No. 4, 2009

The oil and gas industry remains the driver behind economic cooperation between the CIS countries

The priorities of Russia's energy policy in the CIS are connected with ensuring uninterrupted transportation of hydrocarbon raw materials to foreign markets and participation by Russian companies in development of the oil and gas industries of neighboring states.

Oil and gas unity

The energy systems of the former Soviet Union republics were built and developed, until the beginning of the 1990s, as a unified whole. Oil and gas equipment produced in different republics was manufactured to common standards. A well-tuned system of interproduction cooperation had existed for years between the enterprises of the various republics. Specialists and scientists from Russia participated in developing oil and gas fields in Azerbaijan, Kazakhstan, Uzbekistan and Turkmenia, in constructing refineries and petrochemical complexes in Ukraine, Russia, Belarus and Kazakhstan. The Union budget, the most part of which was formed in the Russian Socialist Federative Soviet Republic, as the biggest constituent entity of the USSR, generously financed oil and gas field development in the Soviet republics.

With the collapse of the Soviet Union, the production links between many collaborating enterprises in neighboring republics were disrupted. The previously unified network of trunk oil-and-gas pipelines were split up between newly independent states.

At the same time, partnership in the energy sphere between these states, in spite of all the barriers, could not but develop. The majority of energy specialists in the various republics received their higher education in Russian, of course. In enterprises of the Soviet Union's oil and gas industry, unified design and maintenance documentation was used - also in Russian. Finally, the common cultural space, the largely understandable mentality and close frontiers all determined the "Pro-Russian vector" of the energy cooperation between the majority of CIS countries.

According to the Federal Customs Service of Russia, Russia's foreign trade turnover with CIS countries in 2008 amounted to $106.5 billion, an increase of 29% over 2007, including exports of $69.9 billion (a rise of 32.7%) and imports of $36.6 billion (a rise of 22.5%). Russia's trade with virtually all the CIS countries is characterized by a significant positive trade balance (by the end of 2008, the balance has risen by $10.5 billion or 46.0% over 2007). At the same time, more than 45% of the total volume of Russian exports to the CIS consists of oil, gas, petroleum products and electric power.

The priorities of Russia's energy policy in the CIS are connected with ensuring uninterrupted transportation of hydrocarbon raw materials to foreign markets and participation by Russian companies in development of the fuel markets of neighboring states. Ukraine, Belarus, Armenia, Moldova, Tajikistan and Kyrgyzstan are net importers of oil and gas. These valuable raw material transit countries are Russia, Kazakhstan, Ukraine, Uzbekistan, Moldova and Belarus. About 11% of global reserves of oil and 41% of those of gas are concentrated in the CIS countries. In 2008, the CIS member countries produced 734 billion m³ of gas, 496 million tons of coal and 609 million tons of oil, the biggest producers of energy resources in the CIS being Russia, Kazakhstan, Azerbaijan, Uzbekistan and Turkmenistan. It is this Oil and Gas Five countries exporting hydrocarbon raw materials that exert the greatest influence on the energy security of the Eurasian region.

The current inter-governmental agreements between Russia, Kazakhstan, Azerbaijan, Uzbekistan and Turkmenistan focus mainly on deepening cooperation in the oil and gas sector. An important place here is allotted to creating a legal framework in the partner countries for ensuring development of trade and economic links between the two states in the energy sphere, as well as the conditions for free and uninterrupted transit of energy resources and implementation of an agreed customs, tax and tariff policy in branches of the energy sector.

Oil and gas strategy and tactics

During 2009, several important meetings were held between the heads of CIS states, confirming the readiness of the neighboring partners to expand cooperation in the energy sphere.

In January, Russian President Dmitry Medvedev visited Uzbekistan, in March - Turkmenistan, in June - Azerbaijan, and in July and September President of Kazakhstan Nursultan Nazarbayev visited Russia. During these visits, the parties reached certain agreements and signed a number of important treaties capable of adding new impetus to the partnership between the participants in the energy dialogue in the Eurasian region.

For Russia, it was extremely important to secure long-term agreements for purchase of gas in Uzbekistan and Turkmenistan for further re-export purposes. Russia is today experiencing a natural drop in the volume of gas produced; yet large-scale export obligations towards European partners have to be fulfilled.

Uzbekistan and Turkmenistan are among the global leaders in terns of proven reserves of hydrocarbon raw materials. The aggregate hydrocarbon reserves in these countries amount to 12 billion and 25 billion tons of reference fuel, respectively. Until gigantic new gas fields are brought on line in Russia, among which the Shtokmanovskoye gas condensate field plays the key role, Central Asian gas will be able to cover "problem positions" for the world's biggest gas exporter.

In addition to the need to maintain the export balance in the near and medium future, Russia's energy diplomacy is also working to ensure its long-term strategic interests in the CIS. Projects for construction of new oil and gas pipelines bypassing Russia obviously go against its economic interests. In this sense, the existence of agreements between Uzbekistan, Turkmenistan, Kazakhstan and Azerbaijan is extremely important.

Pipeline construction projects become real only if they are practical. For instance, successful implementation of the Nabucco project for a 3,400 km pipeline from Iran to Europe is open to question. The potential suppliers for the project for which the European Union is lobbying are seen as Iran, Azerbaijan, Kazakhstan, Turkmenistan, Iraq, Syria, Egypt and Libya. Today, however, thanks to the efforts of Russian energy diplomacy, projects for building, in the next few years, a Caspian pipeline capable of expanding the through capacity of the transport corridor across Russia, appear more realistic. If preliminary agreements reached between Russia, Kazakhstan and Turkmenistan back in 2007 are confirmed, the volume of gas transported by the Caspian pipeline will amount to 30 billion m³ a year from Turkmenistan and up to 10 billion m³ a year from Kazakhstan. The Caspian pipeline will stretch about 1700 km, over 500 km crossing the territory of Turkmenistan and about 1200 km across Kazakhstan.

Russia-Kazakhstan energy cooperation is developing dynamically, as evidenced, among other things, by the increase in oil exported by the Caspian Pipeline Consortium from the Russian terminal on the Black Sea. The pipeline, which links the Tengiz deposit in Kazakhstan with the export terminal in the vicinity of the Russian port of Novorossiysk, increased the amount transported from January to August 2009 by 11.9% compared with the same period last year, to 22.95 million tons of oil.

On March 28, 2009, in the presence of the Presidents of Russia and Azerbaijan in Moscow, a Memorandum of Understanding was signed between Gazprom and the state company of Azerbaijan SOCAR. In accordance with this document, agreement was reached on initiating consultations to agree the conditions for supplying Russia with gas from Azerbaijan from January 2010 and for exchange operations with natural gas. Within the scope of this bilateral agreement with Azerbaijan, Gazprom is counting on acquiring the maximum possible quantity of gas produced in the country, apart from the fuel used domestically and that supplied to Georgia. Given the falling demand for energy resources, it is beneficial for Azerbaijan to sell its gas at a good price and along an existing pipeline. The oil statistics also testify to the increase in bilateral cooperation. In 2008, 1,4 million tons of crude oil were exported from Azerbaijan along the Baku-Novorossiysk pipeline, whereas the corresponding figure for just the first quarter of 2009 was already 0.6 million tons.

On October 9, 2009, the Summit of the heads of the CIS states was held in Chisinau, Moldova. The main theme, which the Presidents and Governments representatives of Russia, Ukraine, Belarus, Azerbaijan, Kazakhstan, Armenia, Turkmenistan, Uzbekistan, Tajikistan, Kyrgyzstan and Moldova discussed, was the common measures to overcome the impact of the world economic recession. Another important issue was the multilateral cooperation to avoid energy crisis in the CIS countries.

Cooperation priorities today and tomorrow

LUKOIL today is one of the biggest investors in the CIS and such countries as Kazakhstan, Azerbaijan and Uzbekistan are key regions of its operations.

Kazakhstan possesses the richest fossil fuel reserves in the entire Central Asia region - about 17 billion tons of standard fuel, Kazakhstan's sector of the Caspian Sea accounting for over 70% of this. LUKOIL was the first Russian oil company to begin working on fields in Kazakhstan and is today one of the firm leaders in production on the territory of the country. The Russian major is participating in 11 upstream projects in Kazakhstan: the Atashskiy, Tyub-Karagan, Kumkol, Karachaganak, Tengiz, Arman, Northern Buzachi, Karakuduk, Jambai, Alibekmola and Kozhasai. The Company's proven oil and of gas reserves alone in Kazakhstan exceed 870 million barrels of oil equivalent, while extraction of hydrocarbons tops the mark of 45 million barrels of oil equivalent a year.

LUKOIL is also working actively on the oil and gas market of Azerbaijan: the Company's share in the Shah Deniz project, which is of singular significance for the country, is 10%, including over 530 billion m³ of the consortiums reserves and 550 million m³ of its gas production.

Uzbekistan holds a central position in LUKOIL's gas strategy. The Company's investments in this country since the relevant PSAs came into effect exceed $5.5 billion, making the Company the biggest investor in Uzbekistan's economy. LUKOIL's proven reserves in Uzbekistan at the end of 2008 amounted to more than 4.4 trillion ft³ of gas.

The leader of the Russian oil industry is also interested in participating in geological surveying and production projects on the territory of Turkmenistan. So far, more than a thousand promising oil and gas structures have been identified in Turkmenistan and 150 fields discovered, primarily in Western and Eastern Turkmenistan, a third of these already being developed. At the same time, exceptionally rich reserves of hydrocarbon raw materials lie on the shelf of Turkmenistan's section of the Caspian Sea. LUKOIL has submitted specific proposals for work on three promising blocks on the Caspian shelf for consideration by the Government of Turkmenistan and is waiting for its decision.

Co-ordination of the positions of the CIS countries with respect to the territorial status of the Caspian Sea is currently among the priority topics of the energy dialogue between the independent states. The territory of the Caspian region lies within the jurisdiction of five Caspian states - Russia, Kazakhstan, Turkmenia, Azerbaijan and Iran. Many promising fields are located in "disputed zones".

Russia, Kazakhstan, Azerbaijan and Turkmenistan have managed to advance substantially in resolving territorial problems. Joint development of cross-border fields will allow more efficient development of the region's natural wealth and promote strengthening of energy security in the former republics of the Soviet Union.

By resolution of the presidents of the Commonwealth, 2009 was called the "Year of Energy in the CIS". For development of oil and gas cooperation, the year has, indeed, been a fruitful one - in spite of the economic crisis, problems of the energy security of the CIS member states have been successfully resolved, the Commonwealth's internal market has been supplied with adequate quantities of energy resources and there has been a substantial increase in the oil and gas export potential of the CIS.