NOVEMBER 2016: Issue 107 forum A QUARTERLY JOURNAL FOR DEBATING ENERGY ISSUES AND POLICIES It is well known that Russia is heavily not be practically possible, meaning CONTENTS dependent on its energy sector, from that oil and gas companies could face both an economic and a political a stealth increase in their overall tax Russian energy issues in a volatile perspective. As a result, the fall in the burden. environment oil price over the past two years and the Tatiana Mitrova then discusses one Russia’s macroeconomic problems and dramatic changes taking place in the of the key factors underpinning the the risks to the oil and gas sector global gas market are having signifi cant survival of Russia’s hydrocarbon Christopher Granville 4 consequences for both the Kremlin and industry in 2016, namely the devaluation Russia’s domestic energy companies. Cost dynamics in the Russian energy sector of the ruble and its impact on cost Tatiana Mitrova 7 However, instead of reviewing the competitiveness. The Russian increased risks for Russia from the The Rosneftization of the Russian oil sector government’s decision not to protect change in global energy markets, this Nina Poussenkova 9 the domestic currency as the oil price edition of the Oxford Energy Forum collapsed has signifi cantly enhanced Securing the future: the implications of discusses how Russia has started the position of exporting industries, India’s expanding role in the Russian oil to adapt its policies and commercial reducing their costs in US$ terms, sector strategies in a number of different areas. Vitaly Yermakov 12 but Mitrova argues that this benefi t Some of the new strategies appear very has limited further upside and could positive, while others carry inherent Ukraine’s dramatic gas import diversifi cation risks, but all show how the world’s indeed be reversed if the oil price Simon Pirani 15 largest producer of hydrocarbons is recovers. What is needed for long-term being forced to respond politically and competitiveness to be maintained is The revived Turkish Stream: what, where, commercially to the shock of lower systemic improvements in business and when? commodity prices. practices across the industry. Katja Yafi mava 17 In the fi rst article Christopher Granville From an oil industry perspective, From Nord Stream 1 to Power of Siberia 1: assesses the potential risks to the Nina Poussenkova then considers the a change in mind-set from Soviet planning oil and gas sector from the Russian growing role of Rosneft in the sector, to capitalist unknowns! government’s need to balance the which is particularly relevant following Thierry Bros 20 budget in a low oil price environment. its recent acquisition of fellow state Novatek leads the advance of Russian LNG Increased taxes from oil and gas company Bashneft in the controversial James Henderson 22 production and exports are clearly privatization. This latest purchase Russian power sector approaching the one possible source of extra revenue, seems to have been driven by Rosneft’s next investment ‘wave’ but power but Granville argues that the Kremlin concerns over its production outlook, companies are still mulling the key and Poussenkova questions whether understands the risks this could create decisions for the industry and will focus instead the dominance of the state oil company Fedor Veselov, Andrey Solyanik, on trying to reduce spending across the will be positive for future Russian oil and Irina Erokhina 24 economy. However, in reality this may output. She also asks whether Rosneft’s OXFORD ENERGY FORUM RUSSIAN ENERGY ISSUES IN A VOLATILE ENVIRONMENT diversifi cation into the gas sector and looming negotiation over gas transit, also have interesting implications for INTRODUCTION TO THIS ISSUE into other, more non-core, activities as the 2019 deadline for the end of the EU as it refl ects on its need for will distract the company from its main the current contract with Gazprom Russian gas in the future, despite its production objective. approaches. political concerns. Rosneft’s funding constraints and The other element in this negotiation is Development of fl exibility has been its need to continue new fi eld Russia’s own plan to diversify its transit the main driver behind Russia’s LNG development have led to a growing options, and Katja Yafi mava addresses strategy, but as James Henderson trend towards partnership with foreign this issue in her article on the progress discusses in his article, the corporate companies, especially those from being made in the Black Sea with the focus in this area is now more countries perceived as allies. Vitaly Turkish Stream pipeline. She reviews on Novatek than Gazprom. The Yermakov picks up this theme in a the volatile history of the project, which emergence of domestic competition discussion of Russia’s, and Rosneft’s, has refl ected Russian relations with for Gazprom started in 2013 when growing relationship with India and both the EU and Turkey, and assesses LNG exports were liberalized, and its key oil and gas companies. He the most likely development plan and it would now seem that Novatek is highlights two important trends, the the future capacity of the pipe. She set to become Russia’s largest LNG fi rst being a need to bring in partners also considers the potential for the player, as its Yamal LNG project comes who can help with the fi nancing of South Stream project to re-emerge to fruition while Gazprom’s plans new projects, and the second being in a smaller form (South Stream ‘lite’) lag behind. Indeed, so confi dent is Russia’s desire to fi nd alternatives to and looks at the potential impact of all Novatek about its future that it already Chinese investment in Russia, as the these options on possible gas transit has a second project at the planning need to avoid dependence on Russia’s volumes through Ukraine after 2020, stage, raising the possibility that it southern neighbour in the East is concluding that countries in south-east could become the dominant Russian increasingly being seen as politically Europe will remain dependent on this player in this arena. and commercially vital. He also route for some time. Finally, on a more domestic note highlights the continuation of a Russian Thierry Bros then looks at Gazprom’s Fedor Veselov et al provide a review ‘upstream–downstream’ strategy which overall pipeline strategy and discusses of the electricity sector, focusing in has seen Rosneft take an interest in an whether the company is becoming particular on the implementation of Indian refi ning business to balance the more commercially realistic with upstream deals done in Russia. its spending plans. He asserts that the continuing reform process. They Diversifi cation is a theme that Simon Gazprom’s traditional ‘gold-plated’ argue that the use of a complex Pirani picks up in the gas sector, but on strategy of building capacity to meet capacity payment system has led this occasion it is the more traditional all possible demand scenarios was to overcapacity in the generation story of a desire to buy less Russian possible in a world of continually market, with older more ineffi cient gas. He considers how one key export growing gas demand, but suggests plants remaining online beyond their market for Gazprom, Ukraine, has that the company is developing more theoretically useful life. On a more reduced its import requirement through cautious plans for a new less optimistic positive note they also suggest a combination of falling demand, era. He uses the development of the that this problem is gradually being purchases of reverse fl ow gas from Power of Siberia pipeline in the Far remedied and that the operational Europe, and a drive to increase East as an example of how Gazprom effi ciency of the sector should therefore domestic output. This has put Ukraine is adapting to market needs and is increase, as decommissioning in a stronger position in its commercial creating more fl exibility in its expansion accelerates and a wave of investment relations with Russia ahead of the programme. He argues that this could in new plant is encouraged. 2 OXFORD ENERGY FORUM NOVEMBER 2016: ISSUE 107 INTRODUCTION TO THIS ISSUE CONTRIBUTORS TO THIS ISSUE Thierry Bros is a Senior Research Simon Pirani is a Senior Research Katja Yafi mava is a Senior Research Fellow, OIES Fellow, OIES Fellow, OIES Irina Erokhina is at the Energy Nina Poussenkova is Senior Research Vitaly Yermakov is Head of the Center Research Institute of the Russian Fellow, Institute of World Economy for Energy Policy Research at Russia’s Academy of Sciences (ERI RAS) and International Relations (IMEMO), National Research University – Higher Russian Academy of Sciences School of Economics Christopher Granville is Managing Director, EMEA and Global Political Andrey Solyanik is at the Energy Research, TS Lombard Research Research Institute of the Russian Academy of Sciences (ERI RAS) James Henderson is Director of the Natural Gas Programme, OIES Fedor Veselov is Head of Department Tatiana Mitrova is Head of Oil and Gas for Development and Reforms in the Electric Power Sector, Energy Department in the Energy Research The views expressed in this issue are solely Institute of the Russian Academy of Research Institute of the Russian those of the authors and do not necessarily Sciences (ERI RAS) and Senior Academy of Sciences (ERI RAS) represent the views of OIES, its members, Visiting Research Fellow, OIES or any other organization or company. OXFORD ENERGY FORUM 3 RUSSIAN ENERGY ISSUES IN A VOLATILE ENVIRONMENT Russia’s macroeconomic problems and the risks to the oil and gas sector Christopher Granville As is the case with all petrostates, achievement rely on continued Russia’s macroeconomic stability increases in the tax burden on oil and ‘THE RUSSIAN ECONOMY EXPERIENCED hinges, to a large extent, on the gas companies? ITS SECOND STRAIGHT YEAR OF credibility of government efforts to RECESSION IN 2016 …’ adjust the public fi nances to ‘lower Overall adjustment on track for longer’ oil prices.