No. 1, 2005
LOCOMOTIVE OF RUSSIAN FUEL AND ENERGY COMPLEX
Oil of Russia magazine talks to Yury Neyolov, the Governor of the Yamal-Nenets Autonomous Area
The role that the Yamal-Nenets Autonomous Area plays in RussiaÕs oil and gas industry is, without an exaggeration, crucial, given that it accounts for 90% of the national natural gas production. The area boasts more than 200 fields of hydrocarbons with 72% of the current explored natural gas reserves and 14% of oil reserves in the whole of Russia. And YamalÕs natural treasures are only set to grow in importance.
Q: The Yamal-Nenets Autonomous Area is among the leading Russian regions in attracted investments in 2004. How can you explain this striking result?
A: Any result is explained by the fact that a team of like-thinkers did a good job working for it. The present stage in the development of our country faces the Yamal-Nenets Autonomous Area (YNAA) with difficult tasks, but it also opens new vistas. Prospectively we want this area to be characterized by a diversified high-technology economy, an advanced, all-round infrastructure, cities and settlements equipped with services and utilities, and sound ecology. We know how to do it, and we do much to achieve the goal.
For example, investment projects in the YNAA fuel and energy complex (FEC) amount to a total of $100 billion, including $40 billion channeled into development of exorbitantly rich natural resources in the Yamal Peninsula. Yet, the area administration is emphasizing economic diversification, and it is the centerpiece of a strategy it has devised. In the first place, we want petrochemical and gas-chemical industries of our own, based on low-pressure natural gas and petroleum gas. In particular, we are focusing on prospective development of the mining industry in Polar Urals. The cost of its ore potential alone is estimated at upwards of $220 billion. Boasting the entire Mendeleyev table of elements, Polar Urals means another lease of life for Yamal. Now it is proved that we did the right thing investing budget money in mining exploration. We outlined real prospects, and famous mining companies came to the area. On top of that, the YNAA administration and Siberian Scientific Analytical Center, jointly with JSC Russian Railways and specialized research institutes are completing a comprehensive feasibility study for a web of rail and motor roads, power plants and telecommunications. These are due to integrate the economy of the Area and the Far North as a whole with Greater Urals industries.
Our joint efforts are bringing tangible results: investments into fixed assets grew fast between 1999 and 2004, increasing from 36 to 163 billion rubles. Yamal ranks seventh in investment appeal among the subjects of the Russian Federation. Industrial output grew from 76 to 216 billion rubles over the past four years, and that meant a boost in federal budget spin-off from 34 to 146 billion rubles, and stabilized regional budget level in absolute indicators. Currently the YNAA is among the five biggest budget donors.
Q: How would you characterize activity of Russian fuel and energy companies in YNAA?
A: The main oil developers in the area are JSC Rosneft-Purneftegaz and JSC Sibneft-Noyabrskneftegaz, and JSC Gazprom is the main gas producer. At the same time, we have successful independent gas companies, which produced 50 billion m3 of natural gas in 2003, and we estimate that their combined production will come to 140 billion m3 before 2010. ÒSmaller FECÓ ventures are more dynamic and more geared to innovation; they are developing the most difficult fields, including ones that other companies see as unprofitable. Finally, they give jobs to numerous inhabitants of the Area.
As of the start of 2003, we issued 137 licenses to use mineral resources in the area to 50 ventures. Influential oil companies - JSC LUKOIL, JSC TNK - moved in, conscious of the most favored treatment offered by the YNAA administration. As of today, the number of licenses is 159.
We welcome the coming of new partners, companies capable of operating in the “one field - one investment project” mode. We are interested in attracting investors, as well as in developing high-technology oil and gas producers. For that, the area has all the necessary structures, an up-to-date legal framework for the use of natural resources, and a mechanism for public management of the natural resource potential. Of particular value for users is Russia's only Territorial Bank of Primary Geological and Geophysical Information that was obtained by geologists, geophysicists and field men during nearly 50 years of exploration in the YNAA territory. This unique depository keeps strategic information necessary for development of the oil and gas industry for decades to come, and it can be used by all our partners, both Russian and foreign.
Q: How would you estimate the state of and prospects for cooperation with foreign companies in developing YNAA's natural wealth?
A: Western companies watched the situation cautiously at the start of the socio-political reforms in Russia; conscious of the risks, they were in no hurry to become active in the Russian oil and gas complex. The working projects in the 1990s were mostly those based on product sharing. Importantly, planning for considerable investments was needed to achieve profitability in that difficult situation, an added factor that held foreign interests in check.
For this and many other objective reasons, foreign companies show only a limited presence in the oil and gas industry in the Area, and we have no companies with 100 percent foreign participation in the producing sector. There is Western involvement in joint ventures, mostly in the shape of services rendered to Russian oil and gas producers, like the drilling of horizontal and directional gently sloping wells, hydraulic fracturing of formation, prospecting works, software and hardware support, etc.
In the past few years, however, our foreign partners are becoming increasingly interested in investing into new oil and gas development on their own. And it is clear why. The tax reform is coming to an end, making tax rules more stable and predictable. It is also of no small importance that Russia leads in intensity of development, and this, certainly, is a factor that attracts potential investors.
If we go by expert estimates, the Russian oil industry is going to get not less than $820 billion in profits between 2003 and 2020, and the gas industry $350 billion.
Q: It is common knowledge that the natural environment in the Far North is highly sensitive to technogenic impacts. What, in your view, has been done and what needs to be done to minimize environmental damage likely to be caused by the large-scale oil and gas development program in the YNAA?
A: One of the local peculiarities in the YNAA is that two diametrically opposed types of economy have met in a particularly vulnerable Arctic environment. One is modern industrial production aimed at developing natural resources; the other is aboriginal and ecologically inbuilt in nature. About 600,000 reindeer graze in the tundra (the biggest herd in Russia); the Ob basin accounts for one-third of the world catch of valuable whitefish species. Slightly over 11,000 Nenets, Khanty and Selkups are engaged in traditional occupations, like reindeer herding, fishing, fur farming and hunting. The YNAA has 14 highly protected natural territories measuring a total of eight million hectares, or 10% of its entire area. To compare, the general figure for Russia is 4%.Independent expert sources point to a unique situation that took shape in the YNAA of all northern regions: oil and gas producers keep decades-old friendly and mutually beneficial relations with reindeer herders. A short while ago, President of Reindeer Herders Union of Russia, Dmitry Khorolya, said this: “...The reindeer and gas are partners, not rivals!”
But we also understand that the technogenic pressure on the biological resources will steadily increase. It is for this reason that we undertook to develop such a system for taxes and nature use regulation as would minimize negative impacts on the environment while securing sufficiently high production profitability. The centerpiece of this large-scale project is a provision on stage-by-stage transition to rental taxation for nature users, which will require that we take into account all elements in cost value of each lot, including its biological resources. The preliminary and rather approximate cadaster estimates our specialists made in Pura and Nadym districts showed a stunning result. For each area, the overall cost of terrestrial vertebrate alone was nearly half a billion U.S. dollars! We must cherish it.
The YNAA strictly abides by federal nature conservation and environmental legislation, but additionally it has passed more than a dozen local laws directed at a more meticulous peformance of all environmental actions. I am sure that field exploration should result not only in oil and gas for Russia but also compliance with conditions securing nature conservation in the Area. After all, it is the basis of the traditional way of life and the traditional economy as evolved by the aboriginal populations. One is pleased that oil and gas companies share this idea. Gazprom, for one, launched an advanced R&D program, one unprecedented in scale and amount of funding, for ecologically clean technologies to be used in production and transportation of hydrocarbons in the Yamal Peninsula. Also, the Association “Yamal to Posterity!” held up as positive examples the track record of joint-stock companies Yamburggazdobycha, Noyabrskgazdobycha and Urengoygazprom.
Of course, far from all problems have been removed, and the most sensitive one, in my view, is the lack of the necessary environmental protection framework. What does preservation of biological resources or nature conservation mean? In the larger scheme of things, it is the basis of the worthy quality of living, full-blooded life environment for our posterity, and, finally, perpetuation of our civilization.
