Updated September 11, 2008

   Russia suggests the Organization of Petroleum Exporting Countries (OPEC) to join forces targeted at the stabilization of prices at the world oil market. So, on Tuesday, September, 9, Russia’s Vice Premier Igor Sechin passed the project of OPEC-Russia memorandum to the Organization’s management within the 149th meeting held in Vienna. Russia’s Vice Premier sees definite prospects in the cooperation with OPEC on the fight against the international manipulation of oil prices, and the West is suggested to discuss the issue of energy security and assets’ exchange in the energy sector.

   Russia would intensify the cooperation with OPEC within the framework of the prices’ stabilization at the oil market, as Vice Premier Igor Sechin declared in Vienna. He headed Russia’s delegation with OPEC observer status during the regular meeting of the Organization that ended on September, 10. Russia’ Energy Minister Sergey Shmatko, the heads of Rosneft and Surgutneftegaz Sergey Bogdanchikov and Vladimir Bogdanov, the head of Transnefteprodukt Sergey Maslov, the representatives of Russia’s government, the ministries and Gazprom have come to Vienna as well. On Tuesday, September, 9 the Conference decided to renew the September decisions on cutting the oil supplies at the external market by 0,52 million barrels a day, to 28,8 million barrels (taking into account the suspension of Indonesia’s membership in OPEC) that had resulted already in the growth of oil price by 1,5%.

   According to Igor Sechin, Russia’s delegation came to Vienna at the request of OPEC’s management and by the instruction of Russia’s PM Vladimir Putin. However, Mr. Sechin explained that OPEC and Russia’s interest were mutual. "We shouldn’t pretend that we don’t take part in the pricing in the world oil market, and we are a full member of this process. We have paid already for the entrance ticket to the oil market". Russia’ Vice Premier introduced the project of new OPEC-Russia memorandum to OPEC’s management. The project covers the offer on the creation of mechanisms for OPEC and Russia’s regular dialogues (Mr. Shmatko is nominated as a coordinator of Russia’s party), analytical information exchange on the oil market and joint projects to increase its transparency.

   The official in Russia’s delegation explained that the issues of provision with the operational oil supplies and mid-term reserves of the deliveries increase to the oil market were discussed mainly within the Conference. "The members of the meeting were taking much interest in the reserves of deliveries and in the possible influence of deliveries on the pricing, as well as in the opportunities of the certain players to resist the destabilization of the situation at the oil market for political purposes", he said. It is better to remind that in autumn, 2007, when one barrel of oil of OPEC’s basket crossed the $80 mark, the Organization declared about the major reduction of the influence on the pricing mechanism, and the analysts stated the same. Nevertheless, on September, 10, after OPEC had announced the decision to cut the extraction, the oil prices responded for the first time and went up. Despite Indonesia’s exclusion from OPEC from 2009, the Organization’s stake at the world oil exporting market is kept at the level of about 42% due to the entry of Angola and Ecuador in 2008.

   When Igor Sechin commented the Vienna meeting results, he restated saying that "the thorough analysis of possible manipulation of oil prices for speculative purposes" is required. He considers that the mechanism of hedging investors’ risks via the oil delivery futures "has been developed baselessly", and he speaks about the necessity "to cut the role of unfair mediators" and marks the influence of the tax policy distinctions of the counties-consumers of oil on the stability of prices. According to the data of the source, within the talks with OPEC-countries, Russia’ representatives offered to come back to the conception of the "world energy security" the country had introduced within G8 Summit held in St. Petersburg in June, 2006. This conception emphasizes the long-term direct contracts signed by the key market players, the share of the sellers’ risks between the consumers of the energy market, the mutual entry to the markets and the assets’ exchange in the fuel and energy sector, the price guarantees of recovery of expenses made by the oil producers and consumers via the mechanism of "fair prices". However, G8-countries didn’t take interest in the conception.

   Speaking about "Russia’s contribution to the stabilization" of the world oil prices, Mr. Sechin declared about the necessity to tackle the range of problems at the internal market. Among such problems, he named the issue of the monopolization of the oil services market for the first time. However, he refused to comment the possible activity of Russia’s Federal Antimonopoly Service (FAS) here and the claims to the leaders of this market in Russia, including the Russian divisions of Halliburton. The FAS’s representatives declared that the analysis of the situation at the oil services market was made within the framework of the approval of Integra Group’s deals early in this year, and the Service didn’t find any violations of the antimonopoly law.

   In addition, Mr. Sechin explained that Russia’s key activities in this area would be "the support of the market environment", the stimulation of the extraction and export growth, the differentiation of the custom and tax regulation of the export. OPEC will respond to Russia’s initiatives in October, when its management comes to Moscow.

Updated September 8, 2008

   Within the last two months, the price of oil went by 27,3% down. Thus, one more problem joined the core troubles of Russia’s investors after the war conflict in Georgia – the severe depreciation of the key Russian treasure. If this process doesn’t stop, Russia’s stock market will continue falling.

Stake on the dollar

On July, 11, the world oil prices reached their historical maximum. On that day, the closing price at the New York Mercantile Exchange (NYMEX) was $143,33 per one barrel of Brent crude, and the highest price of the deal during the trading session reached $145,11 per barrel of Brent. Russia’s Urals crude didn’t fall behind: on July, 11 the closing price was $139,88 per barrel, and within the trades the price was reaching $141,66 per barrel.

After that day, the prices for oil started falling at the world markets: $130, $120, $115 per barrel… The market resembles an airplane that fell suddenly into the spin and loses rapidly the altitude. On September, 3 the barrel of Brent crude cost $104,27, and Urals – $102,42, thus the lowest price within the trading session totaled $101,93.

Thus, the quotations of oil fell by 27,3% for almost two months. Moreover, the important level – $100 per barrel – is under the threat from the psychological viewpoint. The world oil prices can again become two-digit in the nearest future.

At the same time, the US dollar was strengthening, though not so rapidly. The peak of its fall to the euro has coincided almost with the peak of oil prices. As for the euro, its highest price was fixed on July, 11 at the level of 1,5940 $/€ according to the trades’ results. As for the separate deals, their record was fixed on July, 15, when the dollar rate fell below 1,6 $/€ – on that day, the euro cost $1,6038 within the trades. At this time, oil started to correct from the peak values: on July, 15 the barrel of Brent crude cost $136,65, that was 4,7% lower the maximum.

The dollar strengthening that was quite stable at the beginning started in mid-July. By August, 1 the euro/dollar pair was traded at the level of 1,5564 $/€, that was 2,4% lower the maximum. Besides, by August, 1 Brent crude fell to $125,16, or by 12,7% from the maximum.

Then, the dollar strengthening accelerated, and within August it grew by 7,02% to the euro, and on September, 3 the euro cost $1,4472 already. Thus, within the examined period, the overall dollar strengthening was 9,21%.

Stake on slowdown

It is better to remind that oil and other primary products were acting as a safety asset for a long time. Almost the whole year – from mid-2007 to July, 2008 – the players were escaping from the loan crisis into oil and other commodity futures. However, they had nowhere to go, since the quotations of stocks were falling rapidly at the western markets, and the profitability of bonds (the US national Treasures foremost) approached the inflation, and was even lower, after the Federal Reserve System (FRS) cute the rates.

However, in spring of 2008, the new tendencies at the US stock markets appeared. The overall exchange indices were falling still because of the crisis financial sector. However, some securities, of the high-technology sector foremost, demonstrated the growth. Moreover, some bonds were demonstrating the tendency towards the quotations growth. Thus, the instruments for bull operations appeared at least in the short-term prospect. 

At the same time, the market players, including the most active hedge funds, had the strong opinion about the "overbought" speculatively oil market. The analysts’ calculations were quite different: some of them estimated the speculative component of the price at 20%, and some of them – at 40%. Still, all of them agreed that the equilibrium oil price – taking to account the balance of supply and demand – is not $145 per barrel, but much lower.

The fears for the deceleration of growth rates of the overall world economy and of the post-Olympic China in particular aggravated the pessimistic situation. The market participants were dissatisfied with the increase of quotas set by OPEC countries in mid-July, as well as with the CFTC’s measures (Commodity Futures Trading Commission at the US markets) directed to the limitation of speculations with the oil futures.

As a result, the majority of the market participants started fixing the income, i.e. to sell commodity contracts, after the July maximums. Since the equity market hasn’t inspired any hopes, the American Treasures or other dollar-nominated assets are bought now because, at the moment, they are more attractive due to the better macroeconomic statistics as compared to Europe. This process resulted in the demand for the US dollar, and that strengthened its positions to the euro and to the other world currencies. However, this led to the slump of oil prices, since it is easy and more pleasant to buy assets at the growing price. Later, the processes of oil prices drop and the dollar strengthening resonated intensifying each other.

However, the dispute – whether oil prices follow the euro/dollar pair or, vice versa, the currency pair follows the oil prices, reminds the dispute – which came first: the chicken or the egg. Although it is better to mark that in this case, oil was the first to start the correction.

Stake on cartel

The present situation influences negatively on Russia’s stock market. From July, 11 to September, 3, Russia’s RTS index went by 26,7% down, and that almost coincides with the amount of the fall of the world prices for oil (27,3%). Within the same period, the RTS oil and gas index lost 26,6%, and that almost coincides with two previous indices.

The fall of the Russian indices is somewhat lower than the drop of the world prices. Russia’s market tries to resist, even despite such negative factors, as the war conflict and the outflow of the foreign investors. Obviously, it is related to the fact that the US dollar strengthening (and the import appreciation) is somewhat a positive aspect for the Russian economy. However, the negative effect of the oil prices drop prevails.

Only a powerful player that can change the present tendencies at the oil market can save Russia’s stocks from the fall. OPEC can become such player: at least, almost all analysts surveyed believe in its efforts. The meeting of the leaders of the oil cartel’s countries-members takes place in Vienna on September, 9. The top issue on the agenda is "the limitation of oil prices drop at the world markets". The past experience shows that OPEC countries can renounce their private interest in favor of common ones, i.e. to cut quotas when the price falls.

In addition, such factors of oil prices support, as the forecasts of the mid-term surplus of this type of the natural resources, should be taken to account. For instance, in August, when the prices were falling severely, the International Energy Agency (IEA) announced the forecast on oil surplus of about 12,5 billion of barrels per day to 2015, and it is 14,5% from the present extraction level (86,5 billion of barrels per day).

In the short-term prospect, Russia’s private investors have to hope that on September, 9 OPEC cuts the quotas and restrains the prices. Moreover, the heating season coming to the Northern hemisphere will help the prices to recover. So, if the market participants face the two-digit oil price in the nearest future, it will not exist long.

Updated September 3, 2008

   In August, 2008 Russia’s oil extraction continued falling – the level is 0,4% less as compared to July. Though the oil refining is growing in Russia, the export falls as well, despite the August price drop both in Russia and at the external market. The drop of oil extraction is compensated partly by means of gas extraction growth provided mainly by the independent producers, while in August Gazprom continued increasing export of energy resources.

   On September, 2 the Central Dispatch Service of Fuel and Energy Sector (CDS FES) published the latest data on extraction and export of the Russian energy resources. Oil extraction continues falling: within eight months of 2008, 325,15 million tons of oil was extracted, or 0,6% less as compared to the analogical period of the previous year. In August, 2008 the extracted oil totaled 41,53 million tons, or 0,8% less as compared to August of the previous year, and 0,4% less as compared to July, 2008. Within eight months of 2008, the export of oil fell by 5,8% and settled at 136,26 million tons. In August, the fall of export was 4,5% to August, 2007 and 4,8% to July, 2008.

   On the background of the world prices’ cut, the export falls because of the high profitability of Russia’s internal market, as the experts explain. "Since the beginning of 2008, the oil companies take interest in the Russian internal market rather than in the export deliveries despite the relatively high internal prices", the director for development and marketing of Kortes IC Pavel Strokov declared. The drop of oil export is explained partly by the growth of oil refining within Russia. According to the data of the CDS FES, in August, 2008, oil supplies in the refineries grew to 20,419 million tons, or by 5,7% as compared to August, 2007.

   Thus, Mr. Strokov underlined that the export of oil products was regulated by means of the same market mechanisms: when it is favorable to sell at the internal market, the export falls. According to him, the export fall could reach higher levels, but "the Russian internal market is inflexible", and the excess amount of oil products would result in the price cut. The expert marked that the export fall takes place on the background of prices drop, and underlined the role of the record high export tax on oil that came into effect on August, 1. According to him, the growth of the tax and the drop of the world prices resulted already in the fall of the high oil price by almost 40%, to RUR 6 800-7 000 per ton with delivery in September. The price fall for oil products continues as well. In July-August, the wholesale prices lost almost 20%, and in August the retail prices for low octane gasoline started falling also.

   As opposed to the fall of oil extraction, the CDS fixed the growth of gas extraction and export in Russia. Within eight months of 2008, 443,90 bcm of gas was extracted in Russia, or 3,1% more as compared to the analogical period of the previous year. In August, 48,16 bcm of gas was extracted (1,6% more as compared to August, 2007, but 2,09% less than in July, 2008). As compared to the low indices of the previous year, the export of gas grew considerably. Within eight months of 2008, the export totaled 111,1 bcm of gas, or 16,4% more as compared to eight months of 2007. In August the export started falling and settled at 11,1 bcm of gas, or 3,29% less than in August, 2007, and 14,35% less than in July.

Updated September 2, 2008

   United Oil Group Ltd (UOG), the division of En+ Group owned by Oleg Deripaska, and Japan Oil, Gas and Metals National Corporation (JOGMEC) signed a joint venture agreement to implement projects in the area of hydrocarbons exploration, prospecting and extraction on the territory of Russia.

   The newly established company will take part in the auctions on granting licenses for the right to use subsoil resources, as well as examine the opportunities of purchasing the companies that already own such licenses. The Krasnoyarsk Territory, the Irkutsk Region and the Sakha Republic (Yakutia) are the priority regions for the activity of the established JV because these territories have the enormous resource potential. UOG will own 51% of stocks in the established company, and JOGMEC – 49%.

   The Japanese company has long been taking interest in the Russian subsoil. So, in April, 2008, JOGMEC established the JV with Irkutsk Oil Company LLC – CJSC INK-Sever – for hydrocarbons exploration, prospecting and extraction as well. The Severo-Mogdinsky block located 150 km from the ESPO oil pipeline (Eastern Siberia-Pacific Ocean oil pipeline) became the first asset in CJSC INK-Sever. In May, 2008 the corporation declared that it had planned to establish the JV with Rosneft to extract oil in the Eastern Siberia (within easy reach of the ESPO) or on Sakhalin’s offshore. Such activity of the Japanese company is quite obvious: JOGMEC is the state corporation that was established in February, 2004, and the company is responsible for providing Japan with the stable deliveries of oil, natural gas, nonferrous metals and other mineral resources. "I’m convinced that if we make a joint effort, we will manage to launch the first projects in the nearest future and transport the produced hydrocarbons to Japan through the ESPO oil pipeline", as JOGMEC ESPT Director Hirokazu Tada said. According to the revised plans, the first part of the ESPO will be launched by the end of 2009, and the whole pipeline system will function in 8 years.

   "The cooperation with the Japanese partner is the access to the new sources of funding necessary for the geological exploration within the implementation of large projects in the area of oil extraction", as En+ chief executive Vladislav Soloviev marked.

Expert comments
Alexander Petrov, the head of Univer Investment Group analytical department

   The joint venture of UOG and JOGMEC is prospective for both parties. Japan doesn’t have its own full resource base, therefore the opportunities’ diversification of resources’ delivery is very important, so, the participation of the Russian state company is sound. On the other hand, UOG will take advantage of the financial, as well the technological, support within the geological exploration. Still, Russia’s activity of keeping the foreign participants out of the important resource objects can be named as the major risk for the company. However, if we take to account the serious Basel’s lobby, the government plans on the development of geological exploration and the necessity of filling the ESPO pipeline, the risks in this direction are quite moderate. The additional risks can result in the permanent problems for the JV, as well as in the extension of completion of the ESPO construction. The terms of this project have been put off several times, and some experts think that this tendency is kept, therefore the plans of the Japanese partner related to this oil pipeline can be frustrated.

Updated August 7, 2008

Last week the Federal Antimonopoly Service (FAS) was forced to conduct control checks of the five largest oil companies with a purpose to find out the information about wholesale prices on diesel and jet fuel.

It is better to remind that against such companies as Rosneft, Lukoil, TNK-BP, Gazprom Neft and Surgutneftegaz were brought criminal cases about antimonopoly law violation. They were suspected of undue overpricing on fuel. In terms of that fact, all companies were obliged to present full data about wholesale prices on fuel to FAS by August, 1. The terms have already expired, and only one company has given a report on the demand – Surgutneftegaz, that occupies the 4th place by oil extraction among the Russian oil extracting companies. And all the other oil companies have ignored the federal agency demand.

To receive the required data, the Federal Antimonopoly Service even called in the Ministry of the Interior representatives, a report says. In the agency refused to comment in details.

Currently, these five companies’ matters with the FAS stand in a bad way. As the FAS head Igor Artemiev says, around 50 criminal cases will be brought against them, and against refueling stations in airports as well, and in terms of antimonopoly law violation.
In case, the FAS manages to prove the fact of violations in a court, oil extracting companies will pay 15% fines from a turnover at a target market of a separate region.

However, the companies do not agree with accusations of them. They assure the have not broken the regulations and they operate within the law framework. However, in the oil companies refused to comment in details. So, for instance, Rosneft company representative reported that at the current moment they examined the situation; in Lukoil declared that, as per the company information, the required data was provided in time.

Mr. Artemiev told the FAS was going to offer all oil companies and refueling stations to reduce prices on fuel, jet fuel and other oil products voluntary. This will act as extenuating circumstance at fines setting. The minimum fine size concerning companies that have reduced prices voluntary totals 1% from a turnover.

Updated July 4, 2008.

   CDU TEK (State Enterprise "Central Dispatching Department of Fuel Energy Complex") has investigated a situation at the oil extraction market. Eight largest oil companies took part in the research. Researchers tried to find out, how daily oil extraction in each company had changed within January-June, 2008 period as compared to the analogical period last year.

   Results were rather surprising: daily oil extraction of five from eight companies has fallen as compared to last year, and only three companies have shown growth of barrels extracted. Overall extraction volume of oil and gas condensate in Russia went by 0,4% down within first half-year as compared to the analogical period last year and totaled 9,756 million barrels per day. Thus, in early year it was extracted by 0,4% of raw material more as compared to 2Q. Specialists assert that there is a tendency of oil extraction reduction. The reasons are as follows: first, old fields’ depletion in Western Siberia; second, investments’ lack in new regions of oil extraction.

   Tax deductions promised in 2009 can partly change a situation. As said Troika Dialog analyst Valery Nesterov, one could expect oil extraction growth by around 2,7% in 2009. By the way, he relates this to promised tax deduction exactly.

   Rosneft, Tatneft and Russneft are among the companies with oil extraction growth. As compared to last year, Rosneft growth totaled 24,8%, Tatneft – 1,1% and Russneft – 1,5%. Such Rosneft indices are explained by Yukos assets purchase in 2007. Tatneft improved its results due to tax cuts by MET (Mining Extraction Tax) for exhausted deposits the company had received in early 2007.

   According to Otkrutie Financial Company analyst Natalia Milchakova, Lukoil has a positive dynamics as well: within the half-year its extraction level went down, but in 2Q it had stabilized at 1Q level. According to her opinion, in 3Q the company demonstrates growth due to Yuzhno Khylchuyu field launch in Timan Pechora province.

   Within first half-year oil extraction level of Surgutneftegaz and Gazprom Neft companies has gone by 5,1% and 5,3% down respectively as compared to the analogical period last year, and, as analysts say, one should not expect situation improvements here, at least in the nearest future. In fact, now these companies need new licenses to large deposits, but no one can grant them.

   The authority representatives reassure. The Ministry of Energy deputy head Anatoly Yanovsky declared that in 2008 one expected oil extraction growth at around 1% volume, and in 2009 small growth would continue. Moreover, he reported that his department presented the Ministry of Economic Development and Trade a three-year forecast concerning oil extraction in Russia by 2011. However, analysts’ forecasts are not as optimistic as officials have. They consider that current year oil extraction indices in Russia remain at the last year level at best. Whose forecast realizes we will see in 2009.

Updated April 1, 2008

For the last eight years, 2000 through 2007, Russia has yielded additional $475 billion due to high oil prices, 72% of which has received on the budgetary system.

According to the vice prime minister and the minister for finance of the Russian Federation Alexey Kudrin, the average oil price in 2000 was forecasted at the previous decade level – $20 a barrel.

"Since then the oil price growth allowed to receive $475 billion in addition from 2000 to 2007, and $340 billion of which, or 72%, received on the budgetary system", Kudrin said.

As it has been reported, oil prices (as of April, 1) are not stable and continue to fall. In May the WTI oil barrel with delivery became cheaper by $4,04 up to $101,58 in New York. In London at the ICE stock exchange the Brent mark oil went down in price by $3,47 up to $100,33 a barrel.

   Tatar authorities intensify the negotiations with the leading world oil companies concerning exploitation of viscous oil (bitumen) deposits on the territory of Republic. There is no time to reflect as in three-four years the oil extraction in Tatarstan will begin to reduce rapidly.

   Tatarstan Prime Minister Rustam Minnikhanov was quoted as saying that the Republic considers the opportunity of attracting the American corporation Chevron to develop bituminous deposits located on its territories. Last year Chevron Neftegaz Inc. (CN) president Ian MacDonald declared that the company was ready to participate. However, the republican authorities stated then that they did not conduct any negotiations with CN as for this. According to Minnikhanov, the presentation of Chevron technologies passed at the highest level just recently. Tatarstan president Mintimer Shaymiev and representatives of this corporation were present at the meeting.

   However, the situation is spiced up with the fact that the main republic oil extraction company – Tatneft OJSC (TN) – already has an agreement about intentions to exploit bituminous deposits coupled with the rival – Dutch oil company Shell Exploration Company (RF) BV. It was signed on September, 27 2007. And, obviously, in order to please the owners, chairman of Shell Corporation in Russia Chris Finlayson underlined that Tatneft would occupy the leading positions in the area of extra viscous oils’ development in Russia by means of Dutch oil company.

   Now Tatneft and Shell establish a joint venture to extract and process the republican bitumen. Chevron appearance does not quite mean that Tatneft has argued with Shell. It is rather an attempt of the republican authorities to force a maximum possible result out of "strategic reserve", which are the bitumen deposits in Tatarstan. The oil extraction has been conducted here since the middle of the last century. Therefore, the majority of the large deposits is in the last stage of production. Thus, there is nothing to compensate them. Last year almost 32 million tons of oil was extracted in Tatarstan. However, even according to the forecasts of the official authorities, this level will be retained within no more than three-four years. It will begin to go down further, and this process can not be stopped even by means of the active expansion of the republican small oil companies, the majority of which is connected with Tatneft, beyond the Republic – to the Samara, Saratov, Ulyanovsk and Orenburg regions, Udmurtia and Bashkiria Republics, as well as Perm area.

   The bituminous deposits’ development will allow Tatarstan to retain the level of the average annual oil extraction at the level of 30 million tons, as well as to provide the basis for the raw material safety of the republican petrochemical projects that are actively developing in the region now. Bitumen reserves on the territory of Tatarstan are estimated at 1,4-7 billion tons. The soviet geologists named far bigger figure – around 21 billion tons. Moreover, extra viscous oil reserves are located on almost all territories around Tatarstan, including Bashkortostan and Samara region.

   Tatneft does not have enough experience in economic production of bitumen, and there has not been the keen necessity until now. Tatneft drilled two couples of wells at the Ashalchinsk deposit as an experiment and applied there the Canadian vapor-injection technology at bitumen development. The result is 15 tons net oil a day from one couple of wells. However, the Tatarstan oil companies are obviously displeased with the profitability of this process as well as with high risks during conducting of geological exploration works.

   The beginning of the official negotiations with Chevron, especially at the level of the Republic chief executives, can be considered as a method to pressure Shell in the matters of joint venture establishment and ways of profit sharing from the general activity. There is another version. The new player could be offered the local partner not related to Tatneft, but controlled by someone from the representatives of the republican authorities. The Tatarstan group TAIF, for example, could be such partner. It is associated with the name of the younger son of the Republic president – Radik Shaymiev. TAIF accumulates the greater part of the republic petrochemical assets, but now this group of companies retreats under Gazprom pressure and can claim to the developer role of the Republic bituminous inheritance.

   It is evident that the Tatarstan authorities have less time to take advantage of the favorable opportunity to start the industrial development of bitumen deposits in the Republic. Thus, not only in terms of economic but also political reasons. Those, who will control the extra viscous oil extraction (bitumen), will be one of the most influential political figures of Tatarstan Republic in the nearest thirty years.

Actuality March 21, 2008

   Industrial gas production from coal bed methane starts at Kuzbass in the 4Q 2009. The deputy chairman of Gazprom board Alexander Ananenkov confirmed this at the working meeting with the governor participation Aman Tuleev. At the meeting were discussed the issues of the innovative project realization, the largest in the Kemerovo region history.

   The regional administration press-service reported that Kuznetsk Company engaged in methane production at Kuzbass becomes Gazprom subsidiary in April, 2008. The oil and gas giant increases its stake in it up to 100%. The "methane project" is a high priority for Aman Tuleev. And he also marked that the company has to reach the methane production level at 4-5 bcm a year in the nearest future. In the governor opinion, the Kuzbass industrial enterprises require exactly such amount of gas. It is important to finalize the prospecting projects development in new areas – Taldinskaya (Prokopyevsk district) and Naryksko-Ostashkinskaya (Novokuznetsk district) to attain such indices in 2008. Moreover, it is necessary to drill 8 wells for test production to determine the optimum methane production areas on Taldinsk deposit., and to drill 60 wells a year to attain the full capacity.

   According to Alexandr Ananenkov, the National Reserve Bank will give Kuznetsk Company the RUR 250 mln. credit to continue these works in 2008 against Gazprom securities. It is planned to drill around 1500 wells 600-900 meters depth in Kuzbas within 10 years. Currently, operate 4 wells on Gazprom scientific ground in the Prokopyevsk district in the South area. They continuously surface gas daily. The experimental methane delivery to the consumers will be carried out already this year.

   The industrial methane production project has been developed in Kuzbass in the 1990th. The governor Tuleev took the lead. Since 2001 Gazprom joined this project. The Kemerovo governor underlines that coal bed methane production will allow creating the new economy industry, and also reduce methane-rich mines and promote mine safety in Kuzbas. We will remind that most mines’ accidents take place in terms of methane explosion. It is also supposed that due to this gas production will be solved the ecological issues. In fact, the Kuzbass mines belch around 28 000 cu m of gas in the production process annually.

   The problem is that Russia does not have the experienced specialists in industrial methane production. They are only in the USA and Australia. "It is necessary to start training and retraining of such specialists either in Gubkin Russian State University of Oil and Gas or in the Kuzbass State Technical University already this year", Tuleev is sure. Moreover, the methane status as the independent mineral product is not determined in the regulatory documents, and it means that it is not registered in the State Reserve Register. All tax deductions possible at the regional level within the act framework will be given to the new innovative project. At the federal level Kuzbass and Gazprom are intended to get the zero tax rates for mining in the first years of project realization. The experts estimate the methane supplies in the Kemerovo region at 13 trln cu m. Methane production technologies were first applied in the USA. For example, if in 1991 there were produced 4 bcm of gas, so today the figure is 55 bcm.

Actuality March 4, 2008

   Federal Tariffs Service (FTS) submitted for the government consideration the tariff rate for oil pumping through the pipeline system Eastern Siberia – Pacific Ocean (ESPO pipeline) – $38,8 per ton from Taishet to Skovorodino (end points of the first ESPO pipeline queue). Experts mark that with such tariff oil supplies to China become more profitable for oilmen, than to another countries of Asia-Pacific Region (APR), although it was planned to make them equally effective from the start.

   FTS passed its suggestions to the government about the tariff rate for oil pumping through ESPO pipeline. FTS received the order to present the forecasting tariff by March, 1 on February, 12 on the meeting with the vice-prime minister Sergey Naryshkin, who supervises pipeline construction. According to the administration head of regulation of oil and gas industries of FTS Denis Volkov, the forecasting tariff on the Taishet – Skovorodino section (first queue of ESPO pipeline) makes up $38,8 per ton. The tariff to the end point of ESPO pipeline – Kozmino bay (Primorsky Kray) – after completion of ESPO – 2 pipeline construction will be the same. Until ESPO – 2 pipeline will not be constructed (the government did not take decision yet about the terms of project realization, and first queue of ESPO pipeline will be put into operation only at the end of 2009), it is assumed to transport oil to Kozmino by railway. However, as Denis Volkov explained, in the offered by FTS tariff the cost of railway oil transportation from Skovorodino to Kozmino is not included.

   Construction of the first queue of ESPO pipeline supposes the oil pipeline laying from Taishet (Irkutsk Region) to Skovorodino (Amur Region, 70 km from the Chinese border). The pipeline capacity is 30 million tons of oil a year. Construction should be completed at the end of 2009. By this moment should be completed the construction of transshipment terminal in Kozmino bay also. It is assumed to supply oil from Skovorodino therein by railway. Also, it is planned to construct the oil pipeline 70-km long from Skovorodino up to Chinese border.

   In March, 2007 the ex-head of Transneft Semen Vaynshtok (left the company in September, 2007) said that the agreement about tariff determination for oil transportation from Skovorodino to Kozmino is already reached with JSC Russian Railways – $25 per ton. In JSC Russian Railways confirmed that the stated by FTS tariff does not include the cost of railway transportations, but added that the transportation cost to Kozmino is not agreed yet. However, in JSC Russian Railways did not state the forecasting level of tariff.

   In Transneft did not comment FST offers. However, in 2007 in the company supposed that cost of oil transportation to Skovorodino and to Kozmino will be the same (taking into account the railway tariff). "So, we deprived China even of the hypothetical opportunity to reduce the price of our oil. And if they do not pay the market price, the companies will transport oil to Kozmino at the same price", Semen Vaynshtok said.

   Rosneft should become the main supplier of oil to ESPO pipeline. The company already declared that it is displeased with oil prices, which China offers it now, to which Rosneft supplies 9 million tons of oil by railway a year. Yesterday in Rosneft declined to discuss the tariff, offered by FTS, having marked that consider it. But the source in the company considers that the offered tariff takes into account the opinion of oil companies. In the company did not report, what direction is considered the priority – China or other APR countries. However, Rosneft was not going to limit oneself to supplies through ESPO pipeline to China until now, speaking about the plans to construct oil refinery in Kozmino with the capacity 20 million tons.

   "Oilmen had two directions of supplies through ESPO pipeline, but now China looks more preferable", marks Konstantin Cherepanov, the analyst of KIT Finance Investment Company. He is also sure that in the future the government will correct the tariff, as in the current version it "does not fit into energy policy of Russia that supposes flexibility of supplies". Valery Nesterov from Troika Dialog is also sure that the tariff changes. The analyst marks that ESPO pipeline can grow in price and in future the network tariff will be used due to which grows the cost of oil transportation to the West at the price reduction in the East direction.

   Kozmino bay is the new end point of ESPO pipeline. The corresponding order was signed by the prime minister of the Russian Federation Viktor Zubkov on February, 27, reported the press-service of the government. According to the document, the route changes from the primary Taishet-Skovorodino-Perevoznaya bay (Primorsky Kray) to Taishet-Skovorodino-Kozmino bay. In fact, the route, approved by the government in 2005, was changed in 2006. First it was decided to lay the pipeline round about Lake Baikal, that elongated the route by 500 km, and then to move the end point from Perevoznaya bay to Kozmino bay. But the government did not take the decision to document the change of route until now.