Putin Addresses Gas Pipeline Access Problem

15.07.2008 (13:52) | RBC

At a conference in Severodvinsk on Friday devoted to the development of Russia’s oil and gas sector, Prime Minister Vladimir Putin promised new benefits and state investment in the sector against assurances that oil production would not fall in 2008.

At the same time, he rebuked Gazprom CEO Alexei Miller, ordering him to ensure equal opportunities to access Russia’s gas pipeline network for all independent gas and oil producers. In return, the gas monopoly will receive the Kirinsky block in the Sakhalin-3 project, with potential resources of 930 billion cubic meters of natural gas. The deposit had also been eyed by Rosneft.

Putin expressed concern that independent producers had to burn their associated gas because they did not have access to Gazprom’s gas pipeline network. “If this situation continues, we will be burning associated gas, while you will be spending huge amounts of money to increase your own production,” Putin stressed, rebuffing Miller’s attempts to deny access problems for independent producers.

In practical terms, Putin’s demands mean that Gazprom will have to build pipelines connecting its pipeline system with the deposits of independent oil companies, which will require billions of dollars in investment, according to some sources. A source at Gazprom confirmed this information, adding that it would not matter who financed the project if gas prices were high enough to ensure the return of investment and if there were contracts to fill the pipeline. Igor Sechin, Deputy Prime Minister and Chairman of the Board of Directors of Rosneft, is seen as the main lobbying force behind the campaign for access to Gazprom’s pipes. Apparently, Putin decided to create an even playing field for both state companies.

Alexei Miller has confirmed that his company would get the Kirinsky block, which had also been sought by Rosneft. “The government has not yet issued a statement on the account, but in fact the question was decided in our favor,” he told RBC Daily. Miller also hopes for similar decisions regarding other two Sakhalin-3 deposits, the Vostochno-Odoptinsky and Ayashsky blocks.

Putin also promised further tax reductions for oil companies against guarantees that oil production would not fall this year. He said tax vacations would be declared soon for offshore oil deposits in the Sea of Okhotsk and the Black Sea, and also on the Yamal Peninsula. Oil companies will save up to RUB 400 billion (approx. $17.2bn) as a result of tax breaks, estimated LUKoil President Vagit Alekperov.

In addition to tax incentives, the government will also support the industry with significant investment. Putin said pension savings could be effectively invested in the energy sector infrastructure. According to Energy Minister Sergei Shmatko, private and state investment in the oil and gas industry will reach RUB 15 trillion and RUB 17 trillion (approx. $645.7bn to $731.8bn) by 2020. The money will be used to build offshore facilities and new oil refineries. Vladimir Putin backed the idea of building new oil refineries for small companies. Earlier, Igor Sechin estimated that the project costs would amount to $8 billion.

According to RBC Daily’s sources, Putin was listening very attentively and taking many notes. Vladimir Bogdanov, head of Surgutneftegas, complained about excessive administrative barriers, and Rosneft’s Sergei Bogdanchikov lamented over the industry’s low profit margins, at 16 percent, against 26 percent in the metals sector. But on the whole, the conference members were very cautious. “Even LUKoil refrained from raising the issue of increasing the cutoff level for the oil production tax from 15 to 24 percent,” he told RBC Daily. The boldest idea was voiced by TNK-BP shareholder German Khan, who proposed to fix by law the level of the crude oil export duty so that officials could not raise it unexpectedly.

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