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with Togrul A. Bagirov, Executive Vice President, Moscow International Petroleum Club (MIPC)

28.12.2009 / Energyboardroom

Dr. Togrul A. Bagirov, Executive Vice President of the Moscow International Petroleum Club, was interviewed by www.RussiaEnergy.com to discuss his views on the current position of the Russian oil and gas sector, its evolution over the last two decades, as well as the most likely prospects of the further evolution of the Russian energy sector and the foreign policy of the Russian energy companies.

What was the industry’s need fifteen years ago for the founding of what was then the Russian-American Petroleum Club?

After the collapse of the USSR and the creation of private vertically integrated Russian oil companies, the former Russian Energy Minister Yuri Shafranik and I felt that the time was right to promote the Russian energy business abroad in order to attract investments. We wanted to create a Western style association which would take into consideration Russian interests. We started in 1994 as the Russian-American Petroleum Club within the framework of the Gore-Chernomyrdin Commission on Technological and Economic Relations. The club functioned as a lobbying machine, consulting mechanism, and an expert advising group for the Russian government. We then established a Duma – Congress working group on energy. Amidst the club’s founding and annual meetings in Washington, DC with US Vice-President Al Gore and Prime Minister Viktor Chernomyrdin this was a very exciting time.

In 1996 we felt that the moment was right to open our club’s doors to European companies such as Total, Shell, BP, Eni, and Ruhr Gas. The club intended to create a forum for the major oil and gas companies, so according to the bylaws only big producers and transporters can become members. Our activities concentrate on trading and commercial activities particularly promoting international investment for major oil and gas projects; assessing the investment climate for pilot project in Russia; and legislation lobbying at parliaments and regional governments. We traditionally focused on production sharing projects but have shifted our focus to more regional projects such as in Yamal, Shtokman, Sakhalin, and the Caspian.

Recently we have had a good experience in enlarging and turning our interest and membership to third countries such as the ones in the Caspian region. We still maintain a representative office in Washington, DC and in Geneva. We are recognized by the United Nations as an expert group at the Economic Commission for Europe. There are numerous tangible advantages of club membership.

Looking at your club’s memberships the interests diverge from one another. It’s not easy to defend a common interest. What is burning on the agenda?

It is important to note that we are a non-government entity and we certainly do not intervene in any commercial negotiations. We do not work one against the other but instead concentrate on the common issues. Lobbying for Russian legislation is important on our agenda because favorable legislation for the industry is not yet fully in place. We need laws pertaining to LNG exports and oil transportation. For example, not everyone has the right to transport because of some technical limits. There is a concern causing rule for small and medium sized companies that limits oil transport and export to only 1/3 of production. Besides, a company is designated as coordinator for a particular region. Surgutneftegas for example is the coordinator for Germany. It is a more pragmatic system than in Soviet “divide and rule” times, but there is still much regulation since transportation is a huge network and very expensive.

Through our numerous and reputable experts we are also trying to lobby to decrease the royalty and export taxes. At the same time, our main activities are b2b. Sometimes even big companies, especially foreign ones, have problems meeting with parties of their interest so we facilitate their networking because of the unique access that we provide.

When you see foreign managers try to establish contact with local authorities or local companies, how do you see the tune of the communication going? Is there a real understanding from the foreign perspective of the goal of the Russian energy industry as a whole?

This is a good question with a complicated answer. Energy in Russia is of geo-strategic value. 55% of the federal budget comes from oil and gas so the industry has a huge impact on the country’s social and political situation. Oil and gas is also quite a strong and effective mechanism for a country’s foreign policy and developing relationships with other countries. Russia has became one of the biggest players in ensuring energy security in Europe and globally. Europe imports almost 40% of its gas from Russia. I think that imports from Russia will remain stable at about 35-40% over the next five to ten years.

Russia and Europe are mutually dependent on each other. If Russians lose the European market it would have a huge impact on the Russian budget. At the same time, if Europe loses the Russian supply, it would have grave consequences like we saw in the beginning of this year with the Ukrainian conflict.

Do you think it is in Russia’s interest and intention to create that same sort of dependence eastwards as they open up to the Asian markets?

The Asian direction is very important because you cannot be dependent on just one region. The opportunity that Russia now has to export to Asia is very appealing because of the rapid growth of Asian markets. However, in my opinion, the European market is the best for Russian gas. There already are pipelines in place with billions of cubic meters of capacity. Now you are trying to build a new pipeline which will bring total exports to 100 billion cubic meters of gas between Nord and South Stream.

But, at the same time, there will be two pipelines going to China. I believe that they will eventually agree on the infrastructure because China needs Russian energy if it plans to be the strongest economy in the world.

Do you plan to invite Chinese companies to the club, despite the fact that the relations seem to be kept on Government-to-Government basis?

We have already invited CNPC and Sinopec, and they are currently observers at the club. We have pleasant relationships with the China Investment Corporation, which is the largest sovereign investment fund in the world today, and with the Hong Kong stock exchange. Our special focus has been to bring new trends to the club’s membership. It used to be fashionable to bring assets to London in order to issue IPOs. Now, Hong Kong has become the new trend, particularly for the oil and gas industry. Next year I believe that there will be two to three very successful IPOs of Russian energy companies in Hong Kong, mainly of medium size energy companies.

As we saw in September, Mr. Putin announced that it was a good moment for foreign companies to come to Russia and that they would be welcomed with open arms. As an expert in the industry, how do you think this message should be taken?

We enjoyed several periods and milestones. In the 1990s we thought that the US and Europe would eagerly come and bring their money and technology. We opened production sharing agreements and major projects like Sakhalin 1 and 2. Then things took a turn for the worse. Oil prices collapsed in 1998 shooting down to $8/barrel which led to an economic crisis. President Yeltsin’s government was weak, regional authorities on the contrary were stronger than the federal. Then over a seven year stretch the price of a barrel jumped to $100. At $100 per barrel, companies became more powerful socially, politically, and internationally. The government’s finances were obviously strengthened and as of yesterday there was $447 billion in foreign reserves. Now Russia became an important international lender. No one would have imagined this back in 1998!

All this means that when oil prices shoot over $100/barrel the situation changes and the atmosphere encourages consolidation, as we saw with the Yukos deal. It is better for the government to have more control so that the whole nation gets benefits, not just a small group of oligarchs. From 2003, following the Yukos deal, until this most recent financial crisis we saw this tendency to consolidate and bring assets under control. It was not just a trend in Russia, but all over the world. But the situation has again reversed because during the most recent crisis government and industry leaders realized that they alone cannot develop the technology for difficult fields like Yamal and Shtokman. Nor can you buy the technology because it will shrink your profits. However, all the international cooperation that is being encouraged will follow the rules. Russia will enjoy at least 51% control of assets but foreign companies could become operators and technology suppliers as we see in the case with Total in Shtokman. They are not just a 25% stakeholder, but they are a joint operator together with Gazprom.

Our primary message to our western friends and colleagues is that Russia is a very smart, educated, and experienced country with companies that can really compete. Look at LUKOIL and TNK BP. They are smart, quick, and can compete with the ExxonMobils of the world. They need technology, yes, but the gap is closing. Look at Chinese companies. Just ten years ago you could not even name one. CNPC now has the largest market capitalization in the world.

The whole Russian energy sector has a smaller market capitalization than ExxonMobil. Is that fair?

It’s not fair. Because of the political situation and mistrust we have within western circles we are still not well understood and are weak in our public relations. We make mistakes as was the case with the Ukrainian crisis. In traditional western eyes, we are still different and sometimes considered a hostile nation. But a new generation of leaders is coming. We can expect that LUKOIL and Rosneft will become as large as ExxonMobil.

However and with less reserves, the Chinese managed to achieve a greater job than Russian companies, you just mentioned CNPC…

This is a controversial situation. Even after Russia became free and liberalized in 1991 we still drew skepticism because of our historical nuclear rivalry with the US and influence over Eastern Europe all the while China was still communist. Ten years ago US trade with China was $60 billion, but with Russia it was just $4 billion. China wasn’t seen as a threat and is now the biggest player that will soon be a bigger and more powerful economy than the US.

Will we see Russian companies going abroad more aggressively?

Yes, I think so. LUKOIL bought ERG in Italy and tried to buy Repsol in Spain. They are very active in Turkey and Greece. Gazprom will now buy a network in Germany as well as forge a partnership with Gaz de France. Chairman of Gaz de France has been here just recently. At a dinner hosted by the French Ambassador I spoke with him and the question was raised if France should join Nord Stream. I said that if I were him, I would sign immediately otherwise lose out on a fantastic opportunity to make money. A direct pipeline beneath the Baltic to Germany and then to France will give you the energy security that you have been wanting for the past ten years. Mr. Putin was recently in Paris and signed a protocol with Gaz de France. They also signed an MOU on Nord Stream to buy 9% of the gas from Germany. In return, they will give 5.2% of the Eastern European gas network to Gazprom. This habit of swapping assets is becoming the new trend in the industry; not only to buy but to sell something.

What are the highlights that we can expect to see in 2010-2011?

We can expect the continued realization of Nord and South Stream. If you look at the situation in Europe now, Europe will not demand as much Russian gas as in previous years. But if you ask me on behalf of Europeans, I think they should let the Russians build the pipelines and they can choose from whom to buy. Gazprom will provide the bulk of the investment and financial contribution with a little help from Eni. In the end I think it is a very good deal for the Europeans; perhaps a better deal than for the Russians.

I also feel that there might be new agreements to replace the take-or-pay contract. Certainly, you can’t completely exclude take-or-pay because without that guarantee no one will be willing to build a pipeline. At the same time there will be very substantial limits to the gas which can be bought or there will even be some link to the LNG spot market. If you follow the Russian gas industry attentively, you see that Russia is turning to LNG through Shtokman, Yamal, and Sakhalin. LNG is the future. You cannot rely on pipe gas forever because of its sustained expensive price. But with new technologies LNG will be relatively cheaper. However with LNG you need to establish regulations and infrastructure. At the moment Europe has only twelve terminals, so the future is promising foreign counties a shift to LNG and required technology.

Are there any last messages you would like to convey to our readers of OGFJ?

Oil and gas is a unique commodity and will still play a large role in the future even in face of new technologies and renewable energies. It is a resource that we have to take care of. Prices will not be as low as they are now because of the weak dollar. But at the same time, prices cannot get too high. We have to find a fair price which to my mind is about $100/barrel. I believe oil prices will again reach that level over the next two years and should hit $90/barrel by next year.



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