Interview with Mikhail Krutikhin

The EEO spoke with one of Russia's leading and independent energy experts, Mikhail Krutikhin of RusEnergy, in Rotterdam at the 'Nationaal Gasplatform'. We asked him about the challenges that lay ahead of Russian gas production and whether the recent BP-Rosneft deal is a sign of a new investment trend emerging in Russia.

Most of Russia's large gas fields are nearing depletion. How do you think Russia and Gazprom will cope with the challenge of securing production in the coming decades?

It's a very difficult question. Right before the recent economic crisis, the official plan of Gazprom and the Russian government was to import 110 BCM from Central Asia, which would help to deal with the shortage of supply within Russia. This is because some of Russia's fields are not economically viable to develop and others will take a lot of time to develop, such as Yamal. There is a lot of talk about Yamal, but you have to take into account that even if they go ahead with all the developments on Yamal, as planned, the first results will be only 3-4 years from now and production will only be 1.5 BCM /a. In order to actually replace the depleting fields, they will need 15-20 years. So it is difficult.

So you are actually saying that Yamal cannot provide for the gas that is needed?

Yamal cannot produce gas immediately. Even if they develop Bovanenkovo, the first field in line, it will only be 1.5 BCM/a initially. Only after five years, a production of 5-7 BCM/a could be reached. The development of the field is very difficult, because of expensive wells, difficult drilling conditions, permafrost etc. Yamal can produce a lot of gas, if they develop all the fields. But this gas will be very expensive and it will not be straight away. This will take a lot of time. So, I don't know how Gazprom is actually planning to tackle this problem if demand actually increases in Europe, without importing Central Asian gas. Currently they are only importing 15 BCM/a from Uzbekistan, less than 10 BCM/a from Turkmenistan and with Kazakhstan they just exchange gas. So it's not really compensating for the decline in Russian gas production. There is hope that independent gas producers within Russia are going to produce more gas. And it's part of Gazprom's plans, but is uncertain whether it will happen. Independent gas producers need access to the pipeline system, but it is hard to obtain access to the system. Also Gazprom wants them to sell the gas at a fraction of the real price, which of course is not profitable for the independents. For example, Russian private oil company Lukoil prefers to operate in Uzbekistan and not in Russia. They are moving their capital to Uzbekistan to produce more gas there and export it to China, in stead of Russia. So it's really a big problem.

This means that Gazprom will continue to rely on Central Asian gas for the coming decade and a half in case demand increases?

No, they have spoiled their relations with Turkmenistan. The planned Prikaspiyski pipeline, running from Turkmenistan to Russia, will not be build. Russia would only build this pipeline on the condition that Turkmenistan guarantees not to sell its gas to Nabucco, but only to Russia instead via this new pipeline. Turkmenistan refused to agree on these terms and it was decided not to build the pipeline, nor the upgrade the existing pipelines.

Turkmenistan is planning to build the East-West pipeline, which could be extend either to the South, across the Caspian Sea or towards the North. So hypothetically the Prikaspiyski pipeline could still be on the agenda?

Hypothetically yes, but I do not think that the relations between Gazprom and Turkmenistan are good enough to allow such a development. Turkmenistan is not prepared to talk to head of Gazprom, Mr. Miller. So, it will be difficult to reconcile the interests of Gazprom and the price of gas. You see Turkmenistan is demanding a so called European price for its gas. Currently Gazprom is buying gas from Azerbaijan at a European price and supplies this gas to the Republic of Dagestan inside the Russian Federation. But Dagestan is not paying for its gas and is back on its payments.

This brings up the question of how South Stream will be supplied?

If the project goes ahead, gas that now floes through the Ukrainian pipeline system will be used, since no one in Russia is going to increase production dramatically. So, it's the same gas that will be used for South Stream. 

So if South Stream does not materialise, the alternative transit route would remain Ukraine. Gazprom has expressed its interest to buy itself in into Ukraine's Naftogaz, offering Russian gas fields in return. What's your opinion on this?

I cannot imagine how they can buy themselves into this Naftogaz. This is Gazprom, it is not capable of offering a win-win situation. The fields that it's offering to Ukraine are fields that Gazprom is unable to develop itself. These fields, located in Astrakhan, are very difficult to develop, it's very sour gas. They don't have any way to market this sulphur, which they produce. The wells will have to be drilled very deep, so it is a very costly affair. So Ukraine does not want it. Then they offer them a gas field in Western Siberia, another very difficult project. So the Ukrainians responded by demanding shares in fields that are already under development by Gazprom or its subsidiaries, only then would Ukraine be prepared to consider some form of joint venture. But Gazprom is not prepared to do that.

In your opinion is the recent deal between BP and Rosneft a sign of a new trend, meant to invite foreign energy companies to join in the exploration and development of new fields?

Well, there are several reasons. First, we are witnessing an outflow of capital from Russia. Last year, there was a $ 38.8 bln outflow of capital from Russia. Russia is considered as one of the worst places for investments, which is supported by several ratings. This was a disaster for Mr. Putin's plans. So the goal is to prove that Russia is comfortable for foreign investments. Another goal is that they want a stake in a respectable foreign company. Then they want a foreign company to acquire some shares in Rosneft. But Rosneft is not a commercial company, it is undertaking some projects that are rather political, such as a pipeline from the Black Sea to the Mediterranean, both Turkish (Samsun-Ceyhan) and the Bulgarian-Greek versions (Burgas-Alexandroupolis oil pipeline). But these pipelines are not of any use to Rosneft, since it will only export refined product from the Black Sea region. It's a political decision. As to show that Rosneft is a full fledged commercial company they need a foreign investor to acquire some of the shares. BP is an excellent target for that, because it is vulnerable. It has a quarter of its reserves in Russia and is an absolutely obedient company. It has been hit by the disaster in the Gulf of Mexico. Immediately after the deal, it was announced that some Kuwaiti funds will acquire some medium sized oil producing projects in Russia. So investors are coming after all.