with Fares Kilzie, Chairman, CREON Energy
Dr. Kilzie, you have an extensive background in the oil and gas sector, with two decades of experience in the international advisory business and you founded Creon Energy. For our readers both international and Russian, can you introduce the company and what was the rationale behind establishing Creon Energy?
After the fall of the Soviet Union it was hard to understand what the demands were for Russia’s domestic market, and identifying development strategies was a huge challenge as well. The industry was contending with questions such as: where should the oil and gas go? Do we need additional gas processing plants? Creon Energy’s task was to find answers to these questions, and to propose roadmaps based on different economic scenarios. Throughout the years, we have been building up our knowledge database by establishing reliable information channels and scrutinizing investment projects, business plans and feasibility studies shared with us by our Russian and international partners involved in engineering and industrial production. Reports and forecasts on global and Russian economy have been essentially complemented by our own research and analysis.
In order to arrive to the full picture which would reflect the real situation from up- to downstream in Russia, we decided to understand the concept of downstream first. Therefore, we started our operations with a main focus on plastics and plastics consumption. We studied the full production chain from resins to applications, across the growing variety of plastics grades and products applied in industrial processes, infrastructure and consumer-targeted businesses. This was followed by contemplating the markets of hydrocarbons, monomers, agrochemicals and specialty chemicals.
Today Creon Energy is the only Russian advisory firm offering the full range of consulting services in upstream, midstream and downstream sectors. We have grown to become the leading Russian advisory group in the oil and gas, petrochemicals, chemicals and related industries in the countries of the former Soviet Union.
What have been the main milestones and achievements of Creon Energy since its establishment?
The history of Creon Energy is tightly linked with the development of the industry. In the past 20 years, the national oil, gas and petrochemical industries have achieved considerable progress, and Creon Energy is proud of its contribution and participation in shaping the innovation development vector in upstream, midstream and downstream sectors of the Russian economy. The trends and approaches that we have started to advocate thirteen years ago, continue to be implemented today.
One of our achievements has been our participation in the LNG project in Vladivostok. We are still involved in the comprehensive research on this project today, and it is an essential part of our broader contribution to large-scale development of resources in Eastern Siberia and the Far East. The LNG plant in Vladivostok is scheduled to come on track by the end of 2018.
Moreover, we have participated in the elaboration of the Energy Strategy 2030 adopted by the Government for petrochemical clusters in Russia. We have many reservations about this plan but it is a basis to start from. In fact, Creon Energy conducted and participated in the vast majority of large projects including strategy and feasibility studies for gas processing, oil refining, petrochemicals, and related infrastructures.
You have an impressive track record of clients. Among your clients are leading Russian and International oil and gas companies. What differentiates Creon Energy from other consulting services providers?
We are in contact with our clients on a daily basis. Apart from advisory, consulting and information services Creon Energy is highly active in organizing conferences, forums, and roundtables with extensive topic discussions. We organize over 50 dedicated business events per year, which is an important marketing tool for us. By encouraging discussions at conferences, we learn from our clients how they think and what they want.
We try to be as interactive with our clients as possible. We work with more than 600 international and 400 major national partners and clients, which includes Total, Shell, Gazprom, Rosneft, Exxon Chemicals, Sibur Holding just to name a few.
Reducing gas flaring has been an important topic on the political agenda in Russia since 2007. Although progress is being made, it seems that it is not enough, as Russian oil companies are facing fines for polluting the atmosphere with excess amounts of flared gas. What role can Creon Energy play to reduce gas flaring in Russia?
As Creon Energy we have done our task regarding APG flaring. We have raised our feasibility studies and passed this into the business community. We are proud that we delivered this but now it is their obligation to do the rest.
Fortunately we can already see oil companies, including market leaders Rosneft, LUKoil and TNK-BP, investing hundreds of millions of dollars to meet the government’s target of increasing associated gas utilization. Compared to other countries such as South Africa we have made significant steps towards reduction of flaring.
Utilization of APG has grown to the scale of an independent industry segment in Russia’s economy, with an appropriate engineering base. Creon Energy offers to oil companies comprehensive overviews of advanced and cost-effective technologies that are able to provide the industry with practical solutions to reduce APG being flared or vented.
How do you explain that Russia went faster than South Africa in tackling this issue?
The Russian government is difficult to move but when they move they can squeeze very tough in every aspect. That being said, if the government understands that steps need to be taken they will.
The first step has been taken by introducing fines for oil companies that flare off more than 5 percent of the associated petroleum gas but there are more measures that can be taken to tackle gas flaring.
We have analyzed certain amendments to the latest Government Resolution No. 1148 which addresses flaring, and issued our expert opinion concerning possible moves to stimulate achieving target indicators of APG utilization.
Is the government fostering an attractive environment for the oil and gas industry?
As much as they can but there remains a lack of competence in the government bodies responsible for decision-making. To date, every single issue needs to be addressed and explained to government officials.
Russia is a young country and competence does not come in a day but companies such as Creon Energy are here to understand things much faster and subsequently to inform the government.
Sometimes the situation improves but not always. My disagreement lies in the fact that we do not see frequent changes in the governments’ elite. Ministers move from one to another position. A new team with new players is prerequisite for progress.
The gas market is being liberalized—allowing private companies to export LNG. In addition Minister Novak recently stated that LNG production must be encouraged and we see huge upcoming projects such as the Yamal LNG. What is your view on the liberalization of the gas market?
Minister Novak, and Minister Donskoy – they are the spokesmen of the industry, which means that they defend the interests of both the business community and the government. Russia is the largest exporter of gas, we have the largest gas reserves worldwide but the industry is lagging behind in terms of LNG projects.
LNG achieves a higher reduction in volume than compressed natural gas so that the energy density of LNG is greater than that of compressed natural gas or that of diesel fuel. This makes LNG cost efficient to transport over long distances where pipelines do not exist. Russia cannot retain its leading position with solely a piping system for exports of gas. In order to be competitive, companies need to be compact and mobile in order to move fast to markets with demand. I believe that mobility in the gas sector is the most important element for gas success. This is exactly the message that we are trying to deliver to the government.
The economic and mobility effect of free trade will be far better than having only one channel for export of gas, which is Gazprom. Furthermore, any monopoly tends to become fat and lazy as competition is lacking—by having competitors in the market, companies run their business faster.
In Russia, gas export (including LNG) is the monopoly right of Gazprom. All other companies are exporting gas through the mediation of Gazprom and its subsidiary, Gazprom Export. NOVATEK, Rosneft and other gas producers are lobbying urgent regulatory changes that would allow independent export of LNG.
How do you explain that the LNG/CNG market is underdeveloped?
Gasoline prevails in the fuel balance of the USA, Europe stands for diesel. While Russia is historically gas orientated. We can be the world leaders in using natural gas as motor fuel.
As a gas orientated country we should implement compressed natural gas technologies for the automotive industry and liquefied natural gas for autonomous supplies to distant settlements. Why should we construct a 600 kilometer pipeline to inhabitants while we could also use compressed or liquefied natural gas to fulfill the demand? This would reduce investments significantly.
When we met Vladimir Kapustin he elaborated on Russia’s refinery upgrade plans and VNIPIneft’s role as general designer of the TANECO project. What we have been told – the project of the century. However the ESPO exports only crude oil that will be refined in China. What is the point for Russia to invest in refineries?
The country exports half of its crude oil and the other half goes into refineries. Another half of what has been refined in Russia is being exported as well. Thus, consumption based on oil is very low domestically. Therefore, even if we do not invest in any refineries today we will remain self-sufficient.
However, the Russian government firmly stated commitment to the modernization of the country’s refining industry and its determination to ensure that domestic demand for higher quality products is met. Unfortunately, these plans are continuously being postponed.
Russia is part of the globalized economy thus we should think about what happens in other countries in order to move fast and meet the demands of these markets.
To answer our title, is Russia business as usual?
For large players such as ExxonMobil, Rosneft and Gazprom it generally is business as usual as the Russian elite is working with them. For small and medium sized enterprises however, it is different as they do not have that direct contact.
Under your leadership, Creon Energy has become a leading advisory group. What is your strategy to maintain this position in the coming 2 to 3 years?
We are a market-dependent company – if the market will develop as it did over the last ten years, we will be developing accordingly. Frankly, the market is not developing in a way that we would like to. In certain segments of the market we have the capacity to develop somewhere between 20% and 30% per year.
Plastics segment can be a good illustration of such tremendous market changes that we can expect to continue. Consumption of all types of plastics per capita in Russia grew from 1.2 kg/person in 2005 to 5 kg/person in 2012. And it still falls 2-3 times behind Western Europe and the United States. Imagine the vast opportunities that remain open in this sector!
At the same time, bureaucracy, corruption and a lack of governmental support remain issues that need to be tackled in the country. An international company that wants to set foot on Russia’s soil needs to be supported by the authorities otherwise they will turn their back towards us.
What would be your final message to our readers?
To your readers in Russia I would say: it is time for change! If we do not change as an industry we will lose our competitiveness in all segments.
For your international readers my message would be: catch our changes! When we change, international players should be present in order to support those changes.