billion.



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RUSSIAN GOVERNMENT APPROVES LONG-TERM PIPELINE DEVELOPMENT PLAN(continued from p.3)

OIL PRODUCT PIPELINESPlans also call for the construction of four oil prod-uct pipelines, a branch from the main oil product pipeline and one condensate pipeline.

In 2018 it is planned to complete the construction of the linear part of the two major pipelines - the second start-up complex of 600-kilometer oil product pipeline “North” from Kirishi to Primorsk and the 1,465-kilometer oil product pipeline “South” along the Syzran-Saratov-Volgograd-Black Sea route.

Annual capacity of the second start-up complex of Kirishi-Primorsk, the first line of the oil pipeline Vtorovo-Yaroslavl-Kirishi-Primorsk, may reach 16.0-16.6 million tons. Implementation of the proj-ect is scheduled for 2018. The oil pipeline “North”, in operation since May 2008, is already exporting Euro-5 diesel fuel to Europe and the U.S. Fuel exports via Primorsk (Leningrad region) totaled 4.3 million tons in the first half 2013.

According to the pipeline territorial plan, project “South” presumes the construction of a main oil pipeline Syzran-Saratov-Volgograd-Black Sea coast. Its designed capacity is 8.7 million tons per year, with completion scheduled for 2018.

The government has not yet determined the end point of oil pipeline “South”. At the end of May, Rosneft awarded the project survey to the Ital-ian company Saipem for the “South” pipeline’s Syzran-Tuapse route. Previously, plans called for

building the pipeline along the Sizran-Saratov-Volgograd-Novorossiysk route. The pumping base Grushovaya was supposed to be the final destina-tion providing shipping on Sheskharis terminal in Novorossiysk. Initially, Rosneft, Lukoil, TNK -BP, Bashneft and refineries in Krasnodar Krai showed interest in the project. But last year, Rosneft appealed to the Russian President Putin with a request to include its plants in Samara to the terminal in Tuapse in Transneft’s product pipeline plan.

Earlier this year, Deputy Prime Minister Arkady Dvorkovich announced that the state would not fund the construction of oil pipelines in the coun-try. However, he did not rule out that VEB might fund the construction. Deputy Energy Minister Kyrill Molodtsov said that the discussion related to the implementation of the project “South” will not resume until September. He indicated that it would be useful to discuss the project after the launch of the Tuapse refinery, currently undergo-ing modernization. According to the Ministry of Energy, the launch of the upgraded plant may be occur by September.

The scheme also includes the 450-km long Ksto-vo-Nagornaya oil product pipeline project, which provides delivery of petroleum products from LUKOIL-Nizhegorodnefteorgsintez to the Moscow region. The pipeline’s capacity will be3.8 million tons per year, with completion scheduled for 2017.

Another project is the 46-km bridge oil pipeline

LIST OF OIL PRODUCT PIPELINES AND GAS CONDENSATE PIPELINES INCLUDED IN THE DEVELOPMENT PLAN OF THE FEDERAL PIPELINE SYSTEM



Oil pipeline Syzran-Saratov-Volgograd-Black Sea coast (Project "South")

8.7 million tons 1,465 2018

Kirishi-Primorsk oil pipeline (Project "North") 16.1-16.6 million tons 600 2018Pipeline branch from the Yurgamysh station to the main oil pipeline Ufa-Petropavlovsk


Oil pipeline Kstovo-Nagornaya 3.8 million tons 450 2017Branch oil pipeline Primorsk seaport-Vysotsk seaport

5 million tons 46 2017

Gas condensate pipeline Urengoi-Purpe n/a n/a 2013Source: Russian Federation Ministry of Energy



(continued from p.4)

GOVERNMENT

RUSSIAN GOVERNMENT APPROVES LONG-TERM PIPELINE DEVELOPMENT PLAN

from the Primorsk seaport to the Vysotsk seaport. It is designed to transport oil from the LUKOIL-Nizhegorodnefteorgsintez and LUKOIL-Permneft-eorgsintez refineries to the RPK-Vysotsk-LUKOIL-II terminal. The pipeline will carry 5 million tons per year when completed in 2017.

The last oil products transport project is the 4-km branch pipeline from linear production-control station Yurgamysh to the main oil product pipeline Ufa-Petropavlovsk. Its capacity will approach 4 million tons per year; completion is scheduled for 2015.

GAS PIPELINESPlanned gas pipelines are a central part of the transportation plan. Gazprom plans to start con-struction of Lines III-VI of the Bovanenkovo-Ukhta

pipeline between 2017 and 2031; each will be 1,110 km long with annual capacity is 60 billion cubic meters of gas per year., Construction completion is scheduled for end 2021 and beyond 2030.

Within the development of the Yamal fields, Gazprom plans to connect the Ob Bay and Taz Bay fields of the Kara Sea to the Unified Gas Supply System beginning in 2020. A pipeline network will be built for those fields and become part of the Unified Gas Supply System in 2021-2023.

Lines III and IV of the Nord Stream gas pipeline are slated for construction in 2018-2020, the III thread of Ukhta-Torzhok gas pipeline (part of Yamal megaproject, which also includes the Bovanenko-vo-Ukhta) is scheduled for 2020-2022, and Line I of Ukhta-Cheboksary gas pipeline in 2027-2029.

Current plans call for two pipelines to China to be built - Altai and The Power of Siberia (Yakutia

LIST OF PIPELINES INCLUDED IN THE DEVELOPMENT PLAN OF THE UNIFIED GAS SUPPLY SYSTEM



Bovanenkovo-Ukhta Line III 60 bcm of gas 1,110 2021-2023

Bovanenkovo-Ukhta Line IV 60 bcm 1,110 2025-2027Bovanenkovo-Ukhta Line V 60 bcm 1,110 2029-2031Bovanenkovo-Ukhta Line VI 60 bcm 1,110 After 2030Pipeline connecting Kamennomysskoye offshore gas field to the Unified Gas Supply System

15 bcm 90 2022-2024

Pipeline connecting Severnoye Kamennomysskoye offshore gas field to the Unified Gas Supply System

15 bcm 106 2020-2022

Gas pipeline connecting fields of Parusovaya group and Taz Bay in the Kara Sea to the Unified Gas Supply System

34 bcm 160 2024-2026

Gas pipeline connecting fields in Ob Bay and Taz Bay in the Kara Sea to the Unified Gas Supply System

66 bcm 170 2021-2023

Line III and Line IV of Nord Stream gas pipeline

55 bcm n/a 2018-2020

Gas pipeline Ukhta-Torzhok Line III (Yamal-Europe gas pipeline)

45 bcm 973 2020-2022

Ukhta-Cheboksary gas pipeline. I thread 37 bcm 920 2027-2029Altai Pipeline Up to 30 bcm 2,622 2020Yakutia-Khabarovsk-Vladivostok pipeline (Power of Siberia)

Line 1 – 32 bcm Line 2 – up to 61 bcm

3,177 2017-2020

Section of the pipeline Murmansk-Volkhov (For transportation of gas from the Shtokman field)

51.84 bcm 456 Not determined

Source: Russian Federation Ministry of Energy



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RUSSIAN GOVERNMENT APPROVES LONG-TERM PIPELINE DEVELOPMENT PLAN

-Khabarovsk- Vladivostok). The 2,622 km Altai pipeline will have a capacity of up to 30 billion cubic meters annually, and will be constructed by 2020. The 3,177 km Yakutia- Khabarovsk-Vladivo-stok pipeline with annual capacity of 32 billion cu-bic meters will be finished in 2017-2020. A second line to China via Vladivostok is being considered in order to bring annual capacity to 61 billion cubic meters. The inclusion of the Altai pipeline is sur-prising as the commercial bona fides of the project have long been questioned and the pipeline has not been mentioned in the latest round of Russia-China gas supply negotiations.

SHTOKMAN IS IN, SOUTH STREAM IS OUT The most interesting feature of the approved scheme is the inclusion of a gas pipeline from the Shtokman field and the omission of the South Stream gas pipeline. A section of the 455.6 km Murmansk-Volkhov pipeline, with annual capacity of 51.84 billion cubic meters, will be built to move gas from the Shtokman field to consumers in the Murmansk region. The commission deadline for this facility is yet to be determined.

However, on 22 July, documents cancelling the tender for engineering and geotechnical surveys on the second and third phases of the develop-ment of the Shtokman field were signed. Then, in late August, Gazprom, through its wholly subsidiary Gazprom Dobycha Shelf (the holder of the geological exploration and gas and gas condensate production licences for Shtokman), canceled a request for proposals for the design of the LNG plant for the second and third phases of Shtokman field development.

Construction of the LNG plant was expected in the first phase of the project (the initial engineer-ing design of the LNG plant was done by French company Technip). Gazprom’s foreign partners for Shtokman - Statoil and Total - have not agreed with Gazprom on many issues, including the Shtokman development strategy, its busi-ness model and investment decision. Shtokman shareholders had no solutions to the problem of marketing and project economics and have not yet been able to agree whether to deliver gas liquified or by pipe. Shtokman shareholders focused initially on supplying LNG to the U.S., but the U.S. shale gas boom forced a reconsideration of that approach.

Earlier, Gazprom spokesman Sergei Kupriyanov said there was no reason to expect investment decisions in the near future. Had it been accepted now, the project would have been possible in

2019-2020. Still, the pipeline project appeared in the Ministry-authorized plan.

Interestingly, Gazprom identifies Bovanenkovo -Ukhta, Ukhta-Torzhok, Gryazovets-Vyborg and South Stream as priority projects in its investment program for 2013. But South Stream is omitted from the government approved scheme. On 14 November 2012 in Milan (Italy) the South Stream Board of Directors made its final investment decision on the offshore part of the project and on 7 December construction of the South Stream pipeline began near the city of Anapa, Krasnodar Krai. Commissioning of the pipeline’s first section is scheduled for late 2015. Construction of the South Stream offshore pipeline will start in the second quarter of 2014.

Gazprom’s plan was to launch construction of South Stream’s European onshore section in Bulgaria in June this year but the start was de-layed. On 8 July, a Gazprom delegation, headed by CEO Alexei Miller, visited Bulgaria to discuss South Stream implementation and assess mu-tual interest in its successful completion. The project should benefit the Bulgarian economy, in particular via $3.5 billion in direct investment and employment of about 2,500 skilled profes-sionals.

First delivery of gas through South Stream is scheduled for late 2015.



At the G20 summit in September Russia and China achieved a possible breakthrough in their drawn out ne-gotiations over natural gas supplies. First, the two countries signed an agreement specifying that Russian gas exports to China would be trans-ported via the Eastern route and the planned Power of Siberia gas pipeline. Second, China’s PetroChina pledged to invest $10 billion in the develop-ment of upstream natural gas assets in Eastern Siberia that would feed the pipeline. But the gas supply agree-ment signed by Russia’s Gazprom and China’s CNPC on the sidelines of the G20 summit still does not resolve the most contentious issue in the two countries’ protracted supply nego-tiations: the price of gas. However, Moscow and Beijing promise to final-ize the contract, including coming to an agreement on pricing, by the end of 2013. Some observers believe that the Russian side may agree to some pricing concessions if China offers to fund major investments in gas supply infrastructure.

During the most recent G20 summit, held in St. Petersburg on 5-6 September 2013, Gazprom Chief Executive Alexei Miller and Head of China’s National Petroleum Corporation (CNPC) Zhou Jiping signed what appeared to be a landmark agreement on the basic terms of Russian gas sup-plies to China along the planned Eastern route.

According to Gazprom company statements, the legally binding document, signed in the presence of Russian President Vladimir Putin, is an exten-sion of previous agreements between the two companies and outlines some key supply condi-tions, including minimum annual supply volumes, take-or-pay terms, the start and end date of gas supply, the transhipment point for gas deliveries, and a number of other parameters.

While the deal has been heralded as a break-through by many industry observers, a number of issues remain unresolved. According to Miller, both sides hope to agree to a complete list of terms, including prices, within the next few months. “The fact that the signing of the basic conditions took place during the G20 summit proves that both sides are committed to the suc-cessful conclusion of negotiations and to signing a contract by the end of 2013,” Miller was quoted as saying.

In March of this year, in a precursor to the St. Pe-tersburg agreement, Gazprom and CNPC signed a memorandum of understanding on the supply of up to 38 billion cubic meters (bcm) of Russian gas to China via the Eastern route starting in 2018, with the potential to increase export volumes to 60 bcm in the future (See “On Course for China”, Russian Petroleum Investor, April’13). The pro-posed Eastern route would include the transport of gas via a pipeline along the Pacific coast and the marine shipment of liquefied natural gas (LNG) via tankers. Gazprom plans to launch a gas liquefaction plant near Vladivostok in 2018 with initial LNG output of 10-20 million tonnes per year (up to 27 bcm).

PRICING REMAINS A STICKY SUBJECTThe significance of any gas supply agreement will depend greatly on the resolution of contentious is-sues surrounding pricing. In past negotiations Chi-nese and Russian government officials have had a fundamental disagreement on price formulation. Russia and Gazprom, as with gas export contracts to Europe, have strongly advocated for long-term oil-linked gas pricing. In June of this year, CNPC President Zhou Jiping unexpectedly proposing linking the price of Russian gas supplies to the Henry Hub spot index in the United States (Henry Hub Gulf Coast Natural Gas Spot Price).

Zhou’s proposed Henry Hub indexing was not accepted, as current Henry Hub price levels are less than or equal to gas prices on the Russian domestic market (See “Gazprom Faces Pricing Impasse in Both Europe and Asia”, Russian Pe-troleum Investor, July’13). Gazprom, predictably, rejected Zhou’s proposal.

The international gas market remains highly segmented and there are vast price differences across regions. Gazprom, for example, currently

RUSSIA AND CHINA CLOSE TO GAS SUPPLY DEAL

GAS

By Sergei Glazkov



GAS



charges its domestic clients no more than $168 per 1,000 cubic meters (mcm), less than half of the average Russian gas export price to Europe, which was around $400 per mcm in the first half of this year. The average price of gas supplied via spot contracts in the Asia-Pacific region is cur-rently estimated at about $600 per mcm.

Before Zhou’s suggestion of linking Russian gas supplies to Henry Hub prices, China had reportedly pushed for a fixed price of $250 per mcm in 2012 before finally agreeing on a higher price of about $350 per mcm. Prices have by far been the must contentious issue in the course of negotiations, and while Gazprom and CNPC hope to reach an agreement by the end of 2013, it is unclear what basis for price formulation will meet the needs of both parties. Beijing has backed down from its revised offer of $350 per mcm, as it is constrained by strictly regulated low domestic gas prices. Russian analysts have said that Gazprom’s proposed gas price would mean that Chinese companies would have to buy gas at higher prices than they are able to sell it for in the domestic market.

WHAT IS DIFFERENT THIS TIME?Most of the terms of the agreement of September 2013 were actually resolved in earlier negotiations dating back to 2009. Gazprom and CNPC signed a framework agreement in October 2009 outlin-ing the basic conditions of natural gas supplies from Russia to China. The agreement provided for annual exports of up to 68 bcm of gas by two routes: the Western route via the planned Altai pipeline (30 bcm per year), and the Eastern route via what would become the planned Power of Siberia pipeline (38 bcm per year).

In September 2010 the parties signed a legally binding document very similar to the agreement signed at the latest G20 summit. The document represents the basis for a 30 year supply contract for annual volumes of 30 bcm, to be delivered via the transhipment point of Blagoveshchensk near the Russian-Chinese border (Eastern route). The latest agreement keeps the basic terms on timeframe and delivery point intact but boosted the volumes to be delivered via Blagoveshchensk to 38 bcm. In March, when Gazprom and CNPC signed a memorandum of understanding for cooperation in pipeline gas supplies, the parties agreed to drop the Western option, leaving only the Eastern supply route and the Power of Siberia pipeline.

The only new wrinkle in the latest round of talks

is that both parties have provided more detail in actually identifying which gas fields will provide output for supply to China. In March, Gazprom’s Alexei Miller said that exports to China depended on the launch of production at the Chayanda gas field in East Siberia. According to Miller, Russian gas supplies to China could begin in 2018 after the launch of Chayanda and the completion of the Power of Siberia pipeline, running from Yakutia through Khabarovsk to Vladivostok. However, in September, Gazprom sources said that the first exports to China could actually come from Sakhalin production, transported via the recently opened 30-bcm Sakhalin-Khabarovsk-Vladivostok pipeline. The exact Sakhalin fields to be desig-nated for export were not specified. Although the Sakhalin-Khabarovsk-Vladivostok pipeline is on line, in order to start deliveries to China, Gazprom would need to build the Khabarovsk-Blagovesh-chensk pipeline spur, which would then become part of the Power of Siberia’s future route.

There are a number of offshore fields that are part of the Sakhalin complex that could be used to supply China. Gazprom, which is developing the Sakhalin-3 gas project, is planning to start work at the Kirinsky gas block this year and then bring production at the 800-bcm Yuzhno Kirinsky field online. However, Gazprom has yet to decide how it will market output from the Kirinsky fields. Shell, Gazprom’s partner in at the Sakhalin-2 project, expects to use its own gas output as feed-stock for LNG production at the Sakhalin-2 LNG plant. Gazprom sources have earlier said that the company will need output from the Kirinsky fields for its own planned LNG plant, Vladivostok LNG, which is expected to be built by 2018. Thus, it is unclear if Sakhalin gas output will reach China.

GAZPROM COMPETING FOR MARKET SHARE WITH CENTRAL ASIAN EXPORTERSWhile Gazprom and China continue the drawn out process of gas supply negotiations, China has steadily expanded its grip on gas coming out of Central Asia, signing a number of new deals to secure new volumes from producers such as Turkmenistan. The new deals strengthen China’s bargaining position towards Gazprom, as the need for Russian volumes becomes less urgent.

On 3 September 2013, just before the G20 sum-mit, Chinese President Xi Jiping visited Turk-menistan. There he participated in the ceremony marking the start of production at the supergiant Galkynysh gas field (also known as Yolotan). Dur-

Russian gas supplies to China could begin in 2018 after the launch of Chayanda and the completion of the Power of Siberia pipeline

GAZPROM HAS YET TO DECIDE HOW IT WILL MARKET OUTPUT FROM THE KIRINSKY FIELDS.



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ing the two-day visit to Turkmenistan, the Chinese leader also concluded a package of gas deals, including an agreement calling for the increase of Turkmen gas exports to China from 35 bcm to 60 bcm per year. At Xi’s meeting with his Turkmen counterpart Gurbanguly Berdymukhammedov, the two leaders agreed to accelerate the expan-sion of the Central Asia-China gas pipeline.

Xi’s visit marks just the latest step in Chinese-Turkmen natural gas cooperation that dates back to 2006. In exchange for future gas sup-plies, China had earlier provided Turkmenistan with an $8 billion soft loan aimed at expediting the development of Galkynysh. In September, CNPC agreed to enter the second stage of the field’s construction, which will require about $30 billion of investment, including the loans from China. Western analysts regarded Xi’s trip as a triumph for Beijing: China has managed to secure additional gas supplies From Turkmeni-stan and strengthen the two counties’ long-term relations. Isabel Gorst from the Financial Times, for example, suggested that after Xi’s success in Turkmenistan, he may decide to play hardball with Gazprom.

Another competitor that may undercut Gazprom’s leverage in its negotiations with CNPC is NO-VATEK, Russia’s biggest independent gas produc-er. CNPC’s expected agreement with NOVATEK on LNG imports from the planned Yamal project could increase CNPC’s leverage in its negotiations with Gazprom, as China’s need to secure addi-tional gas volumes becomes less acute.

Gorst is very negative on the outlook for Gaz-prom’s ambitious plans for gas exports to China. She does not believe that Gazprom will succeed in meeting its commitment to supply annual vol-umes of 38 bcm of pipeline gas to China. “Gaz-prom is trying to get China to raise its bid price for Russian gas in order to justify the huge cost of building the [Power of Siberia] pipeline. In a sign that an agreement is still some ways off, the Russian company postponed plans ... to launch construction of the pipeline this October,” Gorst wrote. She believes that while Gazprom may invite Chinese participation in the development of upstream Siberian fields as a sweetener, this may not be enough to reach a mutually acceptable compromise.

On his way back to Beijing after the G20 sum-mit, President Xi stopped over in the remaining Turkic Central Asian states, visiting Kazakhstan, Uzbekistan, and Kyrgyzstan from 6-13 September 2013. Xi signed dozens of agreements in all three countries and promised lavish new investments to develop new oil and gas assets.

In Kazakhstan, Xi signed a total of 22 agreements worth about $30 billion. Most prominently, he completed negotiations on CNPC’s purchase of the 8.4 percent stake in the massive Kashagan oil and gas project that was previously held by ConocoPhillips. Xi also joined Kazakh president Nursultan Nazarbayev in the official ceremony marking the launch of the first section of the Beineu-Bozoi-Shymkent gas pipeline that tra-verses Kazakhstan from west to east.

CHINESE COMPANIES BECOME MORE ACTIVE WORLDWIDE

Over the last year, the global oil and gas transactions in-volving Chinese companies has increased substantially. Beijing is taking advantage of the fallout from the finan-cial crisis to acquire assets that are for sale around the world as companies push to divest from less profitable as-sets. By purchasing equity in energy assets abroad, China, which is not a major producer of oil and gas at home, aims to reduce its dependence on energy imports in the face of growing domestic demand.

Chinese companies have made inroads into the Unit-

ed States. In February, Chi-na’s Sinopec agreed to in-vest more than $1 billion in oilfields located in Oklaho-ma. A month later, CNPC an-nounced that it is consider-ing investing $40 billion in the development of shale oil in the United States.

Chinese companies are also active in frontier markets. In June, Sinopec (via Sonan-gol Sinopec International) agreed to pay $1.52billion to Marathon Oil for a 10 per-cent stake in the Block 31 off-shore project in Angola. The project, operated by BP, has estimated recoverable oil re-

serves of 533 million barrels. The acquisition brings So-nangol Sinopec Internation-al’s total stake in the Block 31 project to 15 percent.

Likewise in June, CNPC said that it was willing to spend around $5 billion to ac-quire the 8.4 percent stake in Kazakhstan’s massive Kashagan field that was pre-viously held by ConocoPhil-lips. In September, during Chinese President Xi Jin-ping’s visit to Kazakhstan, the two sides announced that the deal will be com-pleted by the end of 2013.

In late August, Sinopec and

the American independent oil producer Apache signed an agreement calling for a global strategic partner-ship, nder which the Chi-nese company will receive a 33 percent stake in Apache’s Egyptian assets. Sinopec paid $3.1 billion for the Western Desert fields, which at the end of 2012 were esti-mated to contain 641 million barrels of oil and 3.79 bil-lion cubic feet of natural gas (approximately 632 million barrels of oil equivalent). The deal, Sinopec’s biggest Middle East transaction, is expected to increase the company’s daily oil produc-

tion by 130,000 barrels, or 9 percent.

Another Chinese energy com-pany, PetroChina, announced in August its plans to expand its presence in Iraq by join-ing ExxonMobil in the devel-opment of the West Qurna-1 project. In addition, accord-ing to Reuters sources famil-iar with the situation, the Chi-nese company is in talks with Russia’s LUKOIL to buy into another Iraqi project, West Qurna-2. LUKOIL, initially confirmed that it was in talks with PetroChina but in August denied that there was poten-tial for joint work in Iraq.




In Uzbekistan, President Xi signed a total of 31 agreements worth approximately $15 billion. The new agreements include a protocol on the principles of operation and construction of the Uzbekistan-China gas pipeline. The pipeline, also known as Line D of the Central Asia-China network, will have a design throughput capacity of up to 30 bcm per year. In order to provide gas for the planned pipeline expansion, CNPC plans to carry out exploration at two Uzbek southern gas blocks, Boisun and Surkhan, and will estab-lish a joint venture to develop three gas fields in Uzbekistan’’s Karakul region: Khodzhasayat , Khodzhadavlat and Vostochny Alat.

In addition, China’s State Development Bank together with the Fund for Reconstruction and Development of Uzbekistan agreed to co-finance investment projects worth a total of $11.6 billion.

In Kyrgyzstan, the next stop on Xi’s Central Asia tour, Chinese and Kyrgyz officials discussed the construction of a new section of the Central Asia-China pipeline network. China is prepared to work with Kyrgyzstan on the joint construction and operation of a gas pipeline that will link into the trunkline connecting Turkmenistan, Uzbekistan, Kyrgyzstan, Tajikistan and China. China agreed to provide a loan of more than $3 billion for energy projects in Kyrgyzstan.

Beijing agreed to invest the same amount in neighbouring Tajikistan. President Xi met with Tajik President Emomali Rakhmon at the summit of the Shanghai Cooperation Organization, held in the Kyrgyz capital of Bishkek on 13 September. Rakhmon welcomed China’s decision to construct

part of the gas pipeline running from Turkmeni-stan to China through the territory of Tajikistan.

Overall, China pledged more than $80 billion of new investment into the economies of Kazakh-stan, Kyrgzystan, and Uzbekistan.

It would appear that China is applying the same strategy to its negotiations with Gazprom as it does in Central Asia. Namely, it offers financial assistance upfront in exchange for long-term supply commitments. In Russia, Gazprom has reportedly been willing to offer price discounts to China upon receipt of an advance payment. According to different sources, Gazprom wants a prepayment of anywhere from $25 billion to $40 billion, which the Russian gas company needs for the construction of the Power of Siberia pipeline and the associated spur to China. However, CNPC was reported to have rejected this offer, saying it did not have $25 billion of funds available, and, therefore, would have to take out expensive loans in order to meet Gazprom’s request.

FITCH HAS FAITH IN CNPC Unlike Gorst of the Financial Times, analysts at the credit rating agency Fitch believe that China will likely agree to finance the construction of gas supply infrastructure located in Russia for exports to China. According to Fitch, the combined cost of developing upstream fields in Russia and constructing a pipeline to supply initial volumes of up to 38 bcm of gas to China will be around $50-60 billion over four years. This amount is equivalent to one and a half years of Gazprom’s

SINOPEC’S EXPANDING PRESENCE IN RUSSIA

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Already active in Russia, Sin-opec owns a 47.57-percent stake in Rosneft subsidi-ary Udmurtneft and was re-cently offered a 25.1 percent stake in the Veninsky off-shore block, which is one of the four assets included in Rosneft’s Sakhalin-3 project.

In March of this year, Rosneft President Igor Sechin con-firmed that Rosneft had of-fered Sinopec not only a 25.1 percent stake in the Venin-sky block, but also a role in the expansion of Sakhalin-3. Gazprom owns the licences

for the remaining three off-shore blocks at Sakhalin.

Also in March, Sinopec Corp said that its joint venture with parent company Sin-opec Group, Sinopec Inter-national Petroleum E&P Hong Kong Overseas, had acquired three assets in Co-lombia, Kazakhstan, and Russia, worth a total of $2.999 billion. These assets include:

i) A 50 percent stake in Cas-pian Investments Resources Ltd. (CIR), acquired from Tip-top Energy Limited in Kazakh-

stan for a consideration $1.57 billion;

ii) A 50 percent stake in Man-sarovar Energy Colombia Ltd. (Mansarovar), acquired from Sinopec Overseas Oil & Gas Ltd. for a consideration of $776 million;

iii) A 49 percent stake in Taihu Limited from Sinopec Over-seas Oil & Gas Ltd.for a con-sideration of $652.77 million. Recall that Sinopec Overseas Oil & Gas Ltd is the owner of a 47.57 percent stake in Ud-murtneft, with 24 oilfields in Russia. In August 2006, Sin-

opec Corp. acquired a 96.86 percent stake in Udmurtneft from TNK-BP through a spe-cially created company called Promleasing. As a result of further share purchases from minority shareholders, Prom-leasing later increased its stake in the mid-sized Siberian producer to 97.08 percent. On 11 December 2006, Rosneft exercised its option to buy a 51-percent stake in Promleas-ing from Sinopec. Thus, indi-rectly through Promleasing, Rosneft currently owns 49.51 percent in Udmurtneft, while Sinopec holds 47.57 percent.

“The deal will facilitate the implementation of strategic objectives of Sinopec Corp. to become an internation-al market player with sig-nificant oil and gas assets,” the company said in a state-ment. China Petrochemical, which currently owns 73.86 percent in Sinopec, has in-vested $34 billion into the subsidiary’s oil and gas units since 2010.

Sinopec International Petro-leum E&P Hong Kong Over-seas is also known as China Petrochemical Corp.




current capital expenditure levels. Fitch released a statement saying that “we believe China will be willing to help fund the construction - possibly by pre-paying for some of the gas or providing long-term financing at attractive terms.”

Gazprom has earlier estimated that the company will need more than RUB 1 trillion to commercial-ize gas resources in Eastern Siberia. The company needs RUB 770 billion in order to build the Power of Siberia pipeline to China’s border and RUB 430 billion to develop the Chayanda gas field.

Fitch believes that the latest round of gas supply deals enhances the long-term credit profiles of all parties. This includes Gazprom, CNPC, and NOVATEK, which signed a deal with China earlier this year. NOVATEK welcomed CNPC as a part-ner tasked with raising outside financing for the Yamal LNG project. Like many other observers, Fitch is watching closely for signs that these new developments in Russia’s energy sector will lead to a liberalization of export regulations: “this is a further strong indication that Russia is likely to relax Gazprom’s monopoly on LNG exports by allowing independent gas producers to sell their gas directly to customers, although we expect Gazprom’s monopoly on pipeline exports to Eu-rope to remain in place,” said Fitch.

It is unclear if the Russian government is linking its export regime legislative plans to the latest negotiations with CNPC, but the government is becoming increasingly receptive to the liberaliza-tion of LNG exports in particular. A source familiar with Russia’s preparations to amend the current legislation on the liberalization of gas exports told Reuters that the government is considering two options: first to provide gas producers with licenses for the construction of LNG plants and second to allow state companies to liquefy and export gas produced at offshore fields. The pipe-line export regime will not be liberalized.

PETROCHINA’S OFFER FOR UPSTREAM ASSETS As a sign of China’s willingness to invest directly in the Russian natural gas sector, CNPC subsid-iary PetroChina is considering investing $10 bil-lion to help develop gas fields in East Siberia.

The largest gas fields in East Siberia include Yakutia’s Chayanda deposit with estimated gas reserves of 1.2 trillion cubic meters and the Irkutsk region’s Kovykta field, with more than 2 trillion cubic meters of reserves. The two depos-

GAZPROM TO RECEIVE SEVEN NEW SUBSOIL LICENSES

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Gazprom may have secured a victory in the race for new offshore licenses. Speaking to reporters in Khabarovsk in early September, Russia’s Minister of Natural Resources and the Environment, Sergei Donskoi said that Gazprom may receive licenses for sev-en new fields in late October or early November. The new subsoil licenses would cover two fields in the Yamal-Nen-ets Autonomous Okrug and five offshore blocks in the Kara Sea.

The Ministry has been con-sidering transferring the sev-en unallocated blocks to Gazprom since the summer. “In June, we suggested trans-ferring the licenses for the Shtormovoye gas condensate field and the Bukharin fields in the Yamal-Nenets Auton-

omous Okrug. On 19 August, we also proposed transfer-ring five offshore licenses in the Kara Sea deposits: Seve-ro-Kharasaveysky, Amder-minsky, Obruchevsky, Nevs-ky, and Leningrad,” Donskoi said.

Transferring offshore licens-es requires a number of in-ternal approvals as well as cooperation across a num-ber of government agencies. Donskoi stated that the Min-istry of Natural Resources and the Environment is cur-rently in the process of for-mal registration procedures for three additional fields: the Severo-Vrangelsky block needs to have its geographic coordinates finalized, while the Severo-Zapadny and Bar-ents-Pechora fields require approvals from “other organ-

izations, in particular of the Ministry of Defense.”

Gazprom and Rosneft are competing with each other for the rights to develop new offshore areas. Both compa-nies have both applied for a license to develop the Seve-ro-Vrangelevsky field in the East Siberian Sea. In May, the Ministry suggested that the field could in fact be di-vided between the two state-owned companies. Gazprom Chairman Alexei Miller said in June that the gas com-pany will receive the license for Severo-Vrangelevsky-2 while Rosneft will get Severo-Vrangelevsky–1. Rosneft has confirmed that the two com-panies agreed to divide the hotly contested offshore field.

Donskoi said that Rosneft has withdrawn applications that

it had previously submitted for licenses for eight offshore blocks in the Barents Sea: Vernadsky, Vasile-Zemelsky, Luninsky, Malyginsky, Seve-ro-Keldinsky, Iyulitorsky, Ha-tyrsky and Shantarsky. Ros-neft itself denied speculation that it had withdrawn its ap-plications for the eight licens-es, saying that it maintains interest for the blocks. But ac-cording to Donskoi, Rosneft withdrew its applications be-cause of lingering disagree-ment with Gazprom, which also had applied to develop the assets. However, the Min-istry is currently considering Rosneft’s applications for li-censes for other offshore de-posits: the Lebedinsky in the Sea of Okhotsk, Tyulensky in the Caspian Sea, and Pecho-ra (in the Pechora Sea).

Head of Gazprom Doby-cha Yamburg Oleg Andreyev said that the company had made an investment deci-sion centered around the de-velopment of the Kamenn-omysskoye-More deposit in the Gulf of Ob. This depos-it, together with the Severo-Kamennomyssky field, is ex-pected to form the basis for the integrated development of a group of neighbouring fields.

The Kamennomysskoye-More gas field stretches for 56 km in the southern part of the Gulf of Ob, between Cape Parusny and the eastern coast of Cape Kamenny Cape. The field covers an area of 825,400 square metres and has estimated gas reserves of 534.7 bcm.




Q2 2013 Q2 2012 % change Н1 2013 Н1 2012 % change

Germany 9.48 8.3 14.2% 18.49 17.13 7.9%Italy 6.28 2.15 192.1% 13.1 6.62 97.9%Turkey 5.54 5.86 -5.5% 12.9 14 -7.9%France 2.36 2.32 1.7% 4.81 4.55 5.7%Finland 0.72 0.73 -1.4% 1.94 2 -3.0%Austria 1.18 1.31 -9.9% 2.36 2.98 -20.8%Greece 0.53 0.47 12.8% 1.24 1.34 -7.5%Netherlands 0.53 1.59 -66.7% 1.06 2.1 -49.5%Switzerland 0.09 0.06 50.0% 0.17 0.15 13.3%Denmark 0.07 0.06 16.7% 0.14 0.15 -6.7%United Kingdom 2.6 1.52 71.1% 5.85 3.85 51.9%Hungary 1.55 1.41 9.9% 3.03 2.67 13.5%Poland 2.54 2.68 -5.2% 5.63 5.03 11.9%Slovakia 1.09 0.89 22.5% 2.22 1.99 11.6%Czech Republic 1.41 1.72 -18.0% 2.83 3.53 -19.8%Romania 0.26 0.8 -67.5% 0.72 1.47 -51.0%Bulgaria 0.68 0.68 - 1.46 1.5 -2.7%Serbia and Montenegro 0.12 0 - 0.54 0.4 35.0%Slovenia 0.12 0.15 -20.0% 0.23 0.27 -14.8%Bosnia and Herzegovina 0.03 0.05 -40.0% 0.11 0.15 -26.7%Macedonia 0.01 0 - 0.03 0.04 -25.0%Ukraine 2.74 7.373 -62.8% 9.67 15.92 -39.3%Belarus 4.15 4.02 3.2% 10.39 10.44 -0.5%Moldova 0.27 0.5 -46.0% 1.12 1.65 -32.1%Lithuania 0.57 0.61 -6.6% 1.62 1.73 -6.4%Latvia 0.29 0.21 38.1% 0.59 0.74 -20.3%Estonia 0.15 0.1 50.0% 0.37 0.3 23.3%Kazakhstan 0.15 0.14 7.1% 0.5 0.51 -2.0%South Ossetia 0.01 0.007 42.9% 0.02 0.02 -Armenia 0.28 0.401 -30.2% 0.95 1.02 -6.9%Georgia 0.03 -0.02 -250.0% 0.08 0.13 -38.5%Total gas exports 45.83 46.091 -0.6% 104.17 104.38 -0.2Gas supplies to Russia 48.81 52.954 -7.8% 151.96 168.394 -9.8

Source: Russian Ministry of Energy

GAZPROM DOMESTIC GAS SUPPLY AND EXPORTS, H1 2012 AND H1 2013, bcm

its are expected to be the main source of gas for the planned Power of Siberia pipeline. Gazprom, which owns the licenses for both fields, has thus far pledged to develop the fields on its own with-out any foreign partners.

The spending could become PetroChina’s biggest ever international energy investment. The entry of Chinese companies into the development of

East Siberian gas assets would accelerate the commercialization of the region’s gas reserves and the construction of the gas pipeline to China. It could also help Russia and China to reach the long-expected gas price agreement.

Another possible upstream deal involves Ros-neft’s Taas Yuryakh Neftedobycha. Rosneft has reportedly offered China a stake in the company

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(See “Sechin waits patiently for Chinese con-tracts” in this issue), which is developing the Srednebotuobinsky gas field in Yakutia. Accord-ing to information provided on the company’s website, there are plans to connect gas output from the deposit to the Power of Siberia pipeline in future. But the Srednebotuobisnky field is not big enough to fill the pipeline to planned capacity and will not justify the investment of $10 billion.

Analysts at 2K Audit-Business Consulting / Mor-rison International believe that both China and Russia would benefit from these upstream invest-ments. According to the experts, such investment could significantly speed up the development of the gas field, as the additional funds could be used to hire larger number of workers and order more expensive special equipment. China would get a share of both profits and equity volumes of natural gas, which the fast growing economy needs in increasing quantities. Gas consumption in China has almost tripled in recent years, in-creasing from 56 bcm in 2006 to 150 bcm in 2012, and continues to grow.

For Russia, faster construction of gas infrastruc-ture in East Siberia would be very beneficial, given the growing tensions between Gazprom and its European Union customers, pushing the Russian gas giant, which provide a quarter of Europe’s gas needs, to review the terms of its supply contracts and cut prices. China’s support is also very impor-tant for Russia’s foreign policy.

POLITICAL RISKSThere are several opponents of Russian-Chinese energy cooperation who have criticized the gas deal on political grounds. Konstantin Simonov, Director of the National Energy Security Fund, believes that Chinese investment in the devel-opment of Russia’s upstream gas reserves will create substantial political risks for Russia. More-over, this investment is displacing investment at home by Russian companies.

“I do not understand why Russian companies are aggressively investing in overseas projects in countries that have high levels of political risk, such as Venezuela, Bolivia, Guinea, and at the same time are actively seeking foreign money for projects inside Russia,” Simonov said.

It is unclear if upstream energy deals with Chinese companies will have broader political implications for Russia. Simonov stated that “in general, Rus-sia has always been very cautious about Chinese investments: contracts with China have tradition-

ally been supply contracts, [not exploration and production contracts]. We used to be afraid of them, because these investments are certainly to be followed by political demands. You have to very clearly understand what obligations you inherit when you accept investment from foreign partners. If in exchange for upstream investment you are required to sell gas at $200 per mcm at the border, then I do not think that it is a good idea,” he said.

Thus, while the supply deal signed on the side-lines of the September G20 meeting represents the furthest progress of Russia-China gas nego-tiations to date, it remains to be seen if the two sides can find enough common ground to reach an agreement on pricing before the end of the year.

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SECHIN WAITS PATIENTLY FOR CHINESE CONTRACTS

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By Ilya Kedrov, Vladimir Soldatkin, and Olesya Astakhova

Contrary to expectations, Russian state energy giant Rosneft and China’s CNPC failed to finalize two anticipated agreements during the early Septem-ber G20 summit in St. Petersburg. The proposed agreements provide for the establishment of a joint Rosneft-CNPC fuel retail network in China and the joint implementation of hydrocarbon projects in Russia. In a separate ar-rangement, Rosneft appears to have offered China a share in Yakutia’s Taas Yuryakh Neftegazodobycha, in which the Russian company plans to increase its stake from the current 35.33 per-cent to full ownership. Two months ago, Rosneft signed a 25-year contract worth $275 billion to supply China with 365 million tonnes of crude, but the plan and other Rosneft activities are being undercut by Transneft. The Russian state oil pipeline monopoly wants Rosneft to agree on an expan-sion of Transneft’s ESPO Asian pipe-line and to scrap the firm’s Far Eastern refinery project.

Russian state-controlled oil major Rosneft and China’s CNPC failed to sign two expected agree-ments at the September G20 summit in St. Petersburg. The first contract concerned imple-mentation of joint projects in production and transportation of hydrocarbons and the creation of joint ventures to develop Russian onshore deposits, including those with hard-to-develop reserves. The second anticipated agreement would allow Rosneft’s entrance into China’s retail market through the creation of a joint network of 300 retail stations across the country.

Rosneft and CNPC had already discussed the two agreements at a previous round of negotiations during the visit of Rosneft president Igor Sechin to China at the end of August. The parties still needed more time after the September talks, Sechin said. “We are trying to improve [the

agreements]. We will work. We still have time,” he said. Paraphrasing the well-known Chinese say-ing “If you sit by a river long enough, you will see the body of your enemy float by”, Sechin said: “Do you know the Chinese philosophy? You can wait on the river bank, while the contract itself floats to you.”

MISTY ON BOTH “RIVER BANKS” The first unsigned agreement was also supposed to secure CNPC entry into Rosneft‘s onshore and offshore upstream projects. During his February visit to China, Sechin invited Chinese oil com-panies, including CNPC, Sinopec and CNOOC, to cooperate on the Russian shelf (See “Rus-sia Broadens Partnership with Global Majors”, Russian Petroleum Investor, March’13). During Sechin’s May visit to Beijing, Rosneft and CNPC agreed to work jointly in three Russian Arctic shelf areas in the Barents Sea and the Pechora Sea (the Zapadno Prinovozemelsky, Yuzhno Russky and Medynsko Varandeisky deposits), as well as the onshore fields in the Irkutsk, Kras-noyarsk and Nenets regions (See “Russia Opens Offshore Blocks to Newcomers”, Russian Petro-leum Investor, June’13).

The two countries should have discussed shelf co-operation again in August, given that the Russian delegation included Zeljko Runje, vice-president of Rosneft’s offshore projects.

ROSNEFT AND CNPC ALREADY WORKING TOGETHERRosneft and CNPC have two existing joint ven-tures: Vostok Energy for hydrocarbon exploration and production in Russia (Rosneft - 51 percent, CNPC – 49 percent) and Vostok Petrochemicals for the construction of the Tianjin refinery and oil products sales (Rosneft - 49 percent, CNPC – 51 percent).

Vostok Energy, created in 2006, has so far not been very active in Russia. In 2007, the venture acquired licenses for two Irkutsk region fields, Verkhneichersky and Zapadno Chonsky, for RUB 1.2 billion at a federal subsoil auction. According to DeGolyer and MacNaughton, the fields’ total recoverable reserves make up 218 million tonnes of crude and 64 billion cubic meters (bcm) of gas. The company began 2D seismic surveys in Janu-



Russian-Chinese Chamber of Com merce: “The Chinese companies are reluctant to take mi-nority stakes in joint ven-tures. As a rule, they expect equal partnership”


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ary 2009 and drilled the first exploration well to a depth of 1,963 metres at the Zapadno Chonsky field in May 2010. However, the project, financed by the Vostok Energy partners in proportion to their shares, did not develop beyond the explo-ration phase. Rosneft has said that the further development was uneconomic given the current taxation system.

The second Russian-Chinese joint venture, Vostok Petrochemicals, was registered in China in 2006-2007 for the construction of a refinery in China’s Tianjin province and cooperation in oil products sales in new markets. The foundation of the refinery, estimated to cost $5 billion, was laid in September 2010. The project’s first stage envis-ages the development of a feasibility study and plant construction. During the second stage, the joint venture plans to create a Chinese network of 300 fuel retail stations, which will operate under the Rosneft and CNPC brand. In the future, the joint venture may also set up a petrochemical production unit.

The Tianjin refinery is expected to process 13 mil-lion tonnes of crude per year, including 9 million tonnes of Russian crude and 4 million tonnes of the crude to be bought on the market. The crude will be shipped by tanker to the port of Tianjin and then pumped by a 42 kilometre pipeline to the refinery. Project plans call for light oil prod-ucts to account for more than 80 percent of the refinery’s output. The plant’s target markets will include Northern China, the Central Plain region - which includes the capital of Beijing and the provinces of Tianjin, Hebei, Shanxi, Henan and Shandong - as well as the country’s East Coast.

In autumn 2012 , Russian President Vladimir Putin, after meeting with his Chinese counterpart Hu Jintao, said that China will allow exports of oil products from the new refinery (See “Rosneft Moves to the Asia-Pacific Region”, Russian Petro-leum Investor, October’12). “The joint venture in Tianjin will have the right to buy and export crude and oil products, as well as market in the Chinese domestic market,” Putin said. He stressed that “it is the first such decision taken by China with respect to companies with foreign participation.” Speaking with reporters, Sechin then said that “the decision was taken on the possibility of prod-uct exports from the refinery and what will make operations cost-effective.”

On March 22, Russia and China signed an agree-ment on strategic cooperation in exploration, de-velopment, production and sale of hydrocarbons. In addition, Rosneft and CNPC were appointed authorized companies in the intergovernmental

agreement on cooperation in the construction and operation of the Tianjin refinery and petrochemi-cal plant (See “On Course for China”, Russian Petroleum Investor, April’13).

The intergovernmental agreement, which en-tered into force on 19 June 2013, provides Vostok Petrochemicals with the right to export oil products and petrochemicals. Inside China, the joint venture has the right to sell its domestically produced oil and petrochemical products, as well as to build the wholesale and retail infrastructure.

However, the key issue of Russia’s investment return has yet to be resolved. Last spring, Ros-neft presidential advisor Larry Bates said that the development of the project to build a refinery in Tianjin is being held back by China’s regulation of oil product prices. Since the parties have never disclosed the details of the export agreement, it can be assumed that Rosneft may be expecting China to give the Russian company special rights to export oil products in excess of the agreed vol-umes. It is also possible that China did not want to sign the expected agreements given that the potential joint assets in Russia have still not been identified.

CHINESE INVOLVEMENT IN TAAS YURYAKH AN OPTION Under the May agreement, Rosneft and CNPC can jointly develop onshore fields in Russia’s Irkutsk, Krasnoyarsk and Nenets regions. Back in 2010, analysts predicted that Vostok Energy might receive the former assets of Urals Energy, which the medium-sized Siberian oil producer trans-ferred to Sberbank as part of a debt settlement in early 2009. The assets included the Dulisma field in the Irkutsk region and the Srednebotuobinsky deposit in Yakutia, which is beyond the area stipu-lated by the May agreement. Last year, Sberbank sold the Dulisma company, which owns the field of the same name, to Yuri Khotin and Alexei Kho-tin. The bank also sold its 35.33-percent stake in Taas Yuryakh, which holds the Srednebotuobinsky licence, to Rosneft.

According to Sergei Sanakoyev, an Executive Sec-retary of the Russian-Chinese Chamber of Com-merce, the two countries’ negotiations could have been delayed because the parties failed to agree on the potential equity size and price for China’s entry into Taas Yuryakh. “The Chinese companies are reluctant to take minority stakes in joint ven-tures. As a rule, they expect equal partnership,” Sanakoyev said.




So far, Rosneft itself has a minority stake in Taas Yuryakh and is struggling to obtain information on the company’s activities from its other sharehold-ers, who apparently may have something to hide (See “Major players pursue new opportunities” in this issue). To solve the problem, Rosneft is going to take over the firm fully by acquiring the remain-ing 65 percent stake.

Crude produced by Taas Yuryakh is expected to be exported to the Asia-Pacific markets, particularly to China.

TRANSNEFT CHALLENGES ROSNEFT ON CHINADuring the St. Petersburg’s International Eco-nomic Forum in June, Rosneft and China signed a 25-year contract on Russia’s supplies of 365 mil-lion tonnes of crude worth $275 billion to China (See “Focus of the Month: Transactions Featured at the St. Petersburg International Economic Forum “, Russian Petroleum Investor, July’13). On 29 July, Rosneft increased its crude oil exports to China, which in 2013 should average 1.42 million tonnes instead of the previously planned 1.3 mil-lion tonnes. This year, Russian crude exports to China are planned to increase by 800,000 tonnes, with additional deliveries set to reach 2 million tonnes in 2014 and 15 million tonnes in 2015. At the peak level, Rosneft’s crude supplies to China will total 31 million tonnes per year. These are huge volumes.

However, as soon as Rosneft agreed to increase its crude supplies to China, Russian state oil pipeline monopoly Transneft said that the oil company should finance the expansion of the ESPO pipeline and other export routes to China. Rosneft, which in late June received China’s advanced payment of over $60 billion for future supplies, agreed to participate in the pipeline expansion by paying a special long-term crude transportation tariff. Rosneft believes that Transneft’s estimation of the pipeline expansion cost is overstated.

Transneft had earlier considered suing Beijing, which, after the signing of a 25-year crude sup-ply contract in exchange for a loan, received a crude price that was allegedly discounted crude price and, in addition, expected to pay a reduced pipeline transportation tariff. China argued that it used only a part of the ESPO pipeline to Skovo-rodino rather than the whole route to Kozmino. After long negotiations, China did manage to gain further discounts from Russia, and the personal intervention of Sechin, then deputy prime-minis-ter, helped to avoid court actions.

Today, Transneft threatens suspension of crude pumping to China if Rosneft does not sign certain contracts on the pipeline expansion. Experts believe that the Transneft position can threaten stable oil flows and may disrupt the implementa-tion of the Russian-Chinese agreements signed at the St. Petersburg Economic Forum.

Rosneft, whose deals with CNPC are in line with Russia’s policy aimed at strengthening ties with China, relies on state support in its disagree-ments with Transneft.

TRANSNEFT QUESTIONS ROSNEFT REFINERY PLAN FOR RUSSIA’S FAR EASTTransneft is also criticizing Rosneft’s plan to con-struct a petrochemical plant in Russia’s Far East. First, Transneft doubts Rosneft’s ability to fund the pipeline expansion necessary for this project. Second, the pipeline monopoly believes that there are no adequate long-term crude sources for the plant. And finally, it sees the project as a threat to Russia’s plan to make the light ESPO Blend crude a regional benchmark.

Sechin presented Rosneft’s plans on the East-ern Petrochemical Company (VNHK) to Putin on 31 August, suggesting that construction of the “objects of VNHK external infrastructure” should be covered from the investment plans of state natural monopolies, which include Transneft.

On September 3, Transneft president Nikolai Tok-arev sent Deputy Prime Minister Arkady Dvorkov-ich a letter in which he estimated that it would cost RUB 139.7 billion to connect the plant, whose first stage processing capacity is planned at 12 million tonnes of oil, to the Transneft pipeline sys-tem. According to Tokarev, such spending is not included in Transneft’s investment programme and that there are no new sources of funding available. Tokarev also said that the new refinery, whose total infrastructure costs were estimated by Transneft to cost RUB 250 billion, will “require the construction of a new” 1,328-km oil pipeline from West Siberia to the Russian Far East port of Nakhodka.

Tokarev said that the oil pipeline expansion could be covered through an increase in crude transpor-tation tariffs. According to Transneft estimates, in order to cover the project’s costs, the pipeline mo-nopoly would have to raise existing ESPO tariffs by 14.1 percent between 2015 and 2021 and 6.8 percent in 2022-2028. In this case, other Russian oil companies, which also use the route, would have to pay for Rosneft’s projects in addition to

East ern Petro-chemical Com-pany (VNHK) total infrastruc-ture costs were estimated by Transneft to cost RUB 250 billion

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the state company itself, Tokarev said.

According to the calculations of presidential aide Andrei Belousov, implementation of Rosneft’s idea of including VNHK infrastructure projects into the natural monopolies’ investment pro-grammes would require RUB 108.7 billion, a figure lower than Transneft’s RUB 139.7 billion es-timate and one that President Putin concurs with.

Deputy Energy Minister Kirill Molodtsov told reporters that a special ministry meeting had failed to resolve the issue, given that the parties had not agreed on the technical specifications of the VNHK connection to the natural monopolies networks. According to Molodtsov, the minis-try expects further proposals from the involved companies in September or October. Meanwhile, Dvorkovich has instructed the energy, economic development and finance ministries to prepare a comprehensive evaluation of the VNHK construc-tion project, said his press-secretary Alija Samig-ullina.

PUTIN GETS INVOLVED Sechin, like Tokarev, wrote to President Putin to explain his position in the dispute. Both letters have been obtained by Reuters.

The conflict between the two state companies is developing against the background of the gaso-line price hike in the Russian domestic market. The federal statistical service Rosstat said on September 4 that the prices for gasoline rose by 3.1 percent in August, to a level not seen since 2011, compared to July and by 4.3 percent from the beginning of the year. During a live broadcast

nationwide phone-in in April, Putin was asked by a resident of the Russian Far East why gasoline was more expensive in oil-rich Russia than in Ven-ezuela.Putin then reproached Rosneft for being a monopoly oil product supplier to the region and promised to sort out the issue.

Rosneft claims that transportation accounts for the bulk of fuel costs in the region, with construc-tion of new facilities helping to eliminate the do-mestic fuel shortages, which also underpin higher prices. “The volume of motor fuel produced in the Russian Far East is not enough to meet the needs of the region,” Sechin said in his letter to Putin. A way out could be the construction of a new refinery at Nakhodka along with modernization of the region’s existing refineries, the Rosneft head suggested.

But Transneft believes that existing refineries can cover the deficit in Russia’s Far East fuel market by simply cutting their exports in favour of do-mestic supplies. Rosneft, owner of the 8 million tonne Komsomolsk refinery in the Khabarovsk re-gion, argues that the region’s plants export fuels that do not correspond to the Russian technical standards, and existing capacities cannot meet domestic demand.

The national Energy Ministry supports Rosneft’s position, however. Deputy Energy Minister Molodtsov announced on July that the first stage of Rosneft’s petrochemical plant in Nakhodka may be launched in 2020.

Transneft, which plans to increase annual capac-ity of its Pacific ESPO pipeline by 80 per cent to 67 million tons as of 2018, is urging the govern-ment to reconsider the expensive refinery project. “Unambiguous consent to the Rosneft proposal

RUSSIAN CRUDE EXPORTS TO CHINA IN 2008-2013, mln t

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2008 2009 2010 2011 2012 2013Е

Exports via Transneft 1.038 1.501 0.550 15.200 15.090 15.800- incl. transit through Kazakhstan (Atasu-Alashankou: TNK-BP, Gazprom Neft)

1.038 1.501 0.550 0 0 0

- incl. ESPO (Skovorodino-Mohe: Rosneft)

0 0 0 15.200 15.090 15.800

Railway exports 10.414 9.701 9.072 0 0 0- including Rosneft 10.414 9.701 9.072 0 0 0TOTAL: 11.452 11.202 9.622 15.200 15.090 15.800

Source: Central Dispatching Department of the Fuel and Energy Complex




to build the first stage of the VNHK project may be premature,” Tokarev wrote in letter to Putin.

BYPASSING TRANSNEFTTrying to ease the conflict, Rosneft is consider-ing delivering up to 10 percent of the contracted Chinese crude volumes by other routes, bypassing the ESPO pipeline system.

Rosneft earlier discussed the possibility of light crude supplies to China via Kazakhstan along the Kazakh-Chinese Atasu-Alashankou pipeline. However, Moscow and Astana have yet to agree on the terms (See “Meeting With No Details”, Rus-sian Petroleum Investor, February’13). Kazakh-stan, which plans to double the Atasu-Alashankou field’s annual pumping capacity to 20 million tonnes per year, would not be able to fill the pipeline without Russian crude. The two countries could also use crude swap schemes, given that Kazakhstan is seeking to accommodate the crude production from its just launched Kashagan oil field, seen as the future source of crude supplies to China. Kazakhstan earlier pressed Transneft to increase the capacity of the Kazakh-Russian Atyrau-Samara pipeline in view of the need to export the increasing Kashagan crude volumes. In such circumstances, Rosneft could provide Ka-zakhstan with crude in Novorossiysk in exchange for the same volume of crude shipped to China from Kazakhstan.

Rosneft has also announced the possibility of crude exchange operations with Azerbaijan. Under the scheme, Azeri state energy firm SO-CAR could supply crude on behalf of Rosneft to southern Europe (See “Could Rosneft be Poised to Enter Azerbaijan?” Russian Petroleum Inves-tor, August’13). Russia earlier this year sought the termination of an intergovernmental agreement with Azerbaijan on Azeri crude transportation via the Baku-Novorossiysk pipeline. During Putin’s visit to Baku this summer, the two countries agreed on the basic conditions of crude supplies between Rosneft and SOCAR. “We are going to develop a number of [business] directions, such as mutual supplies, swap-operations, the use of shared infrastructure, and, in the future, strength-ening cooperation in trading,” Sechin said during the visit.

Some experts do not rule out that Rosneft, Azerbaijan and Kazakhstan can come up with an acceptable arrangement on the combined swap operations.

SECHIN OPPOSES TRANSNEFT’S BOYCOTT OF BELARUSTransneft and Rosneft again took conflicting posi-tions in Russia’s latest trade dispute with Belarus. Transneft cut its crude supplies in September to neighboring Belarus by around a quarter, after Minsk detained the chief executive of Russia’s potash producer Uralkali, Vladislav Baumgertner.

Transneft cites environmental concerns, saying it needs to replace 700 km of old pipes in the Druzhba pipeline. “In order to avoid technical problems on the Druzhba oil pipeline, the pipes should be replaced. This means that, from 1 September, oil supplies to Belarus will be reduced by 400,000 tonnes, including 200,000 tonnes to each the Mozyr and Naftan refineries,” Transneft vice-president Mikhail Barkov said.

Rosneft was the only Russian oil company un-happy with the decision. Sechin asked Transneft to refrain from the cut, which, according to him, could cause Rosneft to lose about $3 million per month. “We will ask Transneft to sustain deliver-ies to the plants. We cannot bear the loss. Who is going to compensate us?” Interfax news agency quoted Sechin as saying.

Apart from Rosneft, LUKOIL, Gazprom Neft and Surgutneftegaz supply up to 1.7-1.9 million tonnes of crude per month to Belarus. Rosneft’s crude supplies to the two Belarus refineries make up about 800,000–850,000 tonnes, including about 500,000 – 550,000 tonnes to Mozyr and the rest to Naftan.

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Transneft suggested that the oil companies could use alternative routes, via the Baltic ports of Primorsk and Ust-Luga, for crude deliveries to Belarus. In this case Rosneft would lose $17 per each tonne delivered, according to experts.

FIGHTING ELITESAnalysts suspect that Transneft’s is opposing Rosneft’s Far East projects given its concern about the risk of losing control over large crude volumes, which could be exported from Kozmino but instead could flow to a new Rosneft’s re-finery. In addition, some experts see Tokarev’s resistance as an attempt to check Sechin, whose ambitions and generous support from the Kremlin annoy others in influential circles. “The elites are fighting for their economic interests”, said Vitaly Kryukov of IFD Kapital.

“It is obvious, that people are fighting for big

projects and as a result, the projects cannot be implemented smoothly,” said another oil and gas analyst, who asked to remain unnamed.

Sergei Zhavoronkov, a senior researcher at the Gaidar Institute of Economic Policy, believes that the long-time Putin ally Sechin has accumulated substantial power and enjoys multiple privileges, but his ambitions sometimes stumble as they clash with the interests of other influential forces in the Russian power structure.

“This conflict has, in my opinion, a redistributive component, but it easily turns into political con-frontation and personal dislike,” the expert said. “Since he took over Rosneft, Sechin has been rap-idly acquiring new opponents among the power-ful, including those who had previously supported him. Sechin’s desire to absorb more and more oil companies or gain control of state assets does not add to his supporters,” Zhavoronkov added.

EASTERN OIL PIPELINE PROJECTS

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ROSNEFT DRAWS UP GAS STRATEGY UNTIL 2020-2030

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By Sergei Glazkov

Rosneft’s move to become a major gas producer is gaining momentum with the development of its own gas re-serves now a strategic priority. Rosneft is seeking to boost annual gas output to 100 billion cubic meters and to raise its share of the domestic gas market to 19-22 percent by 2020 by stepping up production at its existing fields and by acquiring new reserves. It is looking at Alrosa’s gas assets and is considering the launch of an LNG export project in Sakhalin.

State-owned oil champion Rosneft now includes achieving a major presence in the Russian domes-tic natural gas market and entering the global LNG market among its strategic priorities. In late July, the Deputy Head of Rosneft’s gas unit Oleg Ivanov said that the company would finalize its gas strategy by September. Ivanov stressed Rosneft’s need for a clearer understanding of the gas sector as it moves to develop its plans for capital expenditures. “Unlike Gazprom, Rosneft doesn’t need to invest much in the gas distribu-tion network. We have an opportunity to focus on investing in more profitable upstream production assets,” he said, adding that Rosneft’s original plans would not change much. “Timeframes for some projects will be the only tweaks.”

Consequently, Rosneft announced in late August the signing of a EUR one million contract with Boston Consulting Group (BCG) to help to devel-op its gas strategy and organizational structure and to assist in its gas business integration.

In stage one, BCG will determine which assets should fall under the management of Rosneft’s department for gas business development, pin-point asset management strengths and weak-nesses, and develop the operating model and proposals for needed organizational structures. Simultaneously, BCG will map out the integration of TNK-BP’s and Itera’s gas assets into Rosneft, including staff coordination, assessment and mitigation of risks specific to gas, and listing synergy sources.

In stage two, BCG will conduct a critical analysis of Rosneft’s, Itera’s and TNK-BP’s gas assets, make final recommendations on the development of the gas business’s operating model, and set up targets for the merged company out until 2020-2030. BCG will also prepare regulations on busi-ness units, job descriptions for key positions down to department heads, and make final recommen-dations on assessment and mitigation of risks.

BROAD GAS STRATEGYRosneft Vice President for Gas Vlada Rusakova gave a presentation to investors in April, before Rosneft acquired Itera, and outlined the com-pany’s plans to develop its gas business. The highlights: gas output of 100 billion cubic meters (bcm) in 2020, including 53 bcm from new proj-ects and acquisitions and a 19-22 percent share of the domestic gas market by 2020 (see Chart 4 “Rosneft Gas Sales Forecast” and Chart 5 “Ros-neft Share of Russian Gas Market”). This would make Rosneft a major player in the Russian gas sector and a direct challenger to Gazprom.

In 2012, Rosneft increased output of natural and associated gas by 28.1 percent to 16.4 bcm. It expects a substantial hike this year on the back of the newly-acquired assets from TNK-BP and Itera assets. Based on current numbers, 2013 output is expected to total 38 bcm, including 34 bcm of commercial gas, which is double last year’s level. Thus far this year, factoring in the new assets from the date of their acquisition, Q1 output was 6.0 bcm, with a 55.9 percent jump to 9.3 bcm in Q2. However, if the new assets are counted from the start of the year, Q1 output would be 9.9 bcm, meaning Q2 output declined. Rosneft says it produced 9.9 bcm in Q1 and 19.2 bcm in H1 (see Chart 3 “Rosneft Gas Output in H1 2013”).

Greater upstream gas production has also meant greater downstream gas sales. As of 1 January 2013, Rosneft has contracted for 72 bcm in long-term annual gas deliveries.

“Rosneft has taken steps recently that can be seen as a challenge to Russia’s traditional gas monopoly,” said co-head of analytics at Invest-cafe Grigory Birg. “First, Rosneft President Igor Sechin said it was unfair to apply different tax rules to the oil and gas industries and essentially




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urged the industry regulators to revise the export duties and mineral extraction tax rate for Gaz-prom (see “Russian LNG Future Remains Un-certain”, Russian Petroleum Investor, June’13”). Second, Gazprom executive Vlada Rusakova was let go as she reached the retirement age and joined Rosneft as Vice President for Gas. At Gaz-prom, she proved to be an independent-minded manager who lays out her views without regard to political trends. Third, Rosneft has ambitious plans to double its share of the domestic gas market to 20 percent and more than double its gas output by 2020.”

Rosneft’s Sechin, an ally of President Vladimir Putin and Secretary of the Presidential Energy Commission, has been publicly at odds with Arkady Dvorkovich, an ally of Prime Minister Dmi-try Medvedev and head of the Government Energy Commission in Medvedev’s cabinet. The two clearly differ on ideology and on issues of state regulation of the energy industry; while Sechin defends Rosneft’s interests, Dvorkovich is sup-portive of Gazprom. This open standoff conveys the impression of a public drama that is to the detriment of Rosneft. Why would Rosneft benefit from opposition to Dvorkovich? If the Dvorkovich-Sechin disagreement is simply a reflection of two clans warring for assets, this would be a major negative for an aspiring global company, which Rosneft claims to be. Hence the intrigue sur-rounding Rosneft’s intentions.

As we recently wrote (see “Rosneft’s first steps in Azerbaijan”, Russian Petroleum Investor, August’13), the EU has made no secret of its intention to curb Gazprom’s business in Europe,

as evidenced by the Third Energy Package that instructs Gazprom to spin off its gas distribution networks concurrent with litigation efforts from European companies seeking to drive down gas prices. One line of thinking is that the Russian government recognizes the inevitability of compe-tition for European gas markets, and so is pushing for Rosneft to compete with Gazprom for market share in order to crowd out new gas supplies from the Caspian Sea area or elsewhere.

ROSNEFT’S GAS RICHESRosneft has a lot of gas. Rosneft has consoli-dated ABC1+C2 gas reserves of 5.8 trillion cubic meters, including 2.5 trillion of TNK-BP’s reserves and 344 billion of Itera’s reserves (see Chart 1 “Rosneft Consolidated Gas Reserves”). Rosneft also owns 46 offshore licenses with recoverable reserves of 42 billion tons of oil equivalent, in-cluding 20.4 trillion cubic meters of gas reserves (see Chart 2 “Rosneft’s Offshore License Areas”). For comparison, Gazprom asserted its proven gas reserves to be 33.1 trillion cubic meters in 2010.

Although gas accounts for 32 percent of Rosneft’s hydrocarbon reserves, it accounted for less than 10 percent of output in 2012. Rosneft aims to increase associated gas production and start new natural gas projects, including Sakhalin-3, the Kharampurskoe field and the Kynsko-Chaselsky group of fields. It is also looking to raise output from its Rospan and Vankor operations. Rosneft expects output at the fields acquired from Itera to peak in 2016 (see Chart 6 “Consolidated Gas

RUSSIAN GOVERNMENT WILL REVIEW LNG EXPORT LIBERALIZATION IN SEPTEMBER

Deputy Prime Minister Arkady Dvorkovich announced that the Cabinet of Ministers intends to review plans for the liberalization of LNG exports in September, answering repeated petitions submitted by Rosneft and NOVATEK. Dvorkovich said that the liberalization bill would likely be sent to the Duma in the fall and that it could pass before the end of the year. If passed,the bill would effectively end Gazprom’s monopoly on natural gas exports.

Spurred on by Rosneft and NOVATEK’s progress in identifying

international buyers for planned LNG output, Dvorkovich said the bill would not affect any existing LNG export licenses. Instead, going forward, licenses “will be issued not only to Gazprom, but to other companies as well,” Dvorkovich said, adding that some companies had signed memoranda with prospective buyers. “We have confirmation from Chinese and Japanese partners that they are ready to import new sources of Russian LNG. We think their intentions are serious and they will no doubt

follow up on them.”

Prime Minister Dmitry Medvedev had publicly discussed the possibility of liberalizing Russia’s LNG export regime during an appearance at the World Economic Forum in Davos in January 2103, adding that liberalization would only be undertaken if it did not harm Gazprom’s competitive positioning. Gazprom is Russia’s largest taxpayer. In February, President Vladimir Putin said that it was “necessary to think about gradually liberalizing LNG exports,” while President

of Rosneft Igor Sechin was more aggressive, proposing the full liberalization of exports of liquefied natural gas from offshore fields in Russia’s territorial waters and from fields on the Yamal and Gydan peninsulas. Sechin has also pushed for new tax and customs incentives for LNG production. More recently, Dvorkovich stated that LNG export liberalization was only possible on the condition that Russian companies would not infringe upon each other’s market share in international markets.

At this stage, the Energy Ministry

has only considered independent proposals for new exports to the Asia-Pacific region not already served by Gazprom. Independent companies may also be authorized to export gas to European markets so long as they do not infringe on Gazprom’s market share. Putin, speaking at the St. Petersburg International Economic Forum this summer, said that projected increases in LNG demand in the Asia-Pacific could allow Russia to gradually liberalize LNG exports without negatively affecting Gazprom.




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NEW OFFSHORE ASSETS FOR ROSNEFT

As reported in Rosneft’s Q2 2013 IFRS statement, the company received a license to develop the Gudauta area in the Abkhazian section of the Black Sea. Rosneft estimates the area’s reserves of oil and gas condensate at 127.3 million tonnes and hopes to discover a single field with reserves as large as 60 million tonnes. Rosneft plans to invest RUB 1.4 billion in offshore exploration in Abkhazia.

In Q2 2013 Rosneft was also awarded exploration and

development licenses for the offshore Albanovsky and Varneksky areas in the Barents Sea. Rosneft was directly awarded the licenses without needing to participate in a tender or auction. The company made one-time payments of RUB 470 million for the Albanovsky license and RUB 977 million for the Varneksky license for a total payment of RUB 1.4 billion.

Albanovsky has an area of 51,493 square kilometers and has estimated D2 geological

reserves of 144.2 million tonnes of crude, including 43.3 million tonnes of recoverable reserves. The area is estimated to hold 1.2 trillion cubic meters of gas and 43.3 million tonnes of condensate, including recoverable condensate reserves of 30 million tonnes.

Varneksky has an area of 12,836 square kilometers and has estimated D2 geological reserves of 2.08 billion tonnes of crude, including 542 million tonnes of recoverable reserves.

Production”). The company also plans to launch LNG projects in Sakhalin before 2020.

Development of the Kharampurskoe field in the Yamalo-Nenets Autonomous District began in 1990, with over 340 wells drilled and commis-sioned. Production was hampered until 2003 mostly by the lack of associated petroleum gas utilization. Kharampurskoe holds 88 million tons of АВС1+С2 recoverable oil and condensate reserves and 903 bcm of gas reserves, and output is expected to reach 21 bcm by 2020.

The Kynsko-Chaselsky group is a license area in the Yamalo-Nenets Autonomous District that includes six fields with oil reserves of 40.2 million tons and gas reserves of 284.2 bcm. Rosneft’s production target for the area is 3 bcm in 2020. Rosneft transferred these assets to the recently established joint venture with Itera, while Itera’s contribution included gas companies Purgaz and Sibneftegaz. Purgaz, 49-percent owned by Itera and majority-owned by Gazprom, produces 15 bcm a year at the Gubkinskoe gas condensate field with proven reserves in excess of 216 bcm. Sibneftegaz, 49-percent owned by Itera and majority-owned by NOVATEK, has licenses for the Beregovoe, Pyreynoe, Khadyryakhinskoe, and Zapadno-Zapolyarnoe fields with proven reserves of 490 bcm and annual production of 10.3 bcm. These assets should give Rosneft an additional 5 bcm of output this year, with expectations of up to 8 bcm in 2016 and up to 7 bcm in 2020.

Itera was expected to transfer its foreign assets in Turkmenistan, Estonia, and Latvia to the JV. But Itera’s Block 21 project in the Turkmen part of

the Caspian Sea was suspended after the com-pany wrapped up seismic data interpretation and revised the reserves to 700-800 bcm. Itera had planned to start the first exploratory well this year.

Rosneft and China’s Sinopec, partners in Sakhalin 3 project, are conducting exploration at Veninsky license area. Rosneft owns a 74.9 percent stake in the project, while Sinopec owns the other 25.1 percent. The companies launched the Severo-Veninskoe field in 2008 with C1+C2 reserves of 34 bcm of gas and 2.8 million tons (20.7 million barrels) of oil. Rosneft plans to produce 2 bcm in the project by 2020.

Rospan, formerly a TNK-BP subsidiary, develops the Vostochno-Urengoiskoe and Novo-Urengois-koe fields in Yamalo-Nenets Autonomous District with recoverable reserves estimated at 891 bcm of

ROSNEFT OFFSHORE LICENSE AREAS

Number of license areas

Partners Recoverable reserves/resources

Barents Sea 3 Statoil, Eni Resources- oil: 2 bn t; gas: 2 tcmKara Sea 3 ExxonMobil Resources- oil: 5 bn t; gas: 8 tcmSea of Okhotsk 3 ExxonMobil, Sodeco, ONGC Reserves- oil: 218 mn t; gas: 465 bcmSea of Okhotsk 6 Sinopec, Statoil, INPEX Resources- oil: 2 bn t; gas: 2 tcmKara Sea, Laptev Sea, Chukchi Sea

7 ExxonMobil Resources- oil: 7 bn t; gas: 6 tcm

Black Sea 2 ExxonMobil, Eni Resources- oil: 3 bn tGulf of Mexico 20 ExxonMobil Reserves- oil: 46 mn tVietnam shelf 2 PetroVietnam Resources- Block 5.3/11: 40-93 bcm of gas

Reserves- Block 6.1: 57 bcm of gasTotal 46 42 bln t of oil equivalent, including gas

resources of 24 trln cubic metersSource: Rosneft




gas and 133 million tons of gas condensate. The project’s operator Rospan International was es-tablished in 1994, and TNK acquired a 44 percent stake in 2002 before fully acquiring the company in 2004. Rosneft produced 1.8 bcm at Rospan’s fields in H1 2013 (see Chart 3 “Rosneft Gas Output in H1 2013”). Output is expected to reach 15 bcm by 2020.

By 2020, Rosneft plans to produce up to 6 bcm a year at Vankor, its biggest oil field in East Siberia. Vankor’s recoverable reserves are estimated at 524 million tons of oil and gas concentrate and 106 bcm of natural gas.

ROSNEFT EYES ALROSA’S GAS ASSETSRosneft plans not only to ramp up output at exist-ing projects, but also to acquire new assets, which are expected to yield an additional 6 bcm of annual production by 2020. Rosneft is currently in the process of buying gas assets from the Russian dia-mond company Alrosa through TNK-BP Holding.

The Federal Antimonopoly Service in August al-lowed TNK-BP Holding to acquire Geotransgaz and Urengoi Gas Company from Alrosa. Rosneft head Sechin had expressed interest in Alrosa’s gas assets earlier in the year; Alrosa fully ac-quired Geotransgaz and Urengoi Gas Company in

the spring of 2012 as it bought 90 percent in each company from bank VTB Capital for $1.0 billion and 10 percent in each company for $100 million from brokerage Metropol.

Geotransgaz owns a license for the Yuzhno-Geo-logicheskaya part of Beregovoe field in Yamalo-Nenets Autonomous District. The license area has reserves of 107 bcm of gas and 17 million tons of condensate. Geotransgaz commissioned the first

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CONSOLIDATED GAS PRODUCTION OF THE COMPANY, bcm per annum

ROSNEFT SHARE OF RUSSIAN GAS MARKET

19%

0%

5%

10%

15%

20%

25%

2011 2012 2013 2014 2015 2016 2020-2025

22%*

* Possible share increase

ROSNEFT SHARE OF RUSSIAN GAS MARKET




stage of the project in December 2012 which is slated to produce 1 bcm of gas and 300.000 tons of condensate a year. Rosneft agreed to buy 7 bcm from Geotransgaz by 2015.

Urengoi Gas Company owns a license for the Ust-Yamovesky area in Yamalo-Nenets Autonomous District with reserves of 94 bcm of gas and 10 million tons of condensate.

The two companies are estimated to be able to produce up to 6 bcm of gas and 1.2 million tons of condensate a year, which corresponds to Ros-neft’s 2020 target. Could that mean that Rosneft will not buy any more gas assets from this source?

FROM ASSOCIATED GAS TO LNGRosneft’s gas strategy also includes LNG produc-tion and export. Rosneft said on 21 August 2013 that it and ExxonMobil, its partner in the Sakha-lin-1 project, had plans to launch an LNG project in Russia’s Far East. According to Rosneft, the contractor selection process for Front-End Engi-neering and Design (FEED) is officially underway.

In 2013-2014, Rosneft and ExxonMobil plan to complete design work, including selection of a

ROSNEFT CONSOLIDATED GAS RESERVES

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Reserves/resources Assets

Onshore gas reserves (ABC1+C2)West Siberia and Yamal-Nenets Autonomous Okrug

3,783 bcm Rosneft: Purneftegaz, Yuganskneftegaz, Tomskneft TNK-BP: Messoyakha project, Rospan, Naryaganneftegaz TNK-Nyagan, Megionneftegaz (Slavneft) Rosneft + ITERA: Purgaz, Sibneftegaz, Kynsko-Chaselskoe Neftegaz

East Siberia 1,386 bcm Rosneft: Vankorneft Rosneft + TNK-BP: Verknechonskneftegaz

Komi Republic, Nenets Autonomous Okrug 9 bcm Rosneft: Severnaya Neft (Northern Oil)Central Region 114 bcm Rosneft: Samaraneftegaz, TNK-BP: OrenburgneftSouth Region 219 bcm Rosneft: Stavropolneftegaz, Krasnodarneftegaz, DagneftegazFar East 292 bcm Rosneft: SakhalinmorneftegazTotal ROSNEFT 3,006 bcmTotal TNK-BP* 2,453 bcmTotal Itera 344 bcmTOTAL 5,803 bcm

Offshore gas resourcesArctic shelf 17,896 bcmSouthern seas of Russia 50 bcmSea of Okhotsk 2,442 bcm Rosneft: Sakhalin-1, Sakhalinmorneftegaz. TOTAL 20,388 bcm

Source: Rosneft*Includes share in Slavneft

ROSNEFT GAS SALES FORECAST

11 13

4151 56

63

100

0

20

40

60

80

100

120

2011 2012 2013 2014 2015 2016 2020

billion cubic meters

CONSOLIDATED GAS PRODUCTION OF THE COMPANY, bcm per annum




liquefaction technology and identification of major equipment requirements, to perform engineering surveys, complete FEED and required project docu-mentation for the LNG plant, build hydro-technical marine facilities and a source gas pipeline, as well as to perform an environmental impact assessment. Special attention during the design phase will focus on minimizing the environmental impact on the unique ecosystem of Sakhalin Island and encourag-ing development of local infrastructure. A joint team of experts from Rosneft and ExxonMobil will apply best practices from both companies to complete the project in the shortest possible time frame.

Commenting on the progress of the Far East LNG project, Rosneft President Igor Sechin said, “Rosneft’s offshore license areas hold massive hydrocar-bon resource potential, most of which is natu-ral gas. Given the fact that offshore fields are difficult to reach and are not connected to the national gas supply system, the most ef-ficient way to monetize these resources is to liquefy the natural gas and sell the LNG in export markets. We are optimistic about prospects for LNG export liberalization in Russia in the near term and are pleased to announce that we have entered an impor-tant stage of the LNG project jointly with our strategic partner Exx-onMobil. I would also point out that con-struction of the LNG plant and essential infrastructure will rely on the full resources of Russian manufactur-ing and construction industries (primarily those based in the Far East) applying interna-tional best practices.”

The capacity of the Sakhalin LNG project

is expected to be 5 million tons per year, with fur-ther expansion possible. The liquefaction plant, the launch of which is scheduled for 2018, will receive natural gas from Rosneft’s reserves in the Far East and from other Sakhalin gas reserves.

The emergence of Rosneft as a major player in Russia’s natural gas sector is an intriguing story to watch going forward, as the company’s com-petition with Gazprom is either a sign of long-delayed liberalization of the natural gas industry, or simply a result of political maneuvering. Either way, the story is compelling.

CORPORATIONS


3 month period to 6 month period to

30 Jun 2013 31 Mar 2013 Change, % 30 Jun 2013 30 Jun 2012 Change, %bcm bcm

Purneftegaz (West Siberia)

1.03 1.02 1.0% 2.05 2.02 1.5%

Yuganskneftegaz (West Siberia)

0.81 0.92 (12.0%) 1.73 1.46 18.5%

Krasnodarneftegaz (Southern Russia)

0.68 0.80 (15.0%) 1.48 1.42 4.2%

Samaraneftegaz (Central Russia)

0.13 0.12 8.3% 0.25 0.26 (3.8%)

Severnaya Neft (Timano-Pechora)

0.06 0.07 (14.3%) 0.13 0.15 (13.3%)

Vankorneft (East Siberia) 0.11 0.14 (21.4%) 0.25 0.22 13.6%Sakhalin-1 (ex royalty and state share)

0.08 0.13 (38.5%) 0.21 0.21 −

Tomskneft (West Siberia) 0.23 0.20 15.0% 0.43 0.40 7.5%Samotlorneftegaz 1.36 1.38 (1.4%) 2.74 2.66 3.0%Rospan International 0.93 0.92 2.2% 1.84 1.75 5.1%Orenburgneft 0.66 0.66 – 1.32 1.22 8.2%Varyaganneftegaz 0.75 0.82 (8.5) 1.57 1.64 (4.3)TNK-Nyagan 0.34 0.31 9.7% 0.65 0.57 14.0%

Others 0.52 0.53 (1.9%) 1.05 0.97 8.2%Subtotal: gas output by Rosneft affiliates

7.69 8.01 -4.9% 15.70 14.95 5.0%

Itera 1.47 1.76 (16.5%) 3.23 − −Slavneft 0.10 0.01 – 0.20 0.17 17.6%Others 0.05 0.04 25.0% 0.09 0.10 (10.0%)Subtotal: gas output from new assets

1.62 1.90 (14.7%) 3.52 0.27 >100%

Total gas output 9.31 9.91 (6.1%) 19.22 15.22 26.3%Gas output including new assets since their acquisition:

9.31 5.97 55.9% 15.28 6.72 >100%

Non-associated gas 3.96 3.18 24.5% 7.14 2.32 >100%Associated gas 5.35 2.79 91.6% 8.14 4.40 85.0%Note: Gas output does not include flared gas. Source: Rosneft

ROSNEFT CONSOLIDATED GAS RESERVES



SURGUTNEFTEGAZ MAY LEAVE EUROPE WITHOUT CHEAP FUEL OIL

REFINING

By Maxim Nazarov and Sergei Glazkov

Surgutneftegaz, Russia’s third-largest oil company, is currently preparing a double blow to European refiner-ies: the planned launch of the long-delayed hydrocracker at the Kirishi refinery is expected both to cut motor fuel supplies from the Baltic plant to Europe in half and to turn Kirishi into a serious competitor in the Northwest-ern European oil product market. After being conceived over 20 years ago, the Kirishi hydrocracker project has finally triumphed over a whirlpool of political and socio-economic shocks with the rest of Russia.

According to Reuters sources, by the end of 2013 Surgutneftegaz plans to launch a new 5 million tonne-capacity hydrocracker at Kirishinefteorg-sintez refining asset. Kirishinefteorgsintez is also known as the Kirishi refinery, or Kinef.

“Trial runs to test the hydrocracker can begin in late August or September [2013], and the unit is expected to reach its [planned] capacity by De-cember,” a Surgutneftegaz source told Reuters. Company spokesman Alexei Artyomenko declined to specify the exact timetable for the launch of the hydrocracker and said that the unit will be brought online via “a phase-by-phase” approach.

The installation of the cracker will have a double impact on the market for refined products: not only will exports of fuel oil to Europe be cut significantly, but the Kirishi refinery will begin to compete directly with more modern European facility for market share for high-quality oil prod-ucts.

EUROPEAN TRADERS: “THE EFFECT WILL CLEARLY BE FELT”The effect of the Kirishi upgrade will be felt in European markets. Once the hydrocracker is launched, the Kirishi refinery will reduce its ex-ports of fuel oil to Europe from around 11 million tonnes of fuel oil to 5-6 million tonnes. The fuel

oil will be processed at the refinery instead of exported.

The new facility, which cost Surgutneftegaz nearly RUB 90 billion and took more than 10 years to build, will help Kirishi to increase production of high-quality and more expensive oil products for export to western markets. The new volumes of high-quality oil products will compete directly with European output, which is already losing margins against the background of the increased competition and the steady rise in crude oil prices, including prices for Urals blend exports.

A European trader active in Russian commodities markets told Reuters that the installation of the new hydrocracker “would mean a large increase in exports of [low sulfur] Euro-5 diesel. According to rough estimates, this could account for about eight percent of all Russian volumes, so the effect [on markets] will definitely be felt.”

“According to rumors, the [launch] ceremony will be in late August or early September 2013, but the actual start of operations will be in October. The hydrocracker unit will reach its full capacity by the end of the year,” said a source at the port of St. Petersburg, which is responsible for export-ing a significant share of Kirishi output.

MORE HIGH-QUALITY PRODUCTSAccording to Surgutneftegaz sources, the new hydrocracker unit will increase annual output at Kirishi by 1 million tonnes of Euro-5 diesel, 1.1 mil-lion tonnes of jet kerosene, and about 0.8 million tonnes of gasoline. The plant’s total production capacity will remain the same - about 21 million tonnes of oil products per year.

Industry sources are certain that the high-quality products will be marketed outside of Russia: “given the significant surplus of diesel and jet kerosene in Russia, as well as Kinef’s limited ca-pacity for gasoline production, it is safe to assume that Kirishi will export the additional products, taking advantage of its favorable geographical position,” a trader said.

Based on calculations done by Reuters, the one-million-tonne increase in diesel exports from Kirishi, reaching 6.1 million tonnes per year, will lead to a 2.8 percent rise in Russia’s total diesel exports and increase the country’s diesel exports




REFINING


to the northwestern destinations by about 5.3 percent. “An upward trend in Russian exports is expected, the question is, when exactly will we see these changes,” a Western trader said.

TWO FOR ONEBefore the first vertically integrated oil compa-nies appeared in Russia in the early 1990s, the Soviet foreign trade enterprise Kirishineftekhim-export had planned to construct the Shepelevsky oil port and install a hydrocracker at the Kirishi refinery, which was one of the three largest refineries in Russia at the time. Kirishineftekhi-mexport, responsible for fuel exports from the Kirishi refinery, was the largest export company in Russia in the early 1990s. The necessity of installing a hydrocracker while simultaneously constructing an oil portwas obvious: the port would help Kirishineftekhimexport avoid tolling fees paid for the use of other ports on the Baltic Sea while the new hydrocracker would increase the supply of high-quality products via the new marine terminal.

In 1992, Kirishineftekhimexport established Kinex Project Service to conduct the feasibility study for the future construction of the hydrocracker at Kirishi. In 1994, Kirishineftekhimexport, having been transformed into Kinex, was granted a plot of land and signed a contract for the construction of the Shepelevsky oil port in Batareinaya Bay in Leningrad region.

Following the collapse of the Soviet Union, Rus-sia lost access to several ports in the Baltic Sea. In response, in 1993 the government developed plans to construct two new oil terminals in the Gulf of Finland: one at Primorsk and one in Bata-reinaya Bay. Kinex, the newly created Surgutneft-egaz oil company (which had absorbed the Kirishi refinery), and the Leningrad regional government were all joint participants in the Batareinaya terminal project.

In 1996, via the 17 May government resolu-tion “On the construction of a technological port complex in Batareinaya Bay in the Gulf of Finland and the design of pipelines to the port” Surgutneftegaz was named the Batareinaya Bay construction project owner and received the right to operate the future oil terminal. The resolution provided for the allocation of an additional export quota for Surgutneftegaz, which was supposed to use the additional oil export revenue to finance the construction project. The terminal’s total capacity was set at 15 million tonnes per year. Construction was planned to be carried out in two

stages, with the first stage expected to ship up to 7.5 million tonnes of oil products per year.

Taking advantage of the expanded export quota, Surgutneftegaz increased exports by 6 million tonnes of crude in 1996 and by an additional 4 million tonnes in 1997. It was originally planned to start the construction of the Batareinaya port in 1996 and to launch the terminal in 1999. But progress was held up by disagreements between the project participants and the uncertainty over the construction of the hydrocracker unit, which faced cost overruns in excess of the planned $600-700 million.

In addition, in 1996-1998, Surgutneftegaz had been busy fighting for control over the St. Pe-tersburg retail fuel market. The company, which held 51 percent-stakes in the Ruchyi and Krasny Neftyanik fuel storage terminals and in the Nefto-Combi and Lennefteprodukt retail companies, ran into fierce resistance from minority shareholders. The minority shareholders banded together to dilute Surgutneftegaz’ ownership stakes to 10 percent. After two years of intense struggle, the oil company decided to sell its shares in Ruchyi , Krasny Neftyanik and Nefto-Combi. By this time, Russia had been hit by the 1998 economic crisis, and many of the large energy infrastructure proj-ects were put on hold.

KIRISHI REFINERY AT A GLANCE

Kirishi is one of Russia’s largest oil refineries. The facility is located on the bank of the Volkhov river in Leningrad region and was built in record time: construction began in 1961 and finished in 1966, part of a Soviet push for new infrastructure projects led by the Komsomol (young Communist).At the time of its launch, the Kirishi refinery had only minimal facilities. The refinery was constructed in order to supply Russia’s northwestern regions with gasoline, diesel, and fuel oil. Starting in 1974, the Kirishi refinery was redirected to start producing feedstock for the petrochemical industry. At the time, the Kirishi refinery’s product slate included benzene, toluene, isopentane, normal pentanes, butane and oil solvents. In 1981 a catalytic reformer was installed with a processing capacity of up to 1 million tonnes of oil products per year, and a 2 million tonne capacity diesel hydrotreater was installed in 1988.

After the fall of the Soviet Union, the ownership of the Kirishi facility was unclear. In 1993, the Kirishi refinery was included within the structure of Surgutneftegaz, a newly-created vertically integrated oil company. Surgutneftegaz operated and continues to operate across the entire energy value chain, from the exploration and production of hydrocarbons to the processing, distribution and marketing of oil products. The Kirishi refinery currently produces about 80 types of oil products, including unleaded gasoline, diesel, jet fuel, fuel oil, petroleum bitumen, liquefied petroleum gases, aromatics, solvents, polyalkylbenzene, oil paraffin, sulfuric acid, sulfur and asphalt. The plant, located near Russia’s Baltic Sea ports, exports about 80 percent of its production. In 2012, the Kirishi refinery processed 20.6 million tonnes of crude oil. The product slate

included 11 million tonnes of М-100 fuel oil and the E-4 export fuel. The refinery, mainly due to its age, currently has the lowest depth of any refinery in Russia refining depth at under 50 percent. Average refinery depth in Russia is 72 percent. In its own refinery depth calculations, Kirishi does not take into account the output of the E-4 export fuel, yielding a depth of 65 percent. Regular measures have been taken in order to upgrade the Kirishi refinery and increase the quality of its product slate. New installations have also managed to reduce operating costs and improve the facility’s safety. Part of the refinery’s modernization included the reconstruction of eight major facilities, including the Isomalk-2 isomerization unit, which helped the plant to start producing Euro-4 grade gasolines such as Regular Euro-92/4 and Premium Euro-95/4, as well as diesel with sulfur content of 50 ppm and 10 ppm.




Surgutneftegaz is one of the least transpar-ent companies in Russia’s energy sector. The country’s third-largest oil company, Surgutneft-egaz pumps more crude than OPEC member state Libya, has never disclosed its shareholder structure, and is believed to be controlled by its management through an ever-changing structure of affiliates.

HURDLES TO OVERCOMEWhile the Russian oil sector continued to undergo major changes, Surgutneftegaz retained its 10 million tonne supplemental oil export quota. In order to fulfill the quota, in 1999 Surgutneftegaz announced the start of a major reconstruction of the Kirishi refinery. The company also established its own export division, Surgutex, and tried to com-pletely remove Kinex from its export portfolio.

In 1999, Surgutneftegaz established close ties with Porvoo, one of two refineries in Finland. Porvoo runs solely on crude from Surgutneftegaz and fuel oil from Kirishi. Fuel oil from Kirishi was also in demand in the Russian domestic market, where the fuel was used both as heating oil and as a bunker fuel. At that time, Surgutneftegaz was reluctant to proceed with oil refinery mod-ernization as this would jeopardize its dominant position in the Finnish market and in the market for Russian fuel oil. Increasing refining depth would improve the quality of Surgutneftegaz’ product slate and would lead to a drop in fuel oil output. Russian demand for high quality refined products at the time was very low: Russia had

yet to introduce Euro fuel quality standards and the surge in demand for foreign-made cars had yet begun. Europe, with more than one hundred refineries, was also not in need of additional high quality refined products from Russia.

Another obstacle to the modernization of Kirishi was the Russian government’s decision in 1997 to begin preparatory work for the construction of the offshore section of the Nord Stream gas export pipeline. The Russian government was concerned about the need to secure permission from Finland to lay the pipeline in Finland’s territorial waters, and therefore did not want to jeopardize Finland’s energy supply. This means that the government pushed Surgutneftegaz to slow down its plans to install a hydrocracker at Kirishi, as this would have deprived the Porvoo refinery in Finland of cheap crude feedstock. .

Beginning in 2000, Surgutneftegaz started negotiations with Finland on simply acquiring the Porvoo refinery. The talks were shrouded in so much secrecy that even Kirishi CEO Vadim Somov was not invited to participate. However, talks fell through because the Finn’s asking price was not acceptable to head of Surgutneftegaz Vladimir Bogdanov. Bogdanov was later quoted as say-ing that the money to buy the Finnish refinery would be enough to build several new refineries. In 2001, Bogdanov announced that Kirishi would start building a full-conversion hydrocracker aimed at the production of jet kerosene and diesel.

In April 2002, Surgutneftegaz signed a contract for the hydrocracker design with ABB Lummus

REFINING


HYDROCRACKING AT THE KIRISHI REFINERY

Surgutneftegaz is installing a hydrocracking unit designed to process 4.9 million tonnes of M-100 fuel oil and E-4 export grade fuel annually at the Kirishi refinery. The new hydrocracker unit is scheduled to launch in the second half of 2013 and is expected to reach its nameplate capacity by December 2013.The complex includes the following units:• a vacuum distillation unit with a capacity of 4.9 million tonnes per year;• a hydrocracker with a capacity of 2.9 million tonnes of vacuum gasoil;

• a visbreaking unit with a capacity of 1.9 million tonnes of residue;• an L-24-10 hydrotreater and a 2 million tonne diesel dewaxer; • a 112,000 tonne capacity hydrogen production unit;• a sulphur production unit with a capacity of 105,000 tonnes;• a sewage treatment unit with a capacity of 570,000 tonnes.In addition, a new crude tank farm was installed at the refinery, as were an additional loading dock for oil products and a power substation to supply the electricity to the facility. ProductionThe entire volume of feedstock devoted to deep refining (4.9

million tonnes of fuel oil) will be supplied to the vacuum distillation unit. The vacuum distillation unit will produce around 2.9 million tonnes of vacuum gasoil for further hydrocracking and around 1.9 million tonnes for visbreaking.The hydrocracking unit is expected to produce the following output:• 1.0 million tonnes of diesel;• 1.1 million tonnes of jet kerosene;• 580,000 tonnes of gasoline;• 120,000 tonnes of LPG; • 100,000 tonnes of heavy still bottoms.The launch of the hydrocracking facility will enable the Kirishi refinery to switch from the production of Euro-3 and Euro-4

diesel to higher grade Euro-4 and Euro-5.The 1.9 million tonne capacity residue visbreaking unit is expected to yield 81,000 tonnes of visbreaking gasoline and 1.8 million tonnes of residue. By mixing the visbreaking residue and the heavy hydrocracking residue with middle distillates to achieve acceptable viscosity, 2.2 million tonnes of cracking fuel oil with sulphur content of under 3.5 percent can be produced. The visbreaking gasoline will be supplied to the L-24-10/2000 hydrotreater and diesel dewaxer. In addition to visbreaking gasoline, the visbreaking unit will be able to process 1.5 million tonnes

of diesel and 420,000 tonnes of atmospheric gasoil and is expected to produce 1.6 million tonnes of diesel and 200,000 tonnes of gasoline.The hydrogen production unit, running on natural gas, will provide the complex with 112,000 tonnes of hydrogen per year. The unit is designed to process 312,000 tonnes of natural gas per year. In the process of steam methane reforming, the unit is expected to produce about 200,000 tonnes of fuel gas, which can be used to supply the complex with thermal energy.The sulphur production unit will address the problem of hydrogen sulfide utilization.




Global Europe. In autumn of the same year, the oil company held an open tender to choose the project equipment supplier.

The tender was won by Germany’s Maveg, which had offered the lowest price of around $400 million. In December 2002, Leningrad regional governor Valery Serdyukov met with Bogdanov and then announced that construction of the hydrocracker unit at the Kirishi refinery would be completed by 2005. Bogdanov added that “the construction of the Batareinaya port will run in parallel with the installation of the hydrocrack-er.” In addition, Serdyukov said that the an oil products loading terminal would be built at the Batareinaya Bay port by 2005.

But things did not go smoothly. In April 2003 Surgutneftegaz announced the termination of its contract with Maveg due to the alleged failure to meet the project timetable. Surgutneftegaz then replaced Maveg with ABB Lummus Global, which had made the second most attractive offer during the 2002 tender.

FINAL DEADLINEMost of the equipment required for the construc-tion of the deep refining complex had been deliv-ered to Kirishi in the summer of 2005. But after Maveg was replaced by ABB Lummus Global, the project deadline had to be extended. “The installation of the equipment will be completed in 2007 or even closer to 2008,” said a refinery representative. Surgutneftegaz clarified that, under the new schedule, the hydrocracker would be launched in the fourth quarter of 2008. But neither the hydrocracker, nor the Batareinaya port were completed in 2008 or even 2012.

In late July 2012, Surgutneftegaz yet again rescheduled its refinery modernization program, postponing the launch of a number of planned upgrades: the installation of the isomerization unit and the catalytic reformer were postponed from 2015 to 2016, the hydrocracker was post-poned from 2012 to 2013, and the hydrotreater was postponed from 2014 to 2015. The schedule changes were approved by the Federal Anti-monopoly Service (FAS) and Federal Technical Regulator, Rosstandard.

The oil terminal to be located in Batareinaya Bay is now expected to be launched in either 2014 or 2015. After multiple delays to the start of con-struction, the total cost of the terminal has been estimated at $220-250 million.

REFINING


STRONG REASONS FOR DELAYIn May 2013, reporting annual financial results for the first time in more than 10 years, Surgutneft-egaz revealed that it has $29 billion in free cash assets. This is exceptionally high for the Russian oil industry, and indicates that Surgutneftez must have had strong reasons to delay its refinery mod-ernization project as investment capital is not a major constraint. Industry sources believe that there were many different reasons for the delay. “On the one hand, it refinery modernization proj-ect is exceptionally complex and unique. In ad-

dition, there is a lack of consistency between the designers and the contractors that are involved in building the hydrocracker,” a refinery source said.

“Because Kinef chose not to build the hydro-cracker on a turn-key basis, the design team is not the same as the construction team. Kinef took the project design and tried to find cheaper contractors,” another source said, who said that the hydrocracker was nearly completed at the end of 2012 but the state inspection committee concluded that it was not ready for launch.

The inspection “revealed some serious design flaws that could be magnified during construc-tion, and, perhaps, even at the design stage.

Oil product output at Kinef before and after the installation of deep refining technology

(mn tonnes)

2,2

5,1

0,7

11

2,98

6,1

1,8

6,1

2,2

Gasoline Diesel Jet Fuel Straight-runFuel Oil*

Cracked FuelOil

2012 output Expected 2013 output **

* Total output of M100 straight-run fuel oil and E4 cracked fuel oil ** With deep refining technology

OIL PRODUCT OUTPUT AT KINEF BEFORE AND AFTER THE INSTALLATION OF DEEP REFINING TECHNOLOGY , mn tonnes




KINEF OIL PRODUCT EXPORTS IN 2013, th. tonnes

The committee recommendation was that the hydrocracker furnaces should be demolished and rebuilt from scratch,” a refinery source said. In addition, according to the source, some of the equipment that was installed at the initial stages of construction had become outdated and required replacement: “as a result, people worked three shifts to eliminate the defects and rebuild the unit, what caused the final stage to be stretched out for nearly a year,” the source said.

That is not to say that all work was lost. Part of the new complex is already up and running: the L-24/10-2000 diesel hydrotreater and the 2 million tonne capacity dewaxer were launched in 2012. Also in operation are the hydrogen concentration unit of the hydrogen production facility as well as the sulfur production unit. In order to handle the expected additional volumes of oil products, Kirishi has built a new tank farm and a loading terminal.

The history of the Kirishi modernization project is long. Since the refinery modernization idea was first put forward by a Soviet foreign trading company 21 years ago, project costs have shot up nearly four times, from $600-700 million to more than $2.7 billion (RUB 88 billion).

Kinef Oil Product Exports in 2013(th. tonnes)

85

740695

604

475

620

710 700

85 69 60116 120 116

300 270 260215

265320

357

Jan Feb Mar Apr May Jun Jul

Gasoline Diesel Fuel Oil

Sources: Central Dispatching Department of the Fuel and Energy Complex, Reuters

REFINING




MAJOR PLAYERS PURSUE NEW OPPORTUNITIES

TRANSACTIONS

By Victoria Nezhina

Summer’s end brought news about the next steps of Rosneft’s ex-president Eduard Khudainatov and the ex-head of Samara-Nafta Simon Kukes: the former is building up his own Indepen-dent Petroleum Company (IPC), while the latter is switching to oil trading. Both face real challenges. Meanwhile, small acquisitions are proving vexing to Russian majors. Despite its daunt-ing power and influence, Rosneft has still not been able to obtain account-ing and planning information on Taas-Yuryakh Neftegazodobycha, in which it bought a 35 percent stake last year.

In early July and late August, media reports re-vealed the future professional plans of two former Russian oil and gas heavyweights: former president of Rosneft Eduard Khudainatov and former chief ex-ecutive of the now-defunct YUKOS and TNK Simon Kukes, who also headed Samara-Nafta, recently absorbed by LUKOIL.

Moving on from Rosneft, Khudainatov has chosen to remain in the upstream business and is buying oil and gas production assets for the recently-reg-istered Independent Petroleum Company (IPC). For his part, Kukes has opted for the downstream sector, namely, oil product trading (See Inset 1 “CV: Simon Kukes” and Inset 2 “CV: Eduard Khudainatov”).

However, buying small upstream assets is a risky business in Russia today. Even the state-owned oil behemoth Rosneft is laboring to gain valid inside information on the business of a small Yakutia pro-ducer, a stake in which the state company bought last year. Oil products trading, which has attracted Kukes, has its underlying potential problems as well. Such challenges may explain why oil trading high priest Gennady Timchenko chose to expand into alternative businesses recently, such as con-struction.

KHUDAINATOV STARTS INDEPENDENT BUSINESSOn 29 July 2013, Rosneft officially announced Khudainatov’s departure from the company.

Khudainatov had enjoyed a rapid ascent to his career at Rosneft. He joined the company in September 2008 as Vice President of Capital Construction, became its First Vice President four months later and in less than two years was ap-pointed President. Khudainatov replaced Sergei Bogdanchikov - Rosneft president from 1998 to 2010 - who reportedly failed to find a common language with the influential then-Deputy Prime Minister Igor Sechin, who subsequently became President of Rosneft in May 2012.

Unlike Bogdanchikov, Khudainatov enjoys an ex-cellent relationship with Sechin, who took over as head of the Russian largest oil producer when the previous Russian government resigned following the presidential election. With Sechin’s arrival, Khudainatov stepped down and became the com-pany’s First Vice President and Deputy Chairman. Rosneft’s July official statement said that “Khu-dainatov has fulfilled his promise to work for a year in the rank of [Rosneft’s] First Vice President and is currently engaged in the development of new projects.”

Early August press reports asserted that Khudain-atov had started his own business and agreed to buy two energy firms for $500 million. According to some reports, Khudainatov, who registered the Independent Petroleum Company (IPC) in Decem-ber 2012, was ready to leave Rosneft at that time, but stayed several months longer at the insistence of Sechin. Moreover, in July, Khudainatov alleged-ly met with Russian president Vladimir Putin, who approved the creation of IPC, which is expected to focus on oil and gas development in the area of Russia’s Asian export oil pipeline, ESPO.

According to the SPARK (System of Professional Analysis of Markets and Companies) database, IPC shareholders include the Cyprus-registered offshore company Melinco Enterprises, which owns 90 percent, and Siberia Project (founded by Taty-ana Dobrodiychuk), which holds 10 percent. The company’s ultimate beneficiary is Khudainatov.

FIRST MOVES OF KHUDAINATOV’S NEW COMPANYIPC was essentially without assets for eight months before Khudainatov agreed to buy two companies: the gas-focused firm Geotex in the central Russia Saratov region, far from ESPO, and the oil and gas producer Payakha in the East Siberian Krasnoyarsk region.



TRANSACTIONS



Geotex is the third-largest gas producer in the Sara-tov region. The company produced 11,300 tonnes of gas condensate and 49.3 million cubic meters of gas in 2011, and 22,330 tonnes of gas conden-sate and 140.0 million cubic meters of gas in 2012. The company’s output was 8,300 tonnes and 65.5 million cubic meters, respectively, in the first seven months of 2013. Geotex, which prior to the purchase was a part of the MRKS group, owns the license for the Saratov region’s Yuzhno Mechetkinsky deposit, which includes two gas condensate fields, Preo-brazhensky and Voznesensky. Geotex was fully owned by Prime Favorit, registered in Moscow by Alla and Vladimir Kutinitsky.

In 2003, Geotex drilled and tested the first explo-ration well at the Preobrazhensky field, where the company discovered commercial flows of gas and gas condensate. The field’s recoverable reserves were set at 55,000 tonnes of gas condensate and 779 million cubic meters of gas. Also in that year, Geotex conducted additional 2D and 3D seismic surveys within the Yuzhno Mechetkinsky license area. Based on the seismic data results, the com-pany set the Voznesensky field’s prospected recov-erable resources at 160,000 tonnes of gas conden-sate and 2.4 billion cubic meters (bcm) of gas.

In March 2005, Geotex completed the construction of an 8.9 km gathering pipeline from the Preo-brazhensky field to the Mechetkinsky gathering point for further gas supplies to the Engels TPP-3 thermal power plant. Geotex is an active par-ticipant in the comprehensive regional program,

“Development and Use of Hydrocarbons for the Saratov Region’s Gas Supply in 2011-2015”, which provides for the construction of a RUB 45 million gas processing plant with a capacity of one million cubic meters of gas at the Voznesensky field, which has a goal of achieving 95 percent utilization of associated gas. In 2011-2012, Geotex’s total invest-ment amounted to about RUB 290 million, which covered building oilfield facilities and additional exploration in the Yuzhno Mechetkinsky license area, the construction of the second well at the Preobrazhensky field, as well as the Voznesensky gas processing plant.

The second asset bought by Khudainatov, the Payakha company, is engaged in the exploration and production of oil and gas at the Krasnoyarsk region’s Payakh and Severo Payakh fields with total recoverable oil reserves estimated at 58.9 million tonnes. Some experts consider the Payakh field very promising with a high probability of in-creasing reserves, which, they say, could eventually be compared to those of the giant East Siberian Vankor deposit, the main source of crude for the ESPO pipeline.

The Payakh deposit is exempted from the mineral extraction tax until 2016, while the Severo Payakh field has the benefit until 2025. Prior to the Khu-dainatov’s purchase, the Payakha company, which is currently not listed among Russia’s oil and gas producers, was fully owned by Hopkirk Financial Corp., registered in the British Virgin Islands.

THE KHUDAINATOV OIL FAMILY BUSINESS

The Khudainatov family, including Eduard and his wife and brother, is not new to the oil business. Eduard Khudainatov, the former president of Rosneft, began his career in the oil and gas industry in 1993, when he became vice-president and then CEO of the Evikhon Oil Company in Khanty-Mansiysk.It was a sharp takeoff for a man without any training in oil and gas and whose previous work experience was limited to manual jobs such as collective farm worker, porter, construction foreman, and director of a pig farm. The Evikhon Oil Company was created by a government decree in 1992 to develop the Upper Salym, West Salym and Vadelyp oil and gas fields in Western Siberia. The deposits are currently the prize assets of Shell’s Russian joint venture, Salym Petroleum Development.

Khudainatov’s rapid career advancement may have been supported by his wife Marina, who had been a co-owner of Salymneftservis starting in the early 1990s. Salymneftservis owned fuel retail stations in the Tyumen region and together with Evikhon subsidiary Finance and Investment Company Yugra was a shareholder of Priobneftservis in Khanty–Mansiysk.Khudainatov’s brother, Zhan Khudainatov joined the oil business after Eduard. For several years he had been co-owner and director of Severneft, which held the license to develop the Zapadno-Yarokhinsky deposit in the Yamal-Nenets Autonomous Okrug. Zhan Khudainatov was also sole founder of the Soyuzprominvest management company, which managed the firms established

by Energo Holding. The group was the primary owner, with a 99 percent share, of the Cyprus-registered offshore company Quinter Investments. Quinter Investments, in turn, owned the UK-registered company Soulstar Trading Limited, which held a 10 percent stake in Severneft. Apart from Soulstar Trading, other owners of Severneft included Switzerland’s Krini Holding and Alexander Ryazanov, former board member of Gazprom. Ryazanov was partners with Eduard Khudainatov in the Krasnodar-based construction company Regionstroiinvest.Eduard Khudainatov’s wife and brother never reached the same levels of success as he did. Salymneftservis was subjected to multiple lawsuits filed in arbitration courts over the alleged sale of two retail stations

at artificially low prices in 2004. Damage payments of RUB 5 million were sought against on the company. Marina Khudainatova was named as a defendant in the court proceedings related to one of the lawsuits in 2009. Both lawsuits were lost by the litigants and are currently stuck in the appeals process. Zhan Khudainatov became similarly entangled in legal investigations. The main assets f the above mentioned Energo Holding included Severorgsintez, which took out a $111.3 million loan from Latvia’s Parex bank to build a gas processing plant in Novy Urengoi and never paid back the loan. In December 2011, Parex filed a lawsuit with the Riga Court of International Arbitration and, at the end of January 2012, the arbitration court of the Yamal-Nenets

Autonomous District imposed bankruptcy protection measures to assist with the recovery of the debt owed to Parex. Parex hoped to recoup the money via Severneft, which had acted as the loan guarantor and collateralized its main asset, the license for the Zapadno-Yaroyakhinsky field, in order to secure the loan. However, it turned out that Severneft in August 2011 transferred the Zapadno-Yaroyakhinsky license to its subsidiary Severneft Urengoi and sold the company for $403 million to EuroChem a few months later. The transaction was completed in early 2012 and Severneft announced its own dissolution soon after. EuroChem said it had acquired Severneft Urengoi legally and is not responsible for the actions of Severneft or its representatives.



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WHERE IS THE MONEY FROM?Khudainatov reportedly made both purchases in the open market as both companies had been offered for sale. By some estimates, the total amount of the transactions was about $500 million, although Vi-taly Kryukov from IFD Kapital believes that Payakha alone should cost $400-500 million based on its reserves valuation.

Half a billion is quite a sum for Khudainatov, who was likely to use borrowed funds to conclude the deals, according to some experts. However, he may have also sold his shares in Rosneft, which he first started buying in September 2010 after his appoint-ment as company president. On the same day, Khu-dainatov bought 0.0028 percent of Rosneft, worth $1.9 million at the average share price; in 2011, he increased his stake to 0.0483 percent, valued at over $42 million.. Coincidentally, also at the end of August, Sechin raised his Rosneft’s stake to 0.0849 percent by purchasing additional shares valued at $58.8 million. It is quite possible that Khudainatov sold his stake to Sechin. Khudainatov’s predeces-sor Bogdanchikov sold his entire Rosneft’s stake of 0.0012 percent on September 24, 2010.

In addition, the Khudainatov family may have ad-ditional capital of around $500 million, including $111.3 million in outstanding loans from the Latvian Parex bank and $403 million in proceeds from the sale of Severneft Urengoi to EuroChem (See Inset 3 “The Khudainatovs family in the oil business”).

POTENTIAL IPC ACQUISITIONS Khudainatov’s acquisition of the Yakutia oil pro-ducer suggests that IPC may want to focus on the development of East Siberian reserves near the ESPO route. On this assumption, some analysts believe that the company’s future take-over targets may include the Dulisma oil company, owned by Yuri Khotin and Alexei Khotin, as well as Musa Ba-zhaev’s Alliance Oil.

Dulisma has been a subject of inexhaustible market speculation during the past several months. In particular, the company was reported to a potential take-over candidate for Mikhail Gutseriev’s Russneft (See “Russneft Returns to Its Founder”, Russian Petroleum Investor, July 13). It was also expected to become the first buy of Khudainatov.

Dulisma owns the license for the Dulisma oil field with estimated geological oil reserves of 14 million tonnes. Russia’s largest bank Sberbank, which re-ceived Dulisma from Urals Energy as part of a debt settlement in 2009, sold the asset for $89 million to CrownSity in late 2012 (See “M & A Transactions in March”, Russian Petroleum Investor, April’13). The


Curriculum Vitae: Eduard Khudainatov

Experience:

Aug 2013: Left Rosneft and started independent business

May 2012 - Aug 2013: First Vice President of Rosneft and Deputy Chairman of the Board

Sept 2010 - May 2012: President of Rosneft

Jan 2009 - Sept 2010: First Vice President of Rosneft

Sept 2008 - Jan 2009: Vice President for Capital Projects at Rosneft

2003-2008: General Director of Gazprom subsidiary Severneftegazprom

2000-2003: Federal Inspector in the Nenets Autonomous Okrug under the Rus-sian Presidential Envoy in the Northwestern Federal District

1996-2000: Deputy Head of Administration of the town of Nefteyugansk, then First Deputy Head of the Nefteyugansk district and Administrative Head of the village of Poikovsky

1995-1996: President of Yuganskpromfinko

1993: Vice President, then CEO of Evikhon Oil Company

1989-1993: Director of the Bekon farm in Nefteyugansk

1985-1989: Loader, then Foreman at the Surgut Construction Department of Min-neftegazstroi

1981-1985: 3rd Class rigger at Yuganskneftegaz

1978-1981: Service in the Soviet Army

1977-1978: Worker at the Ordzhonikidze collective farm in the Odessa region

Education:

1996 - International Academy of Business (Moscow)

2000 - Tyumen State University

Personal: Born on 11 September 1960




company is controlled by the Khotin father and son, who, according to unofficial information, also own the large Moscow shopping centres Gorbushkin Dvor and Filion. The Khotin family earlier this year bought another oil and gas asset, Matra Petroleum, which owns 100 percent of the Arkhangelsky com-pany which is developing the Sokolovsky deposit in the Orenburg region (See “June M & A Transac-tions: Gazprom’s Power Moves “, Russian Petroleum Investor, July 13).

Analysts believe that oil and gas newcomers Khotins, who began their career in the industry with a scandal with the state oil pipeline monopoly Trans-neft (See “Russneft Returns to Its Founder”, Russian Petroleum Investor, July’13), are likely to sell their recently acquired oil and gas assets. The Khotins themselves have been silent about their plans.

For his part, Bazhaev has denied any talks with Khudainatov. At the same time, a source close to the Alliance group, said that “the proposals often come from different investors.” Alliance Oil owns the Khabarovsk refinery, as well as assets in Tatarstan and Kazakhstan.

POWERFUL ROSNEFT LEARNS THAT SMALL ACQUISITIONS ARE NOT WITHOUT CHALLENGESJust before selling Dulisma to the Khotins, Sber-bank sold another oil and gas asset, 35.33 percent in the Taas Yuryakh Neftegazodobycha, to Rosneft. Taas Yuryakh owns the licence for Yakutia’s Sredne-botuobinsky deposit, whose estimated geological oil resources of 90.9 million tonnes and recoverable reserves of 38.9 million tonnes make it of national importance. Rosneft, which paid $444 million for the asset, said that the purchase represents “an important step in strengthening Rosneft’s first-class resource base in Eastern Siberia and the provision of crude supplies to the ESPO pipeline.” The company also said that the Srednebotuobinsky deposit, to-gether with the company’s Yurubcheno - Tokhomsky field, will “in next few years become the basis of the company’s East Siberian production cluster.”

However, Rosneft’s first problems with the asset emerged immediately after the purchase. The own-ers of the Taas Yuryakh’s controlling stake refused to provide the new shareholder with information on the company’s activities over the last three years and the current year of 2013. Rosneft claimed the necessary information through the Yakutia arbitra-tion court. In June, the court upheld the Rosneft’s claim, which was then appealed by the defendant. The next hearing is scheduled for 2 October 2013.

Rosneft is seeking copies of the documents related to the Taas Yuryakh current business management;

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Curriculum Vitae: Simon Kukes

Experience: Mar 2013 - present: Founder, owner and CEO of Nafta-Consulting (Moscow)

2004 - Mar 2013: Owner and CEO of Samara-Nafta

Jun 2003 - 2004: Board Member of YUKOS, then chairman of YUKOS

Mar 2003 - Jun 2003: Advisor to the President and the Board of TNK-BP

1998 - Mar 2003: First Vice President, then President of the Tyumen Oil Company (TNK)

1996-1998: First Vice President for Distribution at YUKOS

1995-1996: Returned to Moscow as Vice President for Marketing and Refining in Russia of Amoco Oil

1986-1995: Technology Director, then Director of International Refining, Marketing and Transportation of Amoco Oil

1979-1986: Technology Director of Phillips Oil Company

1977-1979: Emigrated to the United States; was invited to Rice University in Hous-ton, where he conducted postdoctoral studies, scientific research and teaching

1970-1977: Junior scientific researcher, then scientific researcher at the Nesmeya-nov Institute of Organo-Element Compounds of the USSR Academy of Sciences

1969-1970: Process engineer at the Titan rubber and ethylene plant

Education: 1969 Degree in Vacuum Pump Technology from the Moscow Chemical and Engineering Institute named after Dmitry Mendeleev

1973 Ph.D. thesis at the Nesmeyanov Institute of Organo-Element Compounds of the USSR Academy of Sciences

1979 Ph.D. at Rice University

Author’s rights and honors: Kukes is the author of 130 U.S. patents and more than 50 articles

He is a professor emeritus at the University of Delaware

In 1999, he was included in the Wall Street Journal’s list of the top ten executives in Central Europe. In 2003, Britain’s Financial Times named him one of the 64 most respected business people in the world.

Personal: Born on 5 December 1946




its development plans, its obligations in excess of $5 million, as well as other documents concerned the decisions of various top-managers, from CEO to chief geologist. The documents include business plans and financial models, as well as the informa-tion on their fulfillment; the books of accounts and audit results for 2012; the documents related to the company’s financial liabilities, including borrow-ings, and contracts of bank accounts.

Rosneft also requested the contracts with foreign creditors, including the contracts under which the creditor’s rights were ceded to Britain’s Vanegold Limited (47 contracts from 2007 to 2012); docu-ments on the bill transactions in the amount of $11.3 million with Vesend Trading Limited, $20 million with Polibridge Limited and $5.3 million with Hero-ics; as well as the information about the company’s creditors, affiliated with the defendants. Rosneft needs the documents to approve its new asset’s financial statements for 2012.

“It is very rare that second-tier businessmen oppose such a strong figure as Igor Sechin,” said Alexei Panin, deputy director of the Centre for Political Information. Apparently, some of the Taas Yuryakh shareholders have something to hide, he suggested.

Apart from Rosneft, the Taas Yuryakh owners include the Cyprus-registered Limenitis Hold-ing Limited (a part of the Ashmore international investment fund group), which owns 10.48 percent, and two offshore companies, Yakut Energy Limited (37.38 percent) and Finfund Limited (16.82 percent). Ashmore Foundation was established as a subsid-iary of Australia and New Zealand Banking Group (ANZ) in 1992. ANZ owners include its top execu-tives Mark Combs, Michael Benson, Graeme Dell, Nick Land and Melda Donnelly. Finfund Limited, which was founded in 2004, has former Cyprus minister of energy, commerce, industry and tourism Antonis Paschalides among its board members. akut Energy was founded in 2003 to invest in the oil and gas exploration and production in developing countries. One of the company’s board members is Britain’s House of Lords Frederick Ponsonby.

Some market sources believe that, despite the high-profile names among the co-owners, the real beneficiaries of the two Cyprus offshore companies are two current shareholders of the mid-sized Rus-sian oil producer Urals Energy, Vyacheslav Rovneiko and Georgy Ramzaitsev. Other owners of Urals En-ergy, which held initial public offering (IPO) in 2005, include Leonid Dyachenko, the former son-in-law of late Russian president Boris Yeltsin, as well as Wil-liam Thomas and Alexander Ogarev. Besides, both Cyprus offshore companies are close to Yevrofinans MosnarBank, which may be a shareholder of Taas Yuryakh through various structures. The bank lav-

ishly financed some of the Taas Yuryakh projects.

The Taas Yuryakh top-management does not ap-pear to be worried about its conflict with Rosneft. In June, company CEO Ivan Menshikov said that Taas Yuryakh wants to cooperate with big traders and oil companies, including Glencore, Itochu and Shell. “We have no contracts so far, although we are work-ing with all the notable players in the Asia-Pacific market. They include such traders as Itochu and Glencore and major companies, including Shell. We have proposed that Rosneft be our agent in crude sales, as they have good experience of organising tenders,” Menshikov told Reuters in an interview. According to him, the company will export all its crude production.

Rosneft seems to have found the way out: it plans to absorb the upstart company. The Russian Federal Antimonopoly Service approved the request of Ros-neft’s unit RN-Eastern Siberia in early September to acquire the remaining Taas Yuryakh’s equity in the amount of 64.67 percent. IFD Kapital’s Kryukov estimated the deal at $821 million.

SIMON KUKES MOVES TO OIL TRADINGLUKOIL bought Samara-Nafta for $2.05 billion in April. Samara-Nafta, a small but promising asset, owns licenses to explore and develop 22 license areas, or 60 fields, in the Volga regions of Samara and Ulyanovsk. The company produced 2.5 million tonnes of crude in 2012. Samara-Nafta, established in 1998, was originally a division of the Saratov-based firm Nafta. In 2001, the Samara SOK group took control over the unit, which was bought by Si-mon Kukes in 2004. In 2005, Kukes sold 65 percent in Samara-Nafta to Hess Oil (U.S), which increased its share to 90 percent in 2011. Kukes, owning the remaining 10-percent, remained as company CEO (See “M & A Transactions in March”, Russian Petro-leum Investor, April 13). Presumably, Kukes received at least $205 million from the Samara-Nafta sale.

The oil and gas public is eager so see Kukes’ next step, whether he will remain in the petroleum indus-try or find another business avenue. Traditionally, upstream assets are considered to be the centre cut of the oil and gas business. However, Kukes, who has not previously sold viable production compa-nies, has apparently ended up in wholesale trade in oil and oil products. In Moscow, he registered a trading company Nafta-Consulting, which currently participates in trading at the St. Petersburg Interna-tional Mercantile Exchange.

But what prompted the sale of Samara-Nafta by Kukes and Hess Oil to LUKOIL at a price of $2.05 billion, or twice the value experts had estimated?

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“It is very rare that second-tier business-men oppose such a strong figure as Igor Sechin”



Some speculate that the transaction was directly linked to a 5 June 2012, Forbes article written about Alexei Veiman, former director of Samara-Nafta’s capital construction department and an adviser to Kukes. According to the story, Veiman, a 35-year-old lawyer, was heavily involved in an organized crimi-nal group called Indeitsy, or Indians, in the Volga city of Novokuibyshevsk. The group was allegedly actively seeking to enter the regional power through memberships in the pro-Kremlin party United Rus-sia and the city Public Chamber.

The Forbes story author Richard Behar wrote that “The Indeitsy control the oil-industry rackets in Novo [Novokuibyshevsk]. The group’s 400-odd mem-bers and associates (including 50 at the top) have created a lucrative niche for themselves by cutting into pipelines in ever more sophisticated ways and then trafficking in the stolen crude, as well as oil products and related plastics.” Whether the story is true or not is unclear, but it was after the publication that Hess Oil decided to sell the company. Although Russia saw harder times with the so-called “bandit capitalism” in the 1990s, small profitable compa-nies in the provincial regions are still risky business. However oil trading, chosen by Kukes, and par-ticularly trading on the Russian stock exchange, is hardly a very rewarding business. Ultimately, oil and gas businessmen are trading one set of upstream risks for another set of downstream risks in the oil trading business.

IS OIL TRADING AS PROFITABLE AS IT LOOKS?According to Russian experts, income from trading oil products on exchanges products rarely exceed $100 per tonne. Russian exchange trading has been slowly developing, and the volumes are still small primarily because fuel market participants are not particularly interested in this type of trading. In or-der to secure notable volumes, trading participants need to have access to major oil flows or wield lob-bying power and have the support of the authorities.

Russia’s most famous oil trader, the co-owner of Gunvor Gennady Timchenko, a long-time associate of President Putin, definitely has such power.

According to Forbes, Gunvor started trading activi-ties at the turn of the 2000s, initially specializing in exports of oil and oil products from Russia. Subse-quently, it gradually added other commodities to its trading portfolio and increased the share of oil products. As a result, Gunvor’s purchases of crude oil declined from 64.5 million tonnes in 2010 to 33.8 million tonnes in 2012, while its purchases of oil products rose from 46.6 million tonnes to 64.8 mil-lion tonnes. In addition, the company’s volume of trading in natural gas and LNG rose from 2.2 million

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tonnes to 18.4 million tonnes, while trading in coal increased from 4.2 million tonnes to 12.8 million tonnes. Such activity has made Gunvor one of the largest independent energy traders in the world. Trading in oil and oil products accounted for more than 90 percent of Gunvor’s revenue in 2012, when the trader still had Rosneft as its main oil and fuels’ supplier.

In 2012, Gunvor, which had long had routinely won Rosneft’s regular bi-annual crude tenders, was left with no Russian crude to sell and was passed by ri-val traders Vitol and Glencore, and Shell. Timchenko explained the surprise outcome by the artificially high prices for Russian crude. “It is not true that we no longer want to work with Rosneft. We are just not willing to pay the current high prices,” Timchenko said. According to experts, traders who enter into contracts with Rosneft pay a premium of $0.5 per barrel above the current oil price in order to win the tender.

In an apparent move to compensate for falling rev-enues, Timchenko has made significant investments in the construction business in recent months. His further plans include buying a 30-percent stake in the Stroytransgaz closed joint stock company (known as Argus Pipeline Service until the summer of 2012), controlled by Anton Rae. (See this issue’s article “August M & A transactions: movement in non-core assets”). The company is expected to win large contracts for the construction of the onshore part of Gazprom’s major gas pipeline South Stream valued at EUR 6.6 billion. Timchenko owns another company called Stroytransgaz, an open joint stock company, which does not have any major contracts with Gazprom, but has other large state-controlled partners, including Olimpstroi, which oversees the preparations for the Winter Olympic Games next year, and Rosavtodor, which is responsible for the maintenance and repairs of Russian roads. The total value of state orders received by Timchenko’s com-pany is RUB 51 billion, according to Forbes.

Timchenko’s business empire reaches far beyond oil trading and construction (See Chart 1 “Assets of Gennady Timchenko”). His fund Volga Resources owns approximately 23 percent of Russia’s largest independent gas producer NOVATEK, 25 percent of the geophysical exploration company Geotech, about 30 percent of the fishing firm Russian Sea, 100 percent of soft drink producer Akvanika, 49.1 percent of the German insurer Sovag, 60 percent of coal group Kolmar and other assets. Through these structures, Timchenko owns just over 46 percent of the Geneva-based Gunvor, 37.5 percent of Russia’s petrochemical group Sibur, 93 percent of Russia’s largest private rail carrier of crude and oil products, Transoil, 74 percent of Avia Group and 9.5 percent of the St. Petersburg’s Russia bank.

Gunvor’s Timchenko: “It is not true that we no longer want to work with Rosneft. We are just not willing to pay the current high prices”



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(continued from p.36)MAJOR PLAYERS PURSUE NEW OPPORTUNITIES

Businessmen/ Executve Ranking Average scoreMODERATE INFLUENCEYury Olenin, TVEL 26 5.44Felix Yevtushenkov, Bashneft 27 5.42Vladimir Rashevsky, SUEK 28 5.40Andrei Shishkin, Rosneft 29 5.37Boris Ayuev, CO-CDA UES 30 5.35Andrey Melnichenko , SUEK 31 5.30Denis Fyodorov, Gazprom Energoholding

32 5.27

Matthias Warnig, Nord Stream 33 5.19Albert Shigabutdinov, TAIF 34 5.17Alexander Korsik, Bashneft 35 5.15Iskander Makhmudov, UGMK 36 5.13Ziyad Manasir, Stroigazconsulting 37 5.10Dmitry Konov, SIBUR Holding 38 5.07Alexei Mordashov, Power Machines 39 5.04Mikhail Barkov, Transneft 40 4.95Azat Shamsuarov, LUKOIL - Western Siberia

41 4.93

Damir Shavaleev, Gazprom Neftekhim Salavat

42 4.91

Maxim Grishanin, Transneft 43 4.89Evgeny Romanov, Rosenergoatom 44 4.87Yury Lisin, Transneft 45 4.85Sergei Kudryashov, Zarubezhneft 46 4.83Viktor Khoroshavtsev, Sistema 47 4.81Vladimir Nekrasov, LUKOIL 48 4.79Arkady Egizaryan, Moscow Refinery 49 4.77NiKholai Brunich, CPC 50 4.75

Businessmen/ Executve Ranking Average score

VERY STRONG INFLUENCEAlexei Miller, Gazprom 1 9.13Igor Sechin, Rosneft 2 8.93Vagit Alekperov, LUKOIL 3 8.30Gennady Timchenko, Gunvor International

4 8.13

Nikolai Tokarev, Transneft 5 7.47Sergei Kiriyenko, Rosatom 6 7.31Alexander Medvedev, Gazprom 7 7.29Leonid Mikhelson, NOVATEK 8 7.27Vladimir Bogdanov, Surgutneftegaz 9 7.25Vladimir Evtushenkov, Sistema 10 6.90

Businessmen/ Executve Ranking Average scoreMODERATEVladimir Shimanovich, Transnefteprodukt

51 4.73

Evgeny Olkhovik, KES 52 4.71Andrei Murov, FSK UES 53 4.69Vladimir Mulyak, LUKOIL 54 4.65Andrei Kozitsyn, UGMK 55 4.63Lyudmila Zalimskaya, Tekhsnabexport 56 4.53Igor Makarov (previously of Itera) 57 4.49Vladimir Travin, Atomenegroprom 58 4.47Eduard Khudainatov (previously of Rosneft )

59 4.44

Evgeny Fyodorov, EvroSibEnergo 60 4.42Yevgeny Dod , RusHydro 61 4.40Anatoly Nuryaev, Surgutneftegaz 62 4.37Yury Sukhanov, Slavneft 63 4.23Musa Bazhaev Alliance 64 4.21Valery Graifer, LUKOIL, RITEK 65 4.19Mikhail Kovalchuk , Kurchatov Institute 66 4.17Vadim Gurinov, Stroytransgaz 67 4.15Boris Vainzikher, KES 68 4.13German Khan (previously of TNK-BP) 69 4.10Boris Korol, Transneft 70 4.03Ivan Blagodyr, RAO UES of the East 71 4.01Igor Kostin, Power Machines 72 3.97Gerhard Schroeder , Nord Stream 73 3.87Andrei Rudov, Nenets Oil Company 74 3.80Grigory Gurevich, Nobel Oil 75 3.73Grigory Berezkin, ESN 76 3.70Nikolai Nikolaev, RITEK 77 3.47Yury Raushkin, Gazprom Avtomatizatsia

78 3.37

Evgeny Yutyaev, SUEK - Kuzbass 79 3.35Andrei Rossinsky, Burgaz 80 3.13Evgeny Velikhov, Kurchatov Institute 81 3.03Artyom Volynets, En + Group 82 2.83Vitaly Kutepov, Vostokgazprom 83 2.80

Businessmen/ Executve Ranking Average score

STRONG INFLUENCEViktor Vekselberg , KES 11 6.63Vitaly Markelov, Gazprom 12 6.57Alexander Dyukov, Gazprom Neft 13 6.53

Leonid Fedun, LUKOIL 14 6.40Valery Golubev, Gazprom 15 6.13Oleg Deripaska, En + Group 16 6.10Boris Kovalchuk, Inter RAO UES 17 5.97Shafagat Takhautdinov, Tatneft 18 5.90Mikhail Gutseriyev, Russneft 19 5.77Sergei Kukura, LUKOIL 20 5.73Oleg Budargin, Rossetti 21 5.63Alisher Usmanov, Gazprominvestholding 22 5.53Arkady Rotenberg, Stroigazmontazh 23 5.50Kirill Seleznev, Mezhregiongas 24 5.48Ravil Maganov, LUKOIL 25 5.46

Source: APEC (Agency of Political and Economic Communication)

DEGREE OF INFLUENCE OF MAJOR BUSINESSMEN AND EXECUTIVES IN RUSSIA’S ENERGY SECTOR IN AUGUST 2013



AUGUST M & A TRANSACTIONS: MOVEMENT IN NON-CORE ASSETS

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By Victoria Nezhina

With August being the peak of the summer holiday season, there were only a relatively small number of newsworthy M&A deals, most of which involved non-core assets. A Gazprom subsidiary acquired a nearly 90 per-cent stake in the Moscow municipal power generation utility in an auc-tion. Gennady Timchenko, co-owner of oil trader Gunvor and a share-holder of NOVATEK, took steps to consolidate assets in the construction industry. Gazprom Neft and SIBUR received permission from the Federal Anti-Monopoly service to acquire the Omsk-based polypropylene producer, Polyom. The EuroChem chemical company announced that it is moving forward with plans to buy natural gas assets, while mid-sized oil firm Bash-neft plans to sell United Petrochemi-cal Company. Finally, Chinese com-panies such as CNPC and Sinochem continued to establish their presence in Russia.

August 2013 saw a relative small number of news-worthy transactions. The deal of the month was the purchase by Gazprom Energoholding (GEH) of an 89.97 percent ownership share in the Moscow municipal power generator, Moscow United Energy Company (MOEK). GEH paid RUB 98.6 billion (around $3 billion) for the stake formerly owned by the Moscow city government. The value of the transaction was equal to the initial price set at the city-run auction for MOEK shares. The auction also featured the participation of Sberenergode-velopment, a subsidiary of the state-owned bank Sberbank.

In May of this year, Russia’s Federal Antimonopoly Service (FAS) had approved the acquisition by GEH of more than 75 percent in MOEK, which provides heating and hot water to the Russian capital and the Moscow region. MOEK is a major purchaser of heat from electricity provider Mosenergo, also controlled by GEH.

GEH is Russia’s largest owner of electricity generat-ing assets, with controlling stakes in Mosenergo, TGK -1, and OGK -2, combining for a total installed capacity of over 37 GW. This represents 17 percent of Russia’s total power generating capacity. The rev-enues of GEH according to International Financial Reporting Standards (IFRS) amounted to RUB 104 billion in the first quarter of 2013.

TIMCHENKO GATHERS FUNDS FOR CONSTRUCTION ASSETSSantata, part of Gennady Timchenko’s Volga Group (See “Major players pursue new opportunities” in this issue) put up a 4.625 percent stake in Rus-sia’s largest independent gas producer NOVATEK in accordance with the terms of a repo transaction mandated by financing terms with international and Russian banks. The stake is estimated to be worth $1.7 billion. The deal cut Santata’s share in NOVATEK from 11.75 percent to 7.125 percent but it “does not affect Volga Group’s consolidated share-holding in NOVATEK,” Timchenko’s company said in a statement. Volga Group owned a 23.49 percent stake in NOVATEK as of the end of 2012.

This was the third Santata’s repo transaction with NOVATEK’s shares since the end of last year. In Oc-tober 2012, Santata decreased its stake in NOVATEK from 13.13 percent to 9.64 percent, but then raised it again to 11.75 percent in April 2013.

Industry experts believe that the tranasctions will help Timchenko raise money for another acquisi-tion. Timchenko, who is also a co-owner of major oil trader Gunvor, has been consolidating his assets in the construction sector. Timchenko controls the Cyprus-registered Stroytransgaz Holding, which fully owns the Russian engineering and construction firm Stroytransgaz and has a 25 percent stake in construction companies ARKS and Most. In the near future, Stroytransgaz Hodling is expected to acquire a 30 percent stake in the construction subsidiary of oil and gas contractor Argus Pipeline. The construc-tion subsidiary, coincidentally, is also called Stroy-transgaz. Stroytransgaz Holding is also expected to fully acquire Stroytransgaz-M and a 25 percent plus 1 share in Stroiputinvest. Once the deals are completed, Volga Group will own 63 percent in Stroytransgaz Holding, while Gazprombank will own 20 percent. The remaining shares will be held by Timchenko business partners Andrei Vorobyov (11.3 percent) and Mikhail Kenin (5.7 percent).

Of particular interest of the transactions described


RUSSIAN PETROLEUM INVESTOR VOLUME XIX, ISSUE 9, SEPTEMBER 2013RUSSIAN PETROLEUM INVESTOR VOLUME XXI, ISSUE 12, MARCH 2013


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above is the acquisition by Stroytransgaz of a stake in the Argus Pipeline subsidiary known as Stroytransgaz (known as Argus Pipeline Service until mid-2012). The subsidiary is owned by Anton Rae and, as one of Gazprom’s major contractors, the firm is expected to secure contracts for the construction of the onshore sections of Gazprom’s South Stream pipeline, estimated to cost EUR 6.6 billion. Forbes has estimated the total value of Rae’s Gazprom contracts at RUB 38 billion. Rae’s Stroytransgaz (a closed joint-stock company) has offices registered in Bulgaria, Serbia and Slovenia, encompassing three of the four countries (with the exclusion of Hungary), to be crossed by the South Stream pipeline.

Stroytransgaz Holding plans to close the deal to buy a stake in CJSC Stroytransgaz before the end of the year, said Volga Resources’ spokesman Anton Kurevin.

Timchenko’s Stroytransgaz has so far failed to be awarded any large contracts from Gazprom, although the construction company is involved in other large construction projects in Russia. Cur-rent customers of Stroytransgaz include Olimp-stroi, which oversees the preparations for the Winter Olympic Games to be held in Sochi in 2014; Rosavtodor, which is responsible for the mainte-nance and repairs of Russian roads; and federal grid operator FSK. The total value of state contracts won by Timchenko’s company is estimated at RUB 51 billion, according to Forbes. Stroytransgaz has also been involved in the construction of the Gazelle pipeline in the Czech Republic, which receives throughput gas from Gazprom’s Nord Stream pipeline.

SISTEMA GOES AHEAD WITH PETROCHEMICAL PURCHASEIn August Bashneft continued to take steps to complete the long-discussed sale of its petro-chemical unit to Bashneft owner Sistema. On 26 August, Bashneft’s shareholders approved the sale of 98 percent of the United Petrochemical Com-pany (UPC), which encompasses the consolidated petrochemical assets previously under Bashneft to Sistema. The companies plan to close the RUB 6.2 billion deal worth by the end of September.

The Federal Antimonopoly Service (FAS) approved Sistema’s acquisition of UPC at the end of last year. In June, on the sidelines of the St. Petersburg International Economic Forum, UPC chairman Felix Evtushenkov, son of Sistema chairman Vladimir Evtushenkov, confirmed Sistema’s plan to acquire UPC from Bashneft (See “June M & A Transactions: Gazprom’s Power Moves”, Russian Petroleum

Investor, July’13). Bashneft’s board gave the green light to the deal in July (See “July M & A transac-tions: closing time”, Russian Petroleum Investor, August’13).

UPC was established in 2011 as a joint venture between Bashneft, which received 74.99 percent in the JV, and Yakov Goldovsky’s Petrochemical Holding, which owned 25.01 percent. In early 2013, Bashneft bought out Goldovsky’s stake, bringing its share in UPC to 98 percent (See “Feb-ruary Sees a Slew of M & A Transactions”, Russian Petroleum Investor, March’13). The remaining two percent were owned by Ufaorgsintez, which later became a part of UPC.

Bashneft said that it was interested in establish-ing a long-term commercial relationship with UPC. The shareholders of UPC have already approved the terms of the contract, according to which Bashneft will sell petrochemicals to UPC’s subsidiary Ufaorgsintez. The contract, valid until 31 December 2014, envisages the purchase of 1.1 million tonnes of petrochemicals worth RUB 14.15 billion.

But the fate of Bashneft is far from certain. Com-pany president Alexander Korsik has once again dismissed speculations that Sistema may sell the oil company to state-owned rival Rosneft. “I can only repeat what I have said earlier. I spoke with the company’s main shareholder Vladimir Evtush-enkov, and he is not considering selling Bash-neft,” Korsik said during a teleconference on 27 August. Rosneft head Igor Sechin has also earlier confirmed that his company was not planning to acquire Bashneft.

The persistent rumor that Rosneft would acquire Bashneft has been circulating ever since Ros-neft acquired Russia’s third largest oil producer, TNK-BP, earlier in 2013. Sistema president Mikhail Shamolin has also denied the rumors of Bash-neft’s sale: speaking during a teleconference on 30 August, Shamolin said that Sistema was not conducting any negotiations to sell Bashneft and that Sistema had plans to develop Bashneft’s oil and gas assets independently in order to increase the company’s operating efficiency. He did not rule out, however, the possibility that Sistema may want to list Bashneft’s shares through an initial public offering (IPO), which can happen in 2014 or 2015, depending on market conditions.

GAZPROM NEFT AND SIBUR ACQUIRE POLYOMIn mid-August, the FAS approved the request of Sibgazpolimer, a joint venture between Gazprom

Sistema’s Shamolin: “Sistema was not con-ducting any negotiations to sell Bash-neft”




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Neft and SIBUR Holding, to acquire a 50 percent ownership stake in the Omsk polypropylene pro-ducer Polyom. The acquisition is valued at RUB 8.7 billion.

Sibgazpolimer filed the application with the FAS to acquire Polyom on 31 May 2013, five months after the former Minister of Economy for Omsk region, Alexander Trippel, first mentioned that SIBUR and Gazprom Neft were interested in buying the Omsk plant.

Polyom, a part of the Titan group, was founded in 2005. The plant has an annual production capac-ity of 180,000 tonnes of polypropylene and can produce 98 grades of the polymer. The Polyom petrochemical complex also includes a 250,000 tonnes-capacity propane fractionator for the pro-duction of propylene, used as feedstock for the main production unit.

Polyom plans to expand its range of petrochemical output by the end of 2013 by adding pipeline-grade propylene and high-index grades of polypropylene to its production slate, according to Titan. An official statement from Titan also mentioned that poly-propylene produced by Polyom had received high praise from Russia’s largest manufacturer of BOPP film, Biaxplen, which is a part of SIBUR Holding.

The St. Petersburg-registered Sibgazpolimer is owned on 50/50 parity basis by SIBUR, Russia’s largest producer of petrochemicals, and Gazprom Neft Finance, a subsidiary of Gazprom Neft. Sib-gazpolimer is responsible for the acquisition and management of petrochemical assets for Gazprom Neft and SIBUR. .

According to industry experts, the acquisition of a stake in Polyom serves several strategic goals for Sibgazpolimer. For one, the deal will reduce com-petition in the domestic polypropylene market while simultaneously decreasing the cost of the product for SIBUR and Gazprom Neft’s own needs. Second, Gazprom Neft and SIBUR will now be able to offer larger volumes of cheaper polypropylene to export markets in China and Eastern Europe.

EUROCHEM MULLS THE ACQUISITION OF ASTRAKHAN GAS ASSETEuroChem, a Russian fertilizer manufacturing com-pany owned by Andrei Melnichenko, has submitted a bid for the acquisition of the Astrakhan Oil and Gas Company (ANGK). ANGK owns the license to develop the Pravoberezhnaya (“right-bank”) sec-tion of the Astrakhan gas condensate field. ANGK is expected to supply feedstock for EuroChem’s subsidiaries in neighboring regions once produc-tion comes online. Industry experts estimate the

purchase value of ANGK at $350-500 million. The FAS has not issued a ruling on EuroChem’s applica-tion to fully acquire ANGK and has stated that the deal bears careful consideration as it may “lead to the restriction of competition.”

While EuroChem is interested in the right bank of the Astrakhan gas condensate field, the Levo-berezhnaya section (“left-bank”), with estimated reserves of 3.3 trillion cubic meters of gas and 520 million tonnes of gas condensate, is developed by Gazprom subsidiary Gazprom Dobycha Astrakhan. The company produces annual volumes of 12 bil-lion cubic meters of gas from Levoberezhnaya and 4 million tonnes of gas condensate. Interestingly, Gazprom has not attempted to acquire the right-bank section of the Astrakhan deposit. According to Gazprom, the right-bank section has a complex subsurface structure, leading to higher production costs, and output from the deposit would require complex refining capacities.

EuroChem, on the other hand, sees many synergies: “the possible purchase of the Astrakhan Oil and Gas Company is in line with EuroChem’s strategy, which envisions the creation of a feedstock base for the fertilizer production. Our experts are considering ac-quiring various assets related to gas deposits,” said EuroChem spokesperson Vladimir Torin. ANGK’s output could be used by EuroChem subsidiaries producing the nitrogen and nitrogen-phosphate fertilizers. These subsidiaries include Novomos-kovsk Nitrogen (in the Tula region), Nevinnomyssk Nitrogen (in the Stavropol region), and EuroChem Belorechensk Fertilizers (in the Krasnodar region). In addition, EuroChem last year acquired nitrogen fertilizers plant in Antwerp, Belgium from Germa-ny’s BASF.

Focusing on the development of the right-bank of the Astrakhan gas condensate field, ANGK was founded in 1999 by a subsidiary of the Guta Group. In 2000, ANGK obtained a license to develop the deposit. The license is valid until 31 December 2025. However, the company still has not started conduct-ing exploration work at the field. The field’s reserves are estimated at 220 bcm of gas and 20 million tonnes of oil. Following the bankruptcy of Guta in 2004, a 75 percent ownership stake in ANGK was transferred to the bank VTB. Ukrainian businessman Dmitry Firtash, a co-owner of gas trader Rosukren-ergo, showed interest in acquiring a stake in ANGK but a deal was never finalized. Currently, 74.87 per-cent of ANGK is owned by Gazprombank, while the remaining shares are held by the Astrakhan region’s State Property Management Agency.

The acquisition of natural gas assets would help Eu-roChem to cover its need for feedstock and reduce its dependence on supplies from Gazprom. Early

“The possible purchase of the Astra-khan Oil and Gas Com-pany is in line with Euro-Chem’s strat-egy, which envisions the creation of a feedstock base for the fertilizer pro-duction. Our experts are considering ac quiring various as-sets related to gas de-posits”




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last year, EuroChem acquired a gas-producing as-set, Severneft Urengoi, which provides gas volumes that meet a quarter of the fertilizer company’s feed-stock needs. Going forward, EuroChem intends to fully meet its gas requirements either from its own production or from long-term supply contracts.

GAZPROM MAY SELL STAKE IN URALNEFTEGAZPROMGazprom, in contrast, is seeking to reduce the share of non-core assets in its portfolio by selling its stake in Uralneftegazprom. Gazprom subsidiary Gazprom Dobycha Orenburg has offered to sell its 37.7 per-cent stake in the small-sized oil and gas producer to the remaining shareholders of Uralneftegazprom. Gazprom’s divestment from Uralneftegazprom is due to the company’s relatively small gas reserves and Gazprom’s minority shareholder status.

Uralneftegazprom has licenses to develop the Ko-pansky, Berdyansk, Yuzhno-Orenburg, Chkalov, Ter-ektinsky and Novopavlovsky oil and gas fields in the Orenburg region. The company’s total reserves are estimated at 28 bcm of natural gas and 23 million tonnes of liquid hydrocarbons. Recoverable reserves are estimated at around 5.8 million tonnes of crude and 1,400 tonnes of gas condensate. The company currently produces 29 million cubic meters of gas and 3,100 tonnes of condensate per month.

Uralneftegazprom’s majority shareholders include former head of Sistema Yevgeny Novitsky, former president of Bashneft, Viktor Khoroshavtsev, and former shareholder of Timan Oil Alexander Kapalin. The group collectively acquired a 62.3 percent stake in Uralneftegazprom in June 2012 from Timchenko’s Stroitransgaz for an estimated $75 million.

IFD Capital analyst Vitaly Kryukov estimated the value of Gazprom Dobycha Orenburg’s stake in Uralneftegazprom at $45 million. As opposed to natural gas, Kryukov believes that the Orenburg region is an attractive area for oil companies be-cause of its advanced infrastructure and proximity to export markets. According to various sources, Novitsky, Kapalin and Khoroshavtsev plan to focus on oil production and the development of oil rims at the deposits.

METALLOINVEST GIVES UP OIL AND GAS LICENSEMetalloinvest subsidiary, the Mikhailovsky Ore Processing Works (GOK) announced in mid-August that it had sold its license to develop the Sladkovs-ko-Zarechnoye oil and gas deposit in the Orenburg region. The license was sold to an unknown party

for RUB 4.047 billion ($125 million). It is unclear how this transaction was authorized, as Russia’s Law on Subsoil use does not permit companies to sell or transfer licenses.

According to Mikhailovsky GOK, by selling the license for RUB 4.047 billion the company was able to recover all capital expenditures spent to date on exploration and evaluation of the deposit, fixed assets and other assets. As of August 2013, the total book value of the Sladkovsko-Zarechnoye license amounted to RUB 3.772 billion, yielding Mikhailovsky GOK a profit of RUB 275 million.

Mikhailovsky GOK acquired the Sladkovsko-Za-rechnoye license for RUB 2.380 billion in 2008. The company had planned to use gas output to supply Metalloinvest’s ore production facilities.

According to DeGolyer and MacNaughton, total reserves of the Sladkovsko-Zarechnoye deposit amounted to 323.2 million barrels of oil equivalent, including 1.125 billion cubic feet of gas and 68.4 mil-lion barrels of gas condensate as of 31 March 2008.

Oil and gas production is a non-core business for Metalloinvest, one of the largest producers of iron ore and hot briquetted iron in the world. The com-pany’s major production assets include Mikhailovsky GOK, Lebedinsky GOK, the Oskol steel plant and the metallurgical company Ural Steel. Metalloinvest is fully owned by USM Holdings. USM Holdings, in turn, is majority owned by Alisher Usmanov (60 percent), who is also a shareholder in the Arsenal Football Club and Facebook. Other USM Holdings owners include Vladimir Skoch (30 percent) and Farhad Moshiri (10 percent).

INTERNATIONAL TRANSACTIONS FEATURING RUSSIAN COMPANIESIn August, Gazprom, LUKOIL, and Rosneft were all involved in a number of substantial transactions outside of Russia.

In early August, Gazprom intensified talks on joining Germany’s Wintershall’s natural gas operations in Argentina. The transaction could be completed via an asset swap between Gazprom and Wintershall’s parent company, BASF. Gaz-prom and BASF last year signed a legally binding assets swap agreement, according to which the Russian company will receive 100 percent of the joint venture trading firm Wingas and two smaller gas trading units, WIEH of Berlin and WIEE of Zug, Switzerland Gazprom will also receive some major European underground gas storage facili-ties: in Rehden and Jemgum, Germany, as well as Haidach, Austria. Gazprom will also receive a 50 percent stake in Wintershall Noordzee, an oil and

The total re-serves of the Sladkovsko-Za-rechnoye de-posit amounted to 323.2 mil-lion barrels of oil equivalent, including 1.125 billion cubic feet of gas and 68.4 mil lion barrels of gas conden-sate.



DOMESTIC M & A DEALS, AUGUST 2013

Description of the deal Asset owner BuyerIn accordance with repo transactions required by financing terms with various creditors, Santata, a part of Gennady Timchenko’s Volga Group, reduced its share in NOVATEK by 4.625 percent stake. The stake was with worth $1.7 billion in early August. Santata’s share in NOVATEK fell to 7.125 percent from 11.75 percent.

Santata –

China’s Sinopec and SIBUR Holding established a joint venture based Sinopec’s participation in the operation of the Krasnoyarsk Synthetic Rubber Plant (KSRP). Under the terms of the deal, Sinopec will own 25 percent plus one share of KSRP. On 12 August, Sibur announced that the deal had been approved by regulatory authorities. According to several sources, the deal’s value is close to $50 million, though Sinopec and Sibur did nto disclose financial terms of the deal.

SIBUR Sinopec

EuroChem, a Russian fertilizer producer, may acquire the Astrakhan oil and gas company (ANGK), which owns the license to develop the Pravoberezhnaya section of the Astrakhan gas condensate field. ANGK is expected to supply feedstock for EuroChem’s subsidiaries in neighboring regions. Experts value ANGK at $350-500 million. Gazprom, which holds the license to develop the Levoberezhnaya section of the Astrakhan deposit, showed no interest in acquiring the Pravoberezhnaya license.

Gazprombank (74.9 percent), and the Astrakhan State Property Management Agency (25.1 percent).

EuroChem, controlled by Andrei Melnichenko

Stroytransgaz Holding, which includes various construction assets owned by Gennady Timchenko, plans to finalize a deal to acquire 30 percent of Stroytransgaz (formerly known as Argus Pipeline Service) by the end of the year.

Stroytransgaz (owned by Anton and Michael Rae)

Stroytransgaz Holding

Gazprom power subsidiary, Gazprom Energoholding (GEH), won the auction to acquire an 89.97 percent stake in Moscow United Energy Company (MOEK), the electric utility serving the city of Moscow. GEH paid RUB 98.6 billion (about $3 billion) for the stake, which was the initial price set at the auction. MOEK was previously owned by the Moscow City Government.

Moscow City Government (89.97 percent)

Gazprom Energo-holding

On 14 August shareholders of LUKOIL production subsidiary RITEK discussed the possibility of acquiring Samara-Nafta and Volganeft.

Samara-Nafta Volganeft RITEK

Metalloinvest subsidiary Mikhailovsky Mining and Processing Works announced that it has sold its license to develop the Sladkovsko-Zarechny oil and gas deposits in the Orenburg region to an unknown party for $125 million, or RUB 4.047 billion.

Metalloinvest (controlled by Alisher Usmanov)

Undisclosed

Transneft announced an open tender for the sale of shares in its insurance subsidiary, SC Transneft. The number of shares on offer was not specified. The insurance company serves eleven of Transneft’s subsidiaries. The tender’s closing date is 20 September.

Transneft Open tender

Russia’s Federal Antimonopoly Service approved the request of Sibgazpolimer, a joint venture between Gazprom Neft and SIBUR Holding, to acquire a 50-percent stake in the Omsk-based polypropylene producer Polyom. The value of the deal is estimated at RUB 8.7 billion.

Polyom Sibgaz-polimer

Gazprom subsidiary Gazprom Dobycha Orenburg has offered its 37.7-percent stake in Uralneftegazprom to the group of investors holding the remaining 63.3 percent of the company. The planned divestment is due to Gazprom Dobycha Orenburg’s minority share and the firm’s insignificant gas reserves.

Gazprom Dobycha Orenburg A group of owners holding the remaining 62.3 percent

Rosneft's board of directors plans to discusse various planned transactions at a meeting on 12 September. A slate of deals worth over $500 million are under consideration. The board intends to approve Rosneft’s deal with Statoil for joint offshore work in Russia. Along with this, the board is examining Rosneft’s ownership position in subsidiaries Verkhnechonskneftegaz and Venineft (Sakhalin). In addition, the board will likely authorize contributions to assets of RN-Tuapsenefteproduk and RN-Eastern Siberia, as well as to the authorized capital of RN-Eastern Siberia.

Various –

On 26 August, Bashneft’s shareholders approved the sale of a 98 percent stake in the United Petrochemical Company to Bashneft’s parent company Sistema. The companies plan to close the deal, valued at RUB 6.2 billion, by the end of September.

Bashneft Sistema

Sistema denied speculation that it plans to sell Bashneft. Instead, Sistema plans to develop Bashneft’s oil and gas assets independently and may follow through with an initial public offering of Bashneft’s shares in either 2014 or 2015, depending on market conditions.

Sistema

NOVATEK plans to close the sale of a 20 percent stake in the Yamal LNG project to CNPC by October. NOVATEK holds owns 80 percent of Yamal LNG, Total owns the remaining 20-percent.

NOVATEK CNPC

Japan’s Itochu and Inpex acquired 25.29 percent and 24.71 percent, respectively, in South-Sakha Oil from the Japan Oil, Gas and Metals National Corporation (JOGMEC). South-Sakha Oil owns 49 percent of INK-Zapad, an Irkutsk-based oil producer.

JOGMEC Itochu and Inpex

Source: Russian Petroleum Investor

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AUGUST M & A TRANSACTIONS: MOVEMENT IN NON-CORE ASSETS(continued from p.41)




gas producer with assets in the southern part of the North Sea.

In exchange for Gazprom’s access to European as-sets, BASF/Wintershall will receive 25 percent plus one share in Blocks 4 and 5 of the Achimov forma-tion of the Siberian Urengoi gas field with an option to increase the stake to 50 percent. The transaction is expected to be completed by the end of 2013. The estimated reserves at Achimov are 247 bcm of natu-ral gas and 74 million tonnes of gas condensate. The start of production is planned for 2016 with initial annual output of 8 bcm of gas. Wintershall is already involved in the development of the first pilot wells at the Achimov formation (See “End of Year Transactions”, Russian Petroleum Investor, Novem-ber / December ‘12).

In Argentina, Wintershall owns shares in 15 oil and gas fields, producing a total of 27 million barrels of oil equivalent per year. One of Wintershall’s partners in Argentina is France’s Total. Total, in turn, partners with Gazprom in projects in Bolivia. This may facili-tate and accelerate negotiations between Gazprom and Wintershall in Argentina.

Gazprom is considering new projects elsewhere in Latin America as well. In Venezuela, the company is already involved in exploration at the Urumaco-1 and Urumaco-2 blocks with total gas reserves of about 100 bcm. Gazprom has also expressed an interest in investing in Peru. Gazprom’s oil arm, Gazprom Neft, is currently carrying out exploration works in Venezuela.

Somewhat surprisingly, oil producer LUKOIL has moved forward with investing in a non-core busi-ness area in Bulgaria. LUKERG Renew, a 50/50 joint venture between LUKOIL-Ekoenergo and Italy’s ERG Renew, received authorization from Bulgaria’s Commission for Protection of Competition to acquire four Bulgarian wind power plant (WPP) operators. The four companies - Global Energy, Mark 1, Mark 2 and UP Bulgaria 4, operate wind farms with a total generating capacity of 14 MW in the Hrabrovo re-gion. The joint venture already owns 40 MW of wind capacity near the Bulgarian town of Dobrich, as well as 84 MW in Romania. On 20 June 2013, LUKERG Renew announced the purchase of additional 70 MW in Romania. LUKOIL and Erg SpA established LUKERG Renew in 2011 for co-investment in the renewable energy assets in Bulgaria and Romania.

LUKOIL, along with Rosneft and Zarubezhneft, passed the prequalification stage for the tender for the Nasiriya Integrated Project in Iraq. The Nasiriya project entails investment in upstream production as well as the construction of a refinery. The deposit, located in the southern province of Dhi Qar, 320 km south of Baghdad, has estimated crude oil reserves of 586 million tonnes.

Other companies that passed the prequalification stage include France’s Maurel & Prom, which is eligible to take part in the tender for upstream ex-ploration and production, while the Arab-Indian Es-sar, South Korea’s GS Engineering and Construction and India’s ONGC have all prequalified as eligible to build the Iraq’s planned largest oil refinery. The nameplate processing capacity of the Nasiriya refin-ery is planned to reach 14 million tonnes of crude.

Other firms eligible to participate in the tender include China’s CNPC, U.S. Brown Energy, India’s Reliance Industries, France’s Total and Japan’s JGC & Tonen General.

Rosneft has yet to decide whether it will partici-pate in the tender alone or if it will form a consor-tium with other Russian companies. According to experts, China’s CNPC is the most likely company to partner with Rosneft in the Nasiriya Integrated Project.

The Iraqi authorities announced the tender for the Nasiriya project in November 2012. The contracts for the deposit development and the construction of the refinery are expected to be signed by the end of 2014.

Rosneft formally submitted its expression of interest in the Nasiriya Integrated Project in April, during Rosneft president Igor Sechin’s visit to Iraq. Rosneft is also rumored to be in talks with ExxonMobil to join southern Iraq’s West Qurna-1 project, and is in discussions with LUKOIL on a number of other projects.

CHINESE COMPANIES TAKE ROOT IN RUSSIAChinese companies continue to take root in Russia’s energy industry, likely to finalize deals for stakes projects spanning the value chain, from liquefied natural gas to petrochemicals.

NOVATEK is still planning to close the sale of a 20 percent stake in the Yamal LNG project to CNPC by the start of October 2013, NOVATEK Chief Financial Officer Mark Gyetvay said during a conference call on 14 August. Gyetvay added that NOVATEK is cur-rently conducting talks to sell an additional stake in the planned liquefaction project to a new company and may make an announcement on the issue this autumn.

Gyetvay’s comment has led to speculation as to which companies may be new candidates to join Yamal LNG. Analayst with Raiffeisen Bank Andrei Polishchuk believes that France’s EDF along with various Asian companies could be interested in joining the liquefaction project, which is scheduled

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NOVATEK is cur-rently conducting talks to sell an additional stake in the planned liquefaction project to a new company and may make an announcement on the issue this autumn.



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FOREIGN M & A DEALS, AUGUST 2013

to start production in 2015-2016 and produce 15 million tonnes of LNG per year by 2018. Polishchuk said, “perhaps a 9 percent share could be of interest to France’s EDF, which had earlier held talks on its possible entry into the project. Obviously, Japanese and Indian companies are likely to be interested in the project too.” NOVATEK Chief Executive Leonid Michelson has previously stated that the company is continuing to discuss the possibility of selling a 9 percent stake in Yamal LNG to unnamed companies in Asia-Pacific region. LNG output from Yamal is

expected to be primarily marketed to Asia-Pacific consumers.

After Total, CNPC is the second international com-pany to join the project. NOVATEK and CNPC signed a framework cooperation agreement on Yamal LNG during the St. Petersburg International Economic Forum in June 2013. The agreement, calls for CNPC to receive a 20 percent stake in the project while NOVATEK commits to a long-term contract for the supply of a minimum of 3 million tonnes of LNG per


Description of the deal Asset owner BuyerGazprom continued talks with Wintershall about joining the German company’s existing gas projects in Argentina. Gazprom is also considering new ventures in Venezuela and Peru.

Wintershall Gazprom

In an official letter delivered to Iraqi Prime Minister Nouri al-Maliki, the Russian government formally expressed LUKOIL’s interest in the development of the mature Kirkuk oilfield in the autonomous region of Kurdistan.

Iraq’s North Oil Company LUKOIL

Bulgaria’s Commission on Protection of Competition approved the acquisition by LUKERG Renew of four wind power plant operators in Bulgaria: Global Energy, Mark 1, Mark 2, and UP Bulgaria 4. Collectively, these four companies operate wind farms with total capacity of 14 MW in the Hrabrovo region. LUKERG Renew is a 50/50 joint venture between LUKOIL-Ekoenergo and Italy's ERG Renew that already owns 40 MW of wind power capacity in Bulgaria.

Bulgaria’s Global Energy, Mark 1, Mark 2, and UP Bulgaria 4

LUKERG Renew, a 50/50 joint venture of LUKOIL-Ekoenergo and Italy's ERG Renew

Rosneft joined LUKOIL and Zarubezhneft as the third Russian company to pre-qualify for the licensing round for the Nasiriyah Integrated Project in Iraq, which involves upstream oil production and the construction of a 14 million tonne-capacity refinery. Rosneft has yet to decide if it will participate in the tender independently or as part of a consortium. According to experts, China's CNPC is the most likely partner for Rosneft in the project.

Government of Iraq Rosneft

LUKOIL reiterated that it has no plans to leave the Shah Deniz project in Azerbaijan, where it has a 10 percent stake. LUKOIL’s partners are BP (25.5 operating stake), Statoil (25.5 percent), SOCAR (10 percent), NICO (10 percent), Total (10 percent), and TPAO (9 percent).

LUKOIL LUKOILLUKOIL president Vagit Alekperov denied that his company has been in talks with PetroChina on the Chinese company’s possible participation in the West Qurna-2 project in Iraq.

LUKOIL –

Gazprom Neft completed the acquisition of Estonia’s AS Baltic Marine Bunker from AS NT Marine. This is the second foreign asset of Gazprom Neft Marine Bunker, the bunkering unit of Gazprom Neft, which acquired a Romanian bunkering company acquired earlier this year.

AS NT Marine Gazprom Neft

Rosneft is in talks with Bolivia on investment opportunities in the Latin American country. The Russian company is interested in electricity sector projects, as well as the exploration and production of hydrocarbons.

Government of Bolivia Rosneft

Gazprom, Rosneft, and Zarubezhneft are all seeking to strengthen their positions in Vietnam. Zarubezhneft plans to expand its business in offshore oil and gas production, as well as in the reconstruction of the Dung Quat refinery. Zarubezhneft hopes to partner with Rosneft in these efforts.

Various assets in Vietnam Gazprom, Zarubezhneft, Rosneft

Source: Russian Petroleum Investor



TRANSACTIONS



year to China. In addition, the Chinese company will assist with efforts to attract external financ-ing for the project from Chinese credit institutions. NOVATEK’s other partner in Yamal LNG, Total, also owns a 20 percent stake.

Yamal LNG is a planned liquefaction facility with a total design capacity of 16.5 million tonnes per year. LNG will be produced using feedstock gas from the Yuzhno-Tambey gas field. The project also entails investment in major infrastructure on the Yamal peninsula, including the construction of a seaport capable of handling tanker traffic in the town of Sabetta and the construction of an Arctic-class tanker fleet. The first tanker is expected to leave the port in 2016.

In addition to the natural gas sector, Chinese companies have been making advances in Russia’s petrochemical industry. Sinopec and SIBUR Holding formally established a joint venture, Sibur-Sinopec Rubber Holding Company, formed on the basis of SIBUR’s Krasnoyarsk Synthetic Rubber Plant (KSRP). Sinopec acquired 25 percent plus one share of KSRP from SIBUR under the terms of the JV. The parties did not disclose the price which Sinopec paid for the KSRP stake. According to several sources, the deal is valued close to $50 million.

The agreement to establish the KSRP-based joint venture had been signed by Sinopec and SIBUR in April of 2012. In October 2012, the two companies agreed that Sinopec would acquire 25 percent plus a blocking share in KSRP. The share arrangement allows Sinopec to occupy a seat on the board of

KSRP. The deal calls for long-term cooperation, with joint operation of KSRP to take place over a period of 30 years with the possibility of an extension. SIBUR will initially finance current KSRP operations, while the longer-term financing arrangements are still to be determined.

According to SIBUR, KSRP is expected to export about 70 percent of its production, with half of the exports aimed for China. The remaining output will be marketed within Russia. According to SIBUR Executive Director Vladimir Razumov, quoted by a company statement, SIBUR hopes that its coopera-tion with China, one of the world’s largest consum-ers of nitrile butadiene rubber, will contribute to SIBUR’s expansion in the sale of synthetic rubbers. Razumov’s statement also said that the Russian and Chinese companies plan to consider increas-ing the plant’s nitrile butadiene rubber production capacity from 42,500 tonnes to 56,000 tonnes per year.

SIBUR and Sinopec have also discussed the pos-sibility of creating a joint venture for the production of nitrile butadiene rubber and polyisoprene rubber in Shanghai. According to the memorandum of understanding signed by the two companies in Oc-tober 2011, they agreed to create two nitrile butadi-ene rubber ventures, one in Krasnoyarsk and one in Shanghai. The planned Shanghai joint venture can produce annual volumes of 50,000 tonnes of each type of rubber, however, the final production plan will not be determined until the Shanghai project’s feasibility study is completed.



RUSSIA

REGIONAL NEWS

RUSSIA’S ECONMIN CUTS ESTIMATES FOR GAZPROM, ROSSETI INVESTMENTSRussia’s Economy Ministry in September lowered its estimates for investments by the country’s major utility companies over the next three years, following a decision on freezing gas, electricity and railway tariffs. The ministry cut forecasts for capital expediture by gas concern Gazprom, power grid firm Rosseti and Russian Railways for 2014-2016, revising down the combined total by 700-800 billion roubles ($22-25 billion). President Vladimir Putin this month approved a plan to freeze prices charged for state-regulated services in an effort to cool inflation expectations and ease cost pressures as economic growth slows. However, Russia has recently back-tracked on some elements of the plan by allowing partial indexation of prices paid by households. This follows lobbying by state infrastructure giants who warn that the tariff freeze could cripple their investments. The Economy Ministry expects Gazprom’s investment programme to be 300 billion roubles ($9.43 billion) lower in the next three-year period than previously planned, said Oleg Zasov, director of the Economy Ministry’s macroeconomic forecast department. The ministry’s estimate for Rosseti’s investments was cut by 200-300 billion roubles and for Russian Railways

by around 200 billion roubles, Zasov told reporters. The ministry expects inflation to be 4.8 percent next year, 4.9 percent in 2015 and 4.4 percent in 2016, he said.

RUSSIAN GASOLINE PRICES TO SPIKE IF TAX CHANGEDRussian gasoline prices may rise as much as 1.4 roubles (4 U.S. cents) a litre next year if the oil taxation system shifts towards raising extraction tax and cutting export duty, Deputy Finance Minister Sergei Shatalov said. Seeking extra revenues, the Finance Ministry has proposed to cut export duties on crude oil gradually - from a current base rate of 60 percent of the oil price - and increase mineral extraction tax (MET) over the next three years. The measure will support projects that already attract MET relief, such as hard-to-extract oil, but will increase the burden on traditional output - spurring exports and hitting refinery margins. Speaking in the lower house of parliament, Shatalov said gasoline and diesel prices will increase by 1.4 roubles per litre at most next year if the measures are implemented. Fuel prices are a painful topic for the Russian authorities, which slapped punitive duties on gasoline exports in 2011 following widespread demonstrations that challenged then-Prime Minister Vladimir Putin over high prices and shortages. Shatalov said Russian companies would lose 18 billion roubles next

year from the proposed changes in oil tax but would reap net gains of 6.3 billion roubles in 2015 and 68.5 billion roubles in 2016. Shatalov also said the Finance Ministry proposed to keep MET for natural gas flat next year. Russia, the world’s top oil producer, has a complicated oil taxation system, offering relief depending on the field, its location, viscosity or difficulty of extraction. The country is pumping near its capacity of over 10 million barrels per day.

ROSNEFT TO SUPPLY GAS TO ENEL RUSSIAN POWER ASSETSRussia’s Rosneft and Italy’s Enel have signed a long-term agreement to supply gas to the Enel’s Russian power plants, Rosneft said in a statement. Rosneft, which agreed to buy Enel’s stake in a Russian gas producer earlier in September, said that supplies would last from 2014 to 2025. Rosneft’s spokeswoman declined to comment on volumes or the value of the contract. The company, headed by Igor Sechin, a long-standing ally of Russian President Vladimir Putin, aims to increase its share of the domestic gas market to 19-22 percent by 2020 from around 9 percent currently. It expects to produce over 60 billion cubic metres (bcm) of gas by 2016, compared with 42 bcm forecast for 2013, and 100 bcm in 2020, of which more than half will be produced at newly acquired projects.

ROSNEFT SAYS EXXON’S RUSSIA LNG PROJECT INTACTRosneft dismissed Gazprom’s opposition to its liquefied natural gas project with Exxon in Russia, saying the plans are intact for building the plant, increasing the stakes in competition for the lucrative market. «The project implementation will facilitate strengthening of Russia’s position as the most powerful player in the energy industry on the international scale and in light of rising LNG global demand,» Rosneft said in emailed comments. Earlier in September Gazprom voiced strong opposition to plans by Rosneft and Exxon to jointly build their own LNG plant in Russia, saying the plant is «superfluous». «The partners do not need additional assessments from rivals,» Rosneft said.

GAZPROM PAID $1.5 BLN TO RWE IN GAS BACK PAYMENTSGazprom said it had returned around $1.5 billion to RWE in rebates on gas bought by the German utility since May 2010 as a part of a wider row with European clients over gas pricing.Gazprom has been in a dispute

with some European buyers over prices, as its long-term contracts are traditionally linked to the oil price, while buyers have been pressing for a greater emphasis on spot gas prices to cut bills. In June, RWE said that a court had ruled it should be reimbursed for overpayment for gas since May 2010, adjusting the price formula of its long-term gas supply contract with Gazprom by introducing «gas market indexation». «The tribunal ... awarded RWE Transgas a partial reimbursement for payments made since May 2010, which amounts to approximately $1.5 billion,» Gazprom said in the prospectus for a Eurobond issue seen by Reuters. A spokesman for Gazprom Export said the rebate had already been paid to RWE. Gazprom accounts for around a quarter of Europe’s gas imports and is set to respond to increasing demands to include spot gas pricing in its contracts in a market that contributes around 55 percent of its revenue. The average gas price for Europe in the long-term contracts Gazprom will negotiate this year is expected to be around $370-$380 per 1,000 cubic metres, down from $402 last year. Gazprom has set aside 200 billion roubles ($6.2 billion) this year for these so-called retroactive payments, which are set to affect its profit. It had promised that it will not face additional pricing pressure from clients in Europe after the RWE ruling.

UKRAINEUKRAINE PRESSES EU AMBITIONS, IGNORES RUSSIAUkraine formally gave the go-ahead for landmark trade deals to be signed with the European Union, disregarding pressure from Moscow for Kiev to halt its westward course. Prime Minister Nikolai Azarov said the agreements that should be signed at a November summit in Lithuania raised the prospect of “a European quality of life” for the ex-Soviet republic. Kiev has come under pressure from Russia, its former colonial master and still biggest single trading partner, which wants to entice it instead into a Russia-led Customs Union. Russia fears a flood of competitive goods on the Russian market if Ukraine joins an EU free trade zone. It has warned Kiev of retaliatory action and said it will forfeit special partner status if it signs up with the EU.

ENI SHOWS INTEREST IN EXPLORING BLACK SEA GAS FIELDSItalian oil and gas group Eni has expressed interest in exploring gas deposits on the Black Sea shelf, Ukrainian Energy Minister Eduard Stavytsky said. Stavytsky told the Ukrainian parliament that the Italian group might explore shallow shelf areas, but gave no more details. «We have a request from Italian companies and especially from Eni,» he said. Earlier this year Stavytsky told Reuters Ukraine could in future tap at least 5 billion cubic meters of gas from shallow shelf areas in the Black Sea. Talks are still going on with a consortium led by ExxonMobil and Royal Dutch Shell on a deal to develop the Skifska field in deeper areas of the Black Sea shelf.

ROMANIA ARCTICPETROM EYES 1 BLN EURO INVESTMENT NEXT YEAR, SHALE GASRomania’s top oil and gas company Petrom plans to earmark about 1 billion euros ($1.35 billion) for investment next year and could move into shale gas exploration if feasible, Chief Executive Mariana Gheorghe said. Petrom is regarded as an indicator of the Balkan country’s financial health and a robust investment programme suggests the European Union’s second poorest member is on track to achieve economic growth of more than 2 percent this year and next. «To continue to stabilise production or to capture the growth, we really need to continue to invest,» Gheorghe told Reuters. «For the next year onwards, we have a guidance of between 0.8 and 1.2 billion again. But probably it will be over 1 billion euros again next year,» she added. Petrom - which is majority-owned by Austria’s OMV - has three main ways to offset its reserves’ natural decline, including increasing recovery rate for conventional crude oil, deep offshore in the Black Sea and shale gas. «I believe no responsible market operators will refuse to look at this new territory ... We are at a very preliminary stage.» Petrom had said before it might expand operations to shale after 2021. In July, U.S. oil major Chevron won approval to drill exploration wells in eastern Romania. Petrom posted a second-quarter net profit of 1.06 billion lei ($319.4 million), slightly above market expectations.

STATOIL SAYS FOUND NO OIL IN ARCTIC ICE CRYSTAL WELLNorway’s Statoil found only natural gas and no oil at the Ice Crystal prospect in the Arctic Barents Sea, the company and the Norwegian Petroleum Directorate said. «Our main goal was to find oil... but unfortunately it did not materialize. We still believe we can prove more oil resources in the Johan Castberg area and will continue our exploration effort with two more wells,» said Gro Haatvedt, senior vice president for exploration in Norway. The discovery probably contains gas equal to between 6 and 25 million barrels of oil equivalent, Statoil added.



CORPORATE NEWS

TRANSPORTATIONTRANSNEFT TO PULL OUT OF ROSNEFT FAR EAST PIPELINERussia’s pipeline monopoly Transneft has decided to withdraw from building a pipeline to Rosneft’s Far East Komsomolsk refinery due to an expected freeze on transportation tariffs, a company executive said. The two sides are at odds over the financing of the expansion of the Eastern Siberia-Pacific Ocean (ESPO) pipeline and a spur line to China as Rosneft plans to increase oil supplies to Beijing. Russia will freeze tariffs on state-regulated services including gas, electricity and railways in 2014 in a move to tackle inflation which at the same time will force companies to cut investment plans. Tariffs are the sole revenue source for Transneft and the company expects the freeze to slash its revenue by more than 30 billion roubles ($928 million) next year. First Vice President Maxim Grishanin told reporters the oil transportation tariff is not expected to rise after Oct. 1, 2013. Rosneft and Transneft agreed to build a spur to Komsomolsk

refinery last year to supply the plant from the ESPO pipeline directly. The refinery, which has an annual capacity of 8 million tonnes, currently receives crude by rail only. Speaking to Reuters, Rosneft spokeswoman said that the company is looking at «different options» in logistics and different possibilities to realise the project.

SOUTH STREAM TO PUMP HALF OF CAPACITY TO ITALYThe South Stream pipeline that will transport natural gas from Russia to Europe will be ready to pump full capacity at the end of 2017, and will deliver half of it to Italy, the CEO of the project said. «The first gas to Italy will be at the end of 2016 and full capacity will be reached by end 2017 ... half will be for Italy,» South Stream Transport BV Chief Executive Oleg Aksyutin said on the sidelines of a conference in Milan. South Stream Transport manages the offshore part of the project. Italy, which imports around 90 percent of its gas needs

mainly from Russia and Algeria, has seen gas consumption slide in recent years, hit by the country’s worst post-war recession. An executive at Gazprom, a shareholder of the project, said that South Streamvolumes would be needed if south-east Europe was to develop on a par with the rest of the continent and that Italy would need gas to meet future demand. «Given the slowdown in Algerian gas flows, for Italy the only realistic alternative is Gazprom,» Alexander Syromyatin, deputy head of Gazprom’s project management department, said. Italian oil and gas major Eni recently renegotiated long-term gas contracts with Algeria, cutting imports from the north African country. Shareholders in South Stream are Gazprom, France’s EDF, Germany’s Wintershall, and Eni. The South Stream project, seen as Russia’s response to EU attempts to find alternative gas suppliers, is planning to transport some 63 billion cubic metres of gas through the Black Sea, Bulgaria, Serbia, Hungary and Slovenia into Italy. A first phase of the project will be ready to pump 15.75 billion cubic metres of gas to Bulgaria by the end of 2015. The

cost of the project would be around 17 billion euros - 10 billion euros for offshore development and some 7 billion euros for onshore.

TRANSNEFT QUESTIONS ROSNEFT’S ASIA AND DOMESTIC COMMITMENTSRosneft lacks enough reserves to honour its oil deals with Asian buyers while feeding domestic refineries, an executive with pipeline monopoly Transneft said in September, intensifying a spat between the two rivals. State-owned Rosneft, presided over by Igor Sechin, a long-standing ally of President Vladimir Putin, has clinched multi-billion deals with China this year to more than double its oil supplies. It also plans to set up a petrochemical complex, known as VNHK, in the Russian Far East with a refining capacity of up to 30 million tonnes a year. But plans for the plant are opposed by Transneft head Nikolai Tokarev, also a member of Putin’s inner circle, who says the

project to refine oil is unaffordable as it needs new and costly infrastructure and as more oil would be diverted to feed it. The bosses of Rosneft and Transneft bosses have been at loggerheads for years as they jostle for power and influence in Putin’s inner circle. Alexei Sapsai, a Transneft vice president, told a ministerial meeting that Rosneft risks being short of at least 3.9 million tonnes of oil a year by 2020 for its eastern routes, according to Transneft’s calculations, even disregarding VNHK. If VNHK goes onstream, the shortage would stand at 15.9 million tonnes, he told the meeting, which was open to reporters, without saying what his calculations were based on. Rosneft supplies China with 15 million tonnes a year (or 300,000 barrels per day) via pipeline. It also ships oil to Asia via the Pacific port of Kozmino. Sapsai also said Rosneft’s production would total 59.4 million tonnes by 2020 at existing fields whose output is destined to fulfil its Eastern contracts. Rosneft, which also aims to upgrade its Far Eastern Komsomolsk and East Siberia’s Angarsk refineries, said it had no immediate comment.

URALS EXPORTS SEEN DOWN EX-NOVO, UP FROM PRIMORSK IN Q4Russia’s draft fourth-quarter seaborne Urals crude export plan showed on Thursday a scheduled rise in liftings from the Baltic ports and a steep decline from the Black Sea port of Novorossiisk, industry sources said. The the schedule has still been under discussion following a decision to cut oil supplies to Belarus by 42 percent in October-December amid a row over the arrest of the head of Uralkali in Minsk. The draft schedule showed that Urals blend exports are to rise from the Baltic Sea port of Primorsk by 0.7 percent to 14.8 million tonnes, quarter-on-quarter. Exports via the neighbouring Ust-Luga outlet are set to increase by 4.3 percent to 7.3 million tonnes. Oil exports from the Black Sea port of Novorossiisk will likely fall by 8 percent to 9.15 million tonnes, according to the schedule, which is yet to be approved by the Energy Ministry. The draft also

showed an increase of 1.9 percent in ESPO blend scheduled liftings from the Pacific port of Kozmino, to 5.3 million tonnes. The volumes, destined to China via the first stage of the East Siberia - Pacific Ocean pipeline, in the fourth quarter have not been disclosed yet.

BP MULLS LONG-TERM OIL DEAL WITH ROSNEFTBP is working on becoming the first oil major with a long-term deal to buy seaborne crude from Rosneft, trade sources said, after a number of trading houses this year secured large volumes from the Kremlin energy champion. While trading houses Glencore, Vitol and Trafigura agreed to lend Rosneft $11.5 billion in exchange for oil supplies over five years, oil majors have largely stayed on the sidelines, preferring to buy Russian crude at spot tenders. BP has already received some volumes of Russian Urals crude under the deal, which is still being

finalised, three trading sources told Reuters. BP and Rosneft declined to comment. «BP is exploring options that are available to it as a major shareholder in Rosneft. The deal will be somewhat different from what Rosneft has with trading houses,» a source familiar with details of the deal said. BP owns a fifth of Rosneft, which became the world’s largest listed oil firm by output after acquiring BP’s venture in Russia, TNK-BP, in a deal valued at more than $50 billion. That left Rosneft, in which the Kremlin owns a controlling stake, heavily indebted and looking for deals with the likes of Glencore to lighten the burden on its balance sheet by reducing debts to banks as the money is being borrowed by the traders. Rosneft also hopes to obtain up to $70 billion from China in prepayment for oil, in an attempt to cut its debt further. Rosneft currently sells its oil from major ports via two methods - long-term loan-for-oil schemes with traders, and short-term, six-month tenders open to traders and majors. Long-term deals with Rosneft allowed trading houses such as Glencore and Vitol to build

large positions in Urals, the most important crude grade for European refiners. But the deals also turned expensive as they are priced against Rosneft’s six-month tenders, in which majors and traders often bid up prices to win volumes. The first signs that BP is working on a new deal emerged when the major offered to sell a cargo of Urals in the Baltic Sea for early-October delivery. Trading sources said BP would be allocated a total of two Urals cargoes from Rosneft in the Baltic during October. Apart from their shareholding relationship, BP and Rosneft also co-own German refinery venture Ruhr Oel.

ROSNEFT EXTENDS TALKS TO SELL TERM NAPHTA CARGOESRussian Rosneft is into its third tender to sell up to 1.2 million tonnes of naphtha for a 12-month period from Nakhodka starting October as bids had failed to meet its

expectations in the first two tenders, traders said. Rosneft had initially asked for bids to be submitted by Sept. 9, and was to award the tender on Sept. 30. But the validity has now been extended to Oct. 15. The weak fundamentals are working against sellers in general, traders said, adding that this is a bad time to negotiate for a year-long contract. Supplies are currently high due to eastbound cargoes while demand is down due to maintenance at one of three naphtha crackers operated by Taiwanese Formosa Petrochemical Corp. Upcoming maintenance at a naphtha splitter owned by South Korea’s GS Caltex and CPC Corp are also weighing on sentiment. Exxon has also shut some of its operating units at its Singapore Chemical Plant, although its naphtha usage is small compared to Taiwan and South Korea. Rosneft has an existing 6-month contract to sell up to a total 400,000 tonnes of naphtha for May to October loading from Nakhodka to Japan’s JX Nippon Oil & Energy Corp and Malaysia’s state-owned refiner Petronas.

TRADING



CORPORATE NEWS(continued from p.44)

PROFITS & LOSSESROSNEFT OFFERS LOWBALL $1.5 BLN FOR TNK-BP MINORITIESOil group Rosneft is to buy the remaining shares in TNK-BP Holding for a fraction of the price it paid BP and a group of oligarchs for their stakes, in a worrying development for minority shareholders in Russian companies. Rosneft bought the holding company and its parent TNK-BP last year in a $55 billion takeover that created the world’s largest publicly traded oil company by output. Minority shareholders own about 5 percent of the unit, now renamed RN Holding. The deal to buy them out for about $1.5 billion was announced by Rosneft on Monday, after months of tough talk and refusal to acquire the shares had sent jitters through the investor community and raised questions over corporate governance in Russia. Rosneft said it planned to buy out holders of ordinary shares at 67 roubles ($2.07) per share and preferred shares at 55 roubles, the company said. But the offer disappointed some investors hoping to get closer to the $3.70 a share analysts calculated that oligarchs including Mikhail Fridman received at the time of the TNK-BP buyout. The other tycoons were German Khan, Viktor Vekselberg and Len Blavatnik.

RUSSNEFT SAYS GLENCORE MAY SWAP DEBT FOR SHARESCommodities trader and mining giant Glencore Xstrata could become a shareholder in Russian oil firm Russneft as part of a debt restructuring, Russneft’s owner said. «If Glencore chooses to convert some of Russneft’s debt into shares, it may well become a shareholder,» Mikhail Gutseriyev told Reuters by telephone. Glencore, which declined to comment, helped Gutseriyev build up Russneft a decade ago into a mid-sized oil firm and is still owed around $2.3 billion out of Russneft’s total debt of $4 billion. But while being a big buyer of Russian oil it still has only a modest presence in oil production in the former SovietUnion, having accumulated minority stakes in some production units of Russneft. Gutseriyev said that regardless of whether Glencore chooses to convert debt into shares, the trading house will remain the main buyer of Russneft’s oil under a renewed 20-year deal. He said Russneft was currently going through a restructuring and debt refinancing with creditors with the aim of cutting interest payments on its debt, streamlining its corporate structure and cutting costs, and ultimately raising production.The firm was also aiming to increase output to 18 million tonnes in

the mid-term from the current 14 million tonnes, equivalent to 280,000 barrels a day, he said.

ALFA GROUP UNIT BUYS STAKE IN REGAL PETROLEUMA1, an investment vehicle of Russian billionaire Mikhail Fridman, said it had acquired a 24.4 percent stake in Regal Petroleum, which produces gas and gas condensate in Ukraine. News of the deal sent Regal’s shares sharply higher in London and they closed up 10.6 percent on the session. The buyer is one of A1’s subsidiaries, and the seller is CIS Natural Resources,» A1 President Mikhail Khabarov told Reuters. Khabarov declined to disclose financial details of the deal, but said Regal Petroleum’s revenues stood at 25.3 million pounds ($40.5 million) in 2012. «We do not rule out that we may invest more in this company. We believe it has potential to increase its market capitalisation and think that we can make the management more efficient in the interests of all shareholders,» he said. A1 is a unit of Fridman’s Alfa Group and its investment portfolio ranges from car dealerships to cinemas to real estate. It is also known for investing in companies that struggle to pay debts or are embroiled in corporate disputes, selling them on relatively quickly after resolving the standoff.

M & AROSNEFT SEES 2013 IFRS NET INCOME AT 439 BLN RBLSRussia’s top crude producer Rosneft said it expects to earn 439 billion roubles ($13.8 billion) in net income under International Financial Reporting Standards this year following its acquisition of TNK-BP. The company also expects to produce 207 million tonnes (4.16 million barrels per day) of crude oil and around 42 billion cubic metres of natural gas this year, Rosneft’s press office said. Rosneft completed a $55 billion deal to acquire TNK-BP from BP and AAR consortium of Soviet-born billionaires in March and became the world’s top listed oil producer.

BASHNEFT CONFIRMS IT PLANS OVERSEAS IPO IN 2014-2015Bashneft, a mid-sized Russian oil producer, confirmed it plans an overseas share offering in 2014-2015 but said that it has not appointed banks or decided on an amount to be sold. Bashneft is controlled by Russian billionaire Vladimir Evtushenkov through his oil-to-telecoms conglomerate Sistema. «The company is studying the possibility of an IPO at the end of 2014 or 2015, which was repeatedly said by our main shareholder,» Bashneft said.

TATNEFT Q2 PROFIT MORE THAN TRIPLESRussian mid-sized oil producer Tatneft said its second-quarter profit attributable to shareholders more than tripled year-on-year to 14.9 billion roubles ($447.26 million). Revenues for the reported period rose by 9 percent to 104.7 billion roubles, while earnings before interest, tax, depreciation and amortisation were up by 42 percent at 26 billion roubles.

SERBIA’S NIS SEES NO REFINING MARGINS RECOVERY…Serbia’s sole oil refiner NIS expects its net profit to fall 22 percent this year on the back of higher taxes and weak refining margins, which are not seen recovering before 2016, NIS chief executive officer Kirill Kravchenko said. «Now, 80 percent of the plants in Europe are working with zero margins. We plan that margins (will recover) in 2016,» said Kravchenko to reporters in an interview. The company, majority owned by Russia’s Gazprom Neft, saw its first-half net income falling 13 percent due to lower oil and natural gas prices as well as thanks to a higher tax bill. Kravchenko also said that NIS, which has insufficient oil production to feed its refineries, plans to start buying Iraqi Kirkuk crude blend in 2014.

…AND BUILDS THE FIRST WIND FARMNIS and its local partners kicked off the construction of the country’s first 102 megawatt (MW) wind farm that will cost 160 million euros ($213.58 million) and improve its energy mix. NIS acquired a 50% stake in the Plandiste wind farm project from the renewable power developer Energowind. The project will comprise 32 wind turbines and produce 212 gigawatt-hours (GWh) of power a year. NIS is setting aside 23 mln euros for the project, while the remainder will be secured by its partners and through a loan. Serbia’s Deputy Prime Minister Aleksandar Vucic said the park will help the country achieve its target of ensuring 27% of total energy consumption from renewables by 2020. The Balkan country produces 70% of its electricity in ageing coal-fired plants. The rest comes from hydropower.

DOWNSTREAM

UPSTREAMBASHNEFT SEES TREBS AND TITOV OUTPUT AROUND 1 MLN T IN 2014Bashneft, Russia’s mid-sized oil producer, sees oil output at its new Trebs and Titov oil fields reaching 1 million tonnes (20,000 bpd) next year, Chief Executive Alexander Korsik told the Reuters

Russia Investment Summit in September. Bashneft, part of oil-to-telecoms company Sistema, started producing in test mode at the two fields in the Timan-Pechora province of northern Russia, the biggest new project to be launched in several years. The ramp-up is planned in three phases, with peak production of 4.8 million tonnes a year expected by 2018. “The first

phase targets 1.5 million tonnes, the second, up to 3 million tonnes, and the third, 4.8 million tonnes,” Korsik said. Not counting Trebs and Titov, Bashneft which pumped 15.4 million tonnes of oil last year and operates its core fields in the ethnic republic of Bashkortostan, aims to boost output to 15.7 million tonnes this year and maintain that level through 2014.



STATISTICS

OIL PRODUCTION IN JULY 2013 (thousand tons)

Company July Daily Average +/- Daily . July Vs June

YTD

Vertically Integrated Companies:Bashneft:Bashmineral 0.0 0.00 0.0 1.2 Bashneft 1,353.7 43.67 0.4 9,078.8 Geoneft 0.0 0.00 (0.1) 41.7 Zirgan 0.0 0.00 0.0 0.0 Total for Bashneft 1,353.7 43.67 0.3 9,121.7 Gazprom neft: Archinskoye 16.7 0.54 0.0 108.6 CNT 23.6 0.76 0.2 124.9 Gazprom neft 93.9 3.03 (0.0) 623.7 Gazprom neft Orenburg 96.2 3.10 0.3 537.1 Gazpromneft-Khantos 97.3 3.14 0.1 617.6 Gazpromneft-NNG 889.9 28.71 (0.1) 6,207.3 Gazpromneft-Vostok 80.7 2.60 0.0 543.4 Gazprmneft Novy Port 1.9 0.06 0.1 14.1 MAGMA 42.6 1.37 0.0 282.3 Meretoyakhaneftegaz 0.2 0.01 (0.0) 0.5 Sibneft-Yugra 1,025.9 33.09 0.1 6,941.2 YuUNG 23.2 0.75 0.0 152.5 Zapolyarneft 346.2 11.17 0.2 2,265.4 Zhivoy Istok 0.2 0.01 0.0 1.5 Total Gazprom neft 2,738.2 88.33 1.1 18,420.0 LUKOIL: Kama-oil 14.8 0.48 0.0 88.4 LUKOIL-AIK 201.0 6.48 (0.1) 1,409.2 LUKOIL-KMN 79.0 2.55 (0.0) 553.3 LUKOIL-Komi 1,171.1 37.78 0.3 7,987.5 LUKOIL-Nizhnevolzhskneft 114.5 3.69 (0.2) 797.9 LUKOIL-Perm 1,128.7 36.41 (0.0) 7,690.0 LUKOIL-Zapadnaya Sibir 3,807.5 122.82 4.1 25,414.8 Brendan 3.7 0.12 (0.0) 0.0 Kondukchaneft 2.7 0.09 0.0 7.8 Mushakneft 0.0 0.00 (0.0) 0.0 Naryanmarneftegaz 96.9 3.13 (0.0) 755.9 NMNG-MNA 2.5 0.08 0.0 48.7 PermTOTINeft 16.6 0.54 (0.0) 113.1 RITEK 418.0 13.48 (4.8) 3,646.2 R-Vnedreniye 0.0 0.00 0.0 0.0 Samara-Nafta 219.4 7.08 (0.1) 644.0 Tursunt 10.0 0.32 0.0 65.9 UralOil 0.0 0.00 0.0 0.0 Volgodeminoil 45.4 1.46 0.2 272.8 Total for LUKOIL 7,331.9 236.51 (0.7) 49,506.6 Rosneft: Dagneftegaz 2.1 0.07 0.0 15.2 Grozneftegaz 41.0 1.32 (0.0) 293.2 RN Ingushneft 5.3 0.17 0.0 36.9 Polar Lights 36.6 1.18 (0.0) 265.3





YTD

RN-Severnaya Neft (Northern Oil) 254.9 8.22 (0.1) 1,836.0 Rosneft-Dagneft 12.9 0.42 (0.0) 84.5 RN-Krasnodarneftegaz 77.4 2.50 0.0 522.4 Rosneft-Malaninskaya gruppa 4.7 0.15 (0.0) 33.3 Rospan International 63.5 2.05 2.0 0.0 RN-Purneftegaz 558.7 18.02 0.4 3,786.8 RN-Sakhalinmorneftegaz 123.2 3.97 (0.0) 842.7 RN-Stavropolneftegaz 68.0 2.19 (0.0) 480.0 Samaraneftegaz 943.5 30.44 0.3 6,308.8 Udmurtneft 548.7 17.70 (0.0) 3,753.0 Vankorneft 1,834.1 59.16 0.1 12,345.4 Vostsibneftegaz 0.0 0.00 0.0 49.5 RN-Yuganskneftegaz 5,598.5 180.60 (0.2) 38,510.5 Yupiter-A 1.6 0.05 0.1 1.6 Buguruslanneft 143.2 4.62 0.0 977.1

Ermakovskoye 65.6 2.12 (0.1) 464.8 Kalchinskoye 43.9 1.42 (0.0) 307.7 Malosiktorskoye 0.0 0.00 0.0 0.0 Nizhnevartovsk OGPC 211.2 6.81 0.0 1,470.6 Novosibirskneftegaz 0.0 0.00 0.0 0.0 Orenburgneft 1,562.1 50.39 (0.5) 10,640.9 Samotlorneftegaz 1,405.2 45.33 (0.4) 9,670.0 Severnoyeneftegaz (up to 12/09) 0.0 0.00 0.0 0.0 Severo-Varyeganskoye 37.1 1.20 (0.0) 254.4 Suzun 0.0 0.00 0.0 0.0 TNK-Nizhnevartovsk 497.1 16.04 (0.9) 3,411.2 TNK-Nyagan 541.8 17.48 (0.1) 3,747.0 TNK-Uvat 744.2 24.01 0.7 4,570.3 Tyumenneftegaz 12.1 0.39 0.2 58.3 Vanyeganneft 115.5 3.73 0.0 765.0 Varyeganneftegaz 143.4 4.63 (0.1) 982.5 Verkhnechonskneftegaz 654.8 21.12 (0.0) 4,424.2 Yugraneft Corp. 28.3 0.91 (0.0) 202.1 Total for Rosneft 16,380.5 528.40 202.6 111,174.3 RussNeft: Aganneftegazgeologiya 105.1 3.39 0.6 475.9 AKI-OTYR 147.1 4.75 0.1 896.9 Archneftegeologiya 0.0 0.00 0.0 0.0 Belkamneft 187.2 6.04 (0.1) 1,293.9 Belye Nochi (White Nights) 139.4 4.50 (0.3) 1,079.8 Chernogorskoye 10.3 0.33 0.0 70.7 Duklinskoye 0.0 0.00 0.0 0.0 Fedyushkinskoye 0.0 0.00 0.0 0.0 Goloil 12.5 0.40 (0.0) 91.2 KNNK 0.4 0.01 (0.0) 2.9

Grushovoye 0.0 0.00 0.0 0.0 Mokhtikneft 30.2 0.97 0.0 202.8 Nafta-Ulyanovsk 0.0 0.00 0.0 0.0 Nefterazvedka 0.5 0.02 0.0 3.0 Novo-Aganskoye 7.0 0.23 0.0 40.6

STATISTICS(continued from p.49)



STATISTICS



YTD

Okunevskoye 1.1 0.04 0.0 6.8 Penzaneft NGDU 0.0 0.00 0.0 0.0 Poselkovoye 0.0 0.00 0.0 0.0 Regionalnyi neftyanoi konsortsyum 101.3 3.27 (0.1) 703.4 RNK 2.1 0.07 0.0 13.9 Saratov-Bureniye 2.8 0.09 (0.0) 19.9 Saratovneftegaz 68.6 2.21 (0.1) 494.8 Sobolinoye 0.0 0.00 0.0 0.0 Stolbovoye 0.0 0.00 0.0 0.0 Tomskaya neft 84.2 2.72 (0.1) 606.0 Udmurt National Oil Company 9.6 0.31 0.0 64.4 Udmurt Oil Company 41.2 1.33 0.2 192.9 Udmurtgeologiya 10.7 0.35 0.0 72.1 Ulyanovskneft 75.9 2.45 0.1 477.2 Uralskaya Neft (Ural Oil) 2.6 0.08 0.0 18.1 UTEK-Ryabovskoye 15.1 0.49 (0.1) 125.9 Valyuninskoye 1.8 0.06 (0.0) 12.7 Varyeganneft 93.2 3.01 (0.0) 636.9 Zapadno-Malobalykskoye 53.5 1.73 (0.0) 378.5 Total for RussNeft 1,203.3 38.82 0.3 7,981.2 Slavneft: Obneftegazgeologiya 315.1 10.16 (0.2) 2,254.5 Obneftegeologiya 39.8 1.28 (0.0) 266.9 Slavneft 53.3 1.72 (0.0) 355.4 Slavneft-Krasnoyarskneftegaz 3.8 0.12 0.1 11.4 Slavneft-Megionneftegaz 775.8 25.03 (0.0) 5,354.3 Slavneft-Megionneftegazgeologiya 42.1 1.36 (0.1) 306.5 Slavneft-Nizhnevartovsk 183.5 5.92 0.0 1,250.4 Sobol 10.7 0.35 (0.0) 79.5 Total for Slavneft 1,423.9 45.93 (0.2) 9,878.9 Surgutneftegaz: Surgutneftegaz (UFO) 4,603.3 148.49 0.0 31,509.0 Surgutneftegaz (Yakutiya) 619.9 20.00 0.1 4,152.2 Total for Surgutneftegaz 5,223.2 168.49 0.1 35,661.2 Tatneft: Ilekneft 1.4 0.05 (0.0) 9.2 Tatneft 2,217.7 71.54 0.0 15,149.8 Tatneft-Samara 24.8 0.80 0.0 172.6 Tatneft-Severny 0.5 0.02 (0.0) 3.3 Total for Tatneft 2,244.4 72.40 0.0 15,334.9 Total for Vertically Integrated Companies

37,899.1 1,222.55 2.0 257,079.0

Total for Gazprom 1,231.5 39.73 (8.3) 9,492.6 Total for NOVATEK 348.5 11.24 (0.7) 2,552.3 Total for Other Oil-Producing Companies:

3,558.4 114.79 (2.2) 25,507.0

Total PSA Operators 1,070.7 34.54 (4.1) 7,854.6 Total 44,108.1 1,422.84 (13.3) 302,485.4 Note: All figures are preliminary. Source: Russian Ministry of Energy




GAS PRODUCTION N JULY 2013 (mln cu m)


YTD

Vertically Integrated Companies:Bashneft:Bashmineral 0.0 0.0 0.0 0.0 Bashneft 47.2 1.5 0.0 273.4 Geoneft 0.0 0.0 (0.0) 1.3 Zirgan 0.0 0.0 0.0 0.0 Total Bashneft 47.2 1.5 0.0 274.6 Gazprom neft: 0.0 0.0 Archinskoye 0.4 0.0 (0.0) 3.4 CNT 1.8 0.1 0.0 5.9 Gazprom neft 6.2 0.2 0.0 35.6 Gazprom Neft Novy Port 0.0 0.0 0.0 0.8 Gazprom neft Orenburg 138.7 4.5 0.0 787.6 Gazpromneft-Khantos 3.4 0.1 0.0 22.9 Gazpromneft-NNG 366.8 11.8 (6.3) 3,678.4 Gazpromneft-Vostok 5.6 0.2 0.0 34.3 MAGMA 4.1 0.1 (0.0) 28.1 Meretoyakhaneftegaz 0.0 0.0 0.0 0.0 Sibneft-Yugra 8.6 0.3 0.1 51.1 YuUNG 12.1 0.4 0.0 78.5 Zapolyarneft 163.1 5.3 (2.6) 1,596.2 Zhivoy Istok 0.2 0.0 (0.0) 0.3 Total Gazprom neft 710.8 22.9 (8.9) 6,322.9 LUKOIL: 0.0 0.0 Kama-oil 0.5 0.0 (0.0) 3.7 LUKOIL-AIK 4.2 0.1 (0.5) 111.1 LUKOIL-KMN 1.9 0.1 0.0 13.3 LUKOIL-Komi 90.6 2.9 (0.0) 627.0 LUKOIL-Nizhnevolzhskneft 104.3 3.4 (0.3) 627.0 LUKOIL-Perm 96.7 3.1 0.1 717.5 LUKOIL-Zapadnaya Sibir 1,112.2 35.9 0.1 7,662.8 Brendan 0.0 0.0 0.0 0.0 Kondukchaneft 0.1 0.0 0.0 0.2 Naryanmarneftegaz 13.9 0.4 (0.0) 128.3 NMNG-MNA 0.0 0.0 (0.0) 1.1 PermTOTINeft 0.2 0.0 (0.0) 1.2 RITEK 48.1 1.6 (0.4) 401.3 R-Vnedreniye 0.0 0.0 0.0 0.0 Samara-Nafta 1.5 0.0 0.0 4.3 Tursunt 0.5 0.0 0.0 3.1 UralOil 0.0 0.0 0.0 0.0 Volgodeminoil 11.2 0.4 0.0 54.7 Total for LUKOIL 1,486.0 47.9 (0.9) 10,447.8 Rosneft: 0.0 0.0 Dagneftegaz 26.0 0.8 0.1 167.8 Grozneftegaz 10.1 0.3 (0.1) 105.4 Kynsko-Chaselsky Neftegas 6.4 0.2 (0.0) 6.4 RN Ingushneft 0.7 0.0 (0.0) 3.4 Polar Lights 2.4 0.1 (0.0) 18.0




GAS PRODUCTION IN JULY 2013 (mln cu m)


YTD

Udmurtneft 0.8 0.0 (0.0) 6.8 Vankorneft 34.1 1.1 (0.0) 288.7 Vostsibneftegaz 0.0 0.0 0.0 1.4 Yuganskneftegaz 316.1 10.2 3.4 2,046.6 Yupiter-A 49.0 1.6 1.6 Buguruslanneft 1.2 0.0 (0.0) 8.7 Ermakovskoye 3.3 0.1 0.0 22.9 Kalchinskoye 2.5 0.1 0.0 11.1 Nizhnevartovsk OGPC 19.9 0.6 0.0 133.1 Novosibirskneftegaz (up to 12/09) 0.0 0.0 0.0 0.0 Orenburgneft 242.2 7.8 (0.1) 1,608.0 Samotlorneftegaz 427.2 13.8 0.7 2,954.7 Severnoyeneftegaz 0.0 0.0 0.0 0.0 Severo-Varyeganskoye 32.8 1.1 0.2 215.4 TNK-Nizhnevartovsk 67.3 2.2 0.1 447.3 TNK-Nyagan 125.9 4.1 0.2 800.7 TNK-Uvat 6.3 0.2 (0.0) 46.1 Tyumenneftegaz 0.0 0.0 0.0 0.0 Vanyeganneft 94.3 3.0 0.6 643.2 Varyeganneftegaz 107.2 3.5 (0.4) 874.5 Verkhnechonskneftegaz 8.1 0.3 0.0 52.0 Yugraneft Corp. 3.2 0.1 0.0 21.5 Total for Rosneft 2,606.3 84.1 51.8 15,762.1 RussNeft: 0.0 0.0 Aganneftegazgeologiya 8.7 0.3 0.1 16.8 AKI-OTYR 9.1 0.3 0.0 44.8 Archneftegeologiya 0.0 0.0 0.0 0.0 Belkamneft 3.5 0.1 (0.0) 21.9 Belye Nochi (White Nights) 52.2 1.7 (0.1) 246.4 Chernogorskoye 0.7 0.0 (0.0) 4.7 Duklinskoye 0.0 0.0 0.0 0.0 Fedyushkinskoye 0.0 0.0 0.0 0.0 Goloil 0.9 0.0 (0.0) 4.6 Grushovoye 0.0 0.0 0.0 0.0 Mokhtikneft 1.5 0.0 (0.0) 9.5 KKNK 0.0 0.0 0.0 0.0 Nafta-Ulyanovsk 0.0 0.0 0.0 0.0 Nefterazvedka 0.0 0.0 0.0 0.0 Novo-Aganskoye 0.8 0.0 0.0 4.3 Okunevskoye 0.0 0.0 0.0 0.0 Penzaneft NGDU 0.0 0.0 0.0 0.0 Poselkovoye 0.0 0.0 0.0 0.0 Regionalnyi neftyanoi konsortsyum 1.6 0.1 0.0 8.8 RNK 0.0 0.0 0.0 0.2 Saratov-Bureniye 2.7 0.1 (0.0) 18.1 Saratovneftegaz 31.8 1.0 (0.0) 237.9 Sobolinoye 0.0 0.0 0.0 0.0 Stolbovoye 0.0 0.0 0.0 0.0 Tomskaya neft 8.4 0.3 (0.0) 18.9 Udmurt National Oil Company 0.1 0.0 (0.0) 0.6 Udmurt Oil Company 0.3 0.0 (0.0) 1.0




GAS PRODUCTION IN JULY 2013 (mln cu m)


YTD

Udmurtgeologiya 0.1 0.0 (0.0) 0.4 Ulyanovskneft 0.6 0.0 (0.0) 3.7 Uralskaya Neft (Ural Oil) 0.0 0.0 0.0 0.2 UTEK-Ryabovskoye 0.2 0.0 (0.0) 1.5 Valyuninskoye 0.1 0.0 (0.0) 0.1 Varyeganneft 50.3 1.6 (0.1) 330.0 Zapadno-Malobalykskoye 1.8 0.1 (0.0) 12.2 Total for RussNeft 175.6 5.7 (0.2) 986.6 Slavneft: 0.0 0.0 Obneftegazgeologiya 6.0 0.2 (0.0) 42.9 Obneftegeologiya 0.2 0.0 (0.0) 1.2 Slavneft 0.4 0.0 (0.0) 2.9

Slavneft-Krasnoyarskneftegaz 0.0 0.0 0.0 0.2 Slavneft-Megionneftegaz 60.3 1.9 0.0 414.0 Slavneft-Megionneftegazgeologiya 0.7 0.0 0.0 5.0 Slavneft-Nizhnevartovsk 0.8 0.0 (0.0) 7.8 Sobol 0.9 0.0 (0.0) 6.4 Total for Slavneft 69.2 2.2 (0.0) 480.4 Surgutneftegaz: 0.0 0.0 Surgutneftegaz (UFO) 957.6 30.9 (0.4) 6,713.9 Surgutneftegaz (Yakutiya) 52.4 1.7 0.0 392.8 Total for Surgutneftegaz 1,010.0 32.6 (0.4) 7,106.7 Tatneft: 0.0 0.0 Ilekneft 0.0 0.0 0.0 0.3 Tatneft 76.3 2.5 0.0 510.1 Tatneft-Samara 0.0 0.0 0.0 2.0 Tatneft-Severny 0.0 0.0 0.0 0.0 Total for Tatneft 76.3 2.5 0.0 512.5 Total for Vertically Integrated Companies

6,181.4 199.4 6.0 41,893.6

Total for Gazprom 31,928.7 1030.0 15.4 271,721.7 Total for NOVATEK 4,094.5 132.1 3.2 30,934.1 Total PSA Operators 1,774.2 57.2 (11.1) 15,758.5 Total 46,508.3 1500.3 (2.8) 381,737.7 Note: All figures are preliminary. Source: Russian Ministry of Energy




OIL REFINING, JANUARY-JULY 2013 (thousand tons)

Company/Refinery Primary Oil Refining Oil Products

Gasoline Diesel Fuel Residual Fuel Jet FuelAlliance Group: Khabarovsk Refinery 395.9 50.6 34.9 126.4 21.5 Total for Alliance Group 395.9 50.6 34.9 126.4 21.5 Afipsk Refinery 450.7 0.0 168.9 199.3 0.0 Bashneft: Novo-Ufimsk Refinery 587.4 194.6 230.5 72.3 13.7 Ufaneftekhim 794.6 92.8 284.8 41.4 0.0 Ufimsk Refinery 524.9 121.1 172.9 139.5 0.0 Total for Bashneft 1,906.9 408.5 688.2 253.2 13.7 Gazprom 266.8 101.6 75.0 34.4 0.3 Gazprom neft: Omsk Refinery 1,871.3 421.3 583.3 101.9 159.7 Moscow Refinery 1,027.7 208.3 212.0 243.8 72.1 Total for Gazprom neft 2,899.0 629.6 795.3 345.7 231.8 Gazprom neftekhim Salavat 562.3 31.6 223.3 90.9 0.0 KrasnodarEcoNeft 211.8 0.0 43.3 96.7 12.2 LUKOIL: Nizhegorodnefteorgsintez 1,472.7 247.3 403.7 478.7 52.1 Permnefteorgsintez 1,129.9 152.3 345.8 120.8 82.7 Ukhtaneftepereeabotka 343.6 39.4 99.6 151.7 0.0 Volgogradneftepererabotka 973.4 154.8 282.4 67.8 90.5 Total for LUKOIL 3,919.6 593.8 1,131.5 819.0 225.3 Novoshakhtinsk Nefteprodukt Refinery 228.0 0.0 0.0 125.6 0.0 Rosneft: Achinsk Refinery 685.7 113.7 183.9 249.9 26.1 Angarsk Petrochemical Company 910.4 118.6 214.5 219.3 67.7 Komsomolsk Refinery 690.1 41.3 189.8 279.7 26.0 Novo-Kuibyshevsk Refinery 727.5 85.8 206.6 188.2 34.1 Samara Refinery 638.0 93.2 226.4 244.4 0.0 Syzran Refinery 729.0 106.7 164.5 235.7 31.6 Tuapse Refinery 600.5 0.0 190.7 266.1 0.0 Novo-Kuibyshevsk Lubricant Plant 0.0 0.0 0.0 0.0 0.0 Saratov Refinery 599.1 100.8 173.0 183.0 0.0 Ryazan Refinery 1,542.2 304.8 381.8 501.1 106.5 Total for Rosneft 7,122.5 964.9 1,931.2 2,367.4 292.0 Orsknefteorgsintez 502.4 66.2 159.2 128.7 19.5 Slavneft: Yaroslavl Refinery 28.2 0.0 0.0 7.2 0.0 Yaroslavnefteorgsintez 1,345.2 215.4 390.9 399.5 106.7 Total for Slavneft 1,373.4 215.4 390.9 406.7 106.7 Surgutneftegaz: Kirishinefteorgsintez 1,748.9 202.2 473.1 760.5 54.7 Total for Surgutneftegaz 1,748.9 202.2 473.1 760.5 54.7 TAIF-NK (Niznekamsk Refinery) 762.6 48.8 180.9 178.3 1.9 TANECO 730.6 0.0 0.0 177.6 0.0 Yaysky Refinery 138.6 0.0 0.0 55.8 0.0Total for Companies and Refineries 23,220.0 3,313.2 6,295.7 6,166.2 979.6 Total for Mini-plant 1,044.8 20.0 200.0 381.3 15.4 Total 24,264.8 3,333.2 6,495.7 6,547.5 995.0 Note: All figures are preliminary. Source: Russian Ministry of Energy




OIL EXPORT FROM RUSSIA, JANUARY-JULY 2013 (thousand tons)

Company Seaports Oil pipelines YTDNovo-

rossiyskTuapse Butinge Primorsk Ust-Luga Druzhba

PipelineESPO

(China)CPC

Far abroad export and transit via Transneft by the directions

21,986.0 0.0 12,496.7 32,638.4 13,193.2 29,668.6 8,875.1 1,079.0 119,937.0

Vertically Integrated Companies:Bashneft 977.1 1,361.2 2,338.3Gazprom neft 3,557.7 1,090.5 4,648.2LUKOIL 8,967.2 2,994.1 11,961.3Rosneft 30,276.2 22,602.8 52,879.0RussNeft 1,947.1 990.5 2,937.6Surgutneftegaz 12,600.9 4,487.0 17,087.9Tatneft 3,797.3 2,885.3 6,682.6TNK-BP Holding 0.0 0.0 0.0Total for Vertically Integrated Companies

62,123.5 36,411.4 98,534.8

State Controlled Companies:Gazprom 367.7 0.0 367.7Total for State-Controlled Companies

367.7 0.0 367.7

Other Oil-Producing and Exporting Companies

5,180.3 1,195.3 6,375.6

PSA Operators 881.2 0.0 881.2CPC 1,079.0 1,079.0Total export for Russian Federation via Transneft

68,552.7 37,606.7 1,079.0 107,238.4

Kazakhstan's transit via Transneft 10,762.1 0.0 10,762.1Azerbaijan's transit via Transneft 994.9 994.9Turkmeniya's transit via Transneft 4.5 4.5 0.0Belarus 937.0 937.0Far abroad export and transit via Transneft

80,314.3 38,543.7 1,079.0 119,937.0

Export to far abroad passing Transneft

13,204.5

Far abroad export and transit 133,141.5Far abroad export from Russia 120,442.9Far abroad transit 12,698.6CIS countries export 16,893.5Export to Kazakhstan 3,802.1Export to Kazakhstan via Transneft

3,773.8

Export to Kazakhstan passing Transneft

28.3

Export to Belarus 13,091.4Export to Belarus via Transneft 12,191.0Export to Belarus passing Transneft

900.4

Export to Ukraine 0.0Export to Ukraine via Transneft 0.0Total export and transit 150,034.9Total export from Russia 137,336.3Total transit 12,698.6

Note: All figures are preliminary; nonreconcilable totals reflect incomplete data supplied by the RF Ministry of Energy


© Thomson Reuters 2013

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