‘Russia’s gas status quo in Europe won’t be affected by new suppliers’

3e0brussia europe status quo Russias gas status quo in Europe won’t be affected by new suppliers

“Gazprom will retain its share on the European market thanksto the infrastructure it has set up over decades and the flexiblepricing policy”, said Vagit Alekperov.Also, he believes that producers and consumers have“struck adelicate balance between profits and a comfortable pricetag.”RT: Some say that Gazprom has missed the shale gasrevolution. Has Lukoil missed it too?Vagit Alekperov: No, we need to look at history. It is ahistorical fact that shale is rich in hydrocarbon. Everybody knewthat and has been using shale industrially. There is a town namedSlanets, which means shale in Russian, near St. Petersburg. Shalehas been mined there for a long time. It was used for makinghydrocarbon based lubricants. Of course, it is a great achievementon the part of US engineers that America is now producing oil andgas from shale. In order to do it, they had to drill very trickywells and do hydraulic fracturing. This way they’ve been able tocut the cost of producing this gas and liquid hydrocarbons fromthese layers. Undoubtedly, this is an achievement, but I wouldn’tcall it a revolution. Of course, shale gas can be found in other countries as well,but there are many other issues to consider here – density ofpopulation living on these fields and having the level of oilservice they have in the US. I think that it is important todevelop all types of energy. All deposits of hydrocarbons should bedeveloped, and we have to look for more efficient technology. Forexample, we are working in the Bazhenov formation, which is a verytricky field. It is similar to shale fields in the US.  So weuse this kind of technology in Russia all the time. We areconvinced that as we develop fields like the Bazhenov formation orthe Domanic-type formation in the Perm Region, we will use thisshale technology.RT: The Arctic shelf issue is very popular in Russiatoday. But there is uncertainty about oil prices, whereasdevelopment of the Arctic shelf requires huge investments. So somesay that maybe this project should be postponed. Maybe right now itwould make sense to focus on shale, if it’s not as expensive andcould yield immediate results, like it has in the US?VA: I have always said that all gas and oil deposits inRussia should be explored and listed as the nation’s fixed assets.This is our potential, our country’s future. It’s up to thepresident and the government to decide when to develop thesefields. Unfortunately, current Russian legislation doesn’t allowprivate and foreign companies to invest significantly intogeological exploration of the Arctic seas. There are severalreasons for these laws – environmental issues, defenseconsiderations, because some military facilities were based there.But we think that this legislation should be adjusted. Privatecompanies, Russian companies should be able to conduct explorationof the Arctic shelf.RT: What do you think about Gazprom possibly losingits monopoly over the export of LNG?VA: Negotiations are underway. This issue is activelydiscussed in Russia. Novatek, which began the construction of itsLNG plant in Russia’s Far North, initiated the discussion. Rosneftis also involved in the talks – this company is involved in somemajor projects on the Arctic shelf and wants to be able to exportits products. Our company has not considered building LNG plants.We have a long-term contract with Gazprom – and at this point, thiscompany meets all our requirements. We want to have a solidpartnership with the gas monopoly. We would like to keep our rateof return at the level we have now, when we sell gas to them.RT: But if this happens, don’t you think Russiancompanies will compete against each other on the market? Russiangas companies will compete with each other in Europe orelsewhere.VA: I think LNG will be sold to European and Asianmarkets. So, I don’t expect tough competition today, because Europealready has LNG regasification terminals. If Russia does not supplygas to this market, other suppliers will. So, we have to carefullyconsider whatever steps we take. Of course, we should not allowinternal competition.RT: What is the current situation with the Norwegianshelf project? Are you making progress with negotiations?VA: We have submitted our application, and we have beenaccepted as operators. We have cleared all the procedural issueswith the Norwegian authorities. We hope that there will soon be atender, and together with our Norwegian partners we will submit ourbids.RT: How much are you going to invest there?VA: It’s hard to say at this point because we are stillat the exploration stage. Exploration usually does not require alot of investment. We hope to keep it under US$200 million.RT: What will you do if Lukoil loses its privilegedstatus in developing Caspian Sea fields? Because the Russiangovernment may postpone the adoption of the law regulating thismatter.VA: Lukoil cannot lose its privileged status because itdoesn’t have any. What we have is a special tax rate for developingCaspian Sea fields. The law was adopted in December and will gointo effect on April 1. There is a hitch because of two conflictinglaws that has cost us two or three months. We hope that they willmake necessary adjustments in April or May, while new proceduresfor taking decisions under the new law are being approved, and theenergy minister has confirmed to us that this is indeed what isgoing to happen. In other words, the new law has a provision aboutthe Caspian Sea fields that we develop. So, we hope that all thesethings are in sync, so as to avoid financial losses.RT: The Iraqi oil minister said that they are planningto invest $173 billion in the national oil sector. How can thatimpact Lukoil’s operations in that country?VA: We have been very active in Iraq. West Qurna-2, amajor Iraqi oil field, is on track to start producing late thisyear or early next year. We are about to begin exploration work onthe Block 10 field with our Japanese partners. We are also eyeingthe Nasiriyah oil field project. Lukoil has extensive experience ofworking in Iraq: we have set up the infrastructure and built a teamthat is well-adapted to the operations on this territory. So if thegovernment goes ahead with the tender on Nasiriyah, we will takepart in – provided that the terms are acceptable for Lukoil.So this is investment in the industry, it’s really huge, alsobecause the country boasts enormous reserves. This is what makesinternational energy companies so interested in Iraq.RT: You mentioned the Nasiriyah oilfield – do you planto develop it alone or in an alliance with a partner?VA: Alliances are possible.RT: With Russian or foreign companies?VA: It could be either Russian or foreign companies. Weare ready to set up a partnership. In fact, we have partnershiprelations with all the world’s biggest companies.RT: Why is it taking you so long to find a partner forWest Qurna-2? It’s been reported that Chinese producers were amongthe candidates.VA: Let me make it absolutely clear – we are not lookingfor a partner. A number of companies are seeking partnership withus on this project. But we have already gone through the mostchallenging stage in West Qurna-2 – we have built a dedicated team,designed the security system, picked the contractors, cleared allthe procedural issues with the Oil Ministry and South Oil Company.So today we are on the final stretch. The field will go on streamas early as next year. We’ll have all the infrastructure up andrunning. However, if there’s an investor who can make us alucrative offer or make sure there’s a specific market ready to buyour giant oil supplies, we would only welcome such a partner.RT: So there have been no good offers so far,right?VA: We did receive some offers from Chinese companies. Weare in talks, but for the time being we are still carrying out theproject on our own.RT: Can you give any deadline?VA: No. A partnership might be as well struck after itgoes on stream or during its operation. It’s also possible that wewill go on without a partner.RT: What’s your take on the potential natural gassupplies from Kurdistan to Europe via Turkey through theTrans-Adriatic Pipeline?VA: I think Iraq’s natural gas could be supplied viaTurkey, because Iraq boasts large gas reserves. But gas fields areat the initial stage of development, with tenders held onlyrecently. This is a promising area but I would say it’s morelong-term.RT: How will it affect Russia’s plans?VA: Any new supplier of natural gas to Europe willdefinitely affect the status quo. But I am sure that Gazprom willretain its share on the European market thanks to theinfrastructure it has set up over decades and the flexible pricingpolicy.RT: Lukoil has been conducting exploration works inSaudi Arabia for some years year. The government is expected todecide on the future of the gas-condensate field by the year’s end.What’s the cause of the delay?VA: Negotiations are underway. Let me remind you that wediscovered a large gas field, and we estimate its reserves at some300 billion cubic meters. But this is a field with complexgeological properties, based on low producing formations. And soits development requires the use of special technology. This willdrive up the costs and capex [capital expenditure]. So today,together with our partner, Saudi Aramco, and the Oil Ministry, weare discussing the business model for this field. We are about tobegin drafting the blueprint for this field, and we hope to come upwith a solution that would make this project economically viable.So far the talks have been positive.RT: Is this for the domestic market or will it beexported?VA: It will be consumed domestically. Under our contract,Saudi Arabia will buy the full volume for its own needs.RT: What are Lukoil’s plans in Lebanon?VA: We are now forging a consortium with Total. It willbe the operator while we will be among the participants of theproject. We have a minority share – just above 20 per cent.Generally, we consider the East Mediterranean as a very promisingregion and are ready to look at different projects. After thediscoveries made in Israel and Cyprus we can now hope for potentialfields on the Lebanon shelf.RT: What’s the capex plan?VA: It will be pretty modest because the first stageincludes only exploration – drilling at one or two sites.RT: What your forecast for the oil prices for thisyear?VA: We view the current range – between $110 and $120 –to be a fair price. It’s okay both for oil producers – they getenough cash to invest into exploration and deepwater fielddevelopment. It’s also okay for the consumers who get adapted tothe price. Just look at what’s happening in Europe, in Russia orelsewhere in the world. We are not seeing any social tension overthe price of fuel. It means that this price is acceptable for ourcustomers. It means we have struck a delicate balance between theprofits we need for investment into new fields and a comfortableprice tag for consumers.RT: What’s your short-term forecast?VA: We are expecting that the commodities will continueto be volatile. Some agencies predict a hike to $125-140, otherskeep the range at $105-115. I guess the worst job for an analyst isto make a forecast for the oil prices.

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‘Russia’s gas status quo in Europe won’t be affected by new suppliers’

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