Milov Carnegie Feb 1 2005 eng

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Information about Milov Carnegie Feb 1 2005 eng
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Published on April 16, 2008

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Russian energy policy challenges:  Russian energy policy challenges Vladimir Milov President, Institute of Energy Policy Moscow, February 1, 2005, The Moscow Carnegie Center Key challenges to Russian energy policy:  Key challenges to Russian energy policy Energy intensive economy and the problems of domestic energy markets Limitations for oil and gas exports growth Model of state policy in energy sector The problems of Russian oil downstream sector Part I. Domestic energy markets and energy efficiency of the economy:  Part I. Domestic energy markets and energy efficiency of the economy Russian energy intensity ‘in action’:  Russian energy intensity ‘in action’ Note. GDP in 2003 US dollars by purchase power parity Primary energy consumption per dollar GDP by PPP in 2003 money Primary energy consumption per capita in 2003 Russia is not just behind other economies in terms of energy efficiency, but is far behind the emerging economies in terms of energy consumption per capita. That makes the country uncompetitive Source: The World Bank, UN, BP In 1990s, other transition economies had managed to improve energy efficiency:  In 1990s, other transition economies had managed to improve energy efficiency Primary energy consumption per dollar GDP in transition economies (GDP in 1995 US dollars under market exchange rates) Source: Energy Information Administration In other transition economies, liberalization of energy markets served as a key driver to improvement of energy efficiency of the economy. In Russia energy markets, in general, were never liberalized, therefore, energy efficiency remains low How much additional energy production the GDP growth may require?:  How much additional energy production the GDP growth may require? Primary energy consumption growth elasticity to GDP growth 0,25 Primary energy consumption growth elasticity to GDP growth 0,4 (in 2003 – 0,52) Source: BP , Goskomstat, Institute of Energy Policy Even with low elasticity of primary energy consumption growth to GDP growth (0,25, as seen only in 1999-2001 - during ‘recovery growth’), further economic growth in Russia may require to increase energy production in 2015 by 130 mln. tons of oil equivalent, or to cut exports Politically depressed energy prices do not create stimulus for energy efficient consumers’ behavior:  Politically depressed energy prices do not create stimulus for energy efficient consumers’ behavior Energy consumption per unit of industrial output, according to Goskomstat, does not decline – energy efficient upgrade of industrial capacities and technologies is not being implemented Growth of power consumption in transport/communications and in industry in 2003, according to Goskomstat, was very high – 10,9% and 3,6% respectively Gazprom contains growth in gas consumption only through centrally administered limits of gas supply to customers, which set limitations to industrial and commercial growth (gas supply limits had remained unchanged since 1998) We are reaching the end of ‘recession resource’:  We are reaching the end of ‘recession resource’ Source: Goskomstat, RAO UES Sources of capital financing in power:  Sources of capital financing in power Capex structure in power sector, 2003, % Source: Goskomstat Share of market sources of capex financing (bank loans, new issue of shares) in the power sector is still not higher than 6-7% Recent equity investments in power companies (at least, due to the list of investors) are most likely associated with securing core businesses, rather than modernizing power capacities Structure of capital financing in gas sector:  Structure of capital financing in gas sector Structure of Gazprom’s capital investments in 2000-2005 Despite evident gas production crisis, Gazprom prefers to increase investments in totally different areas, mainly transport Source: Institute of Energy Policy Production crisis in gas sector:  Production crisis in gas sector Source: Institute of Energy Policy Is the reliability of gas supply a goal for Gazprom?:  Is the reliability of gas supply a goal for Gazprom? What areas of investment activity were hurt most due to Gazprom’s decision to participate in Yuganskneftegaz (YNG) auction*? *) although Gazprom had finally chosen not to participate, the trend is evident Gazprom is leading Russia towards gas crisis Significantly reducing investments in the development of major new gas fields Reducing investments in upstream gas production Source: Institute of Energy Policy Production crisis in power sector:  Production crisis in power sector Source: Ministry of Economic Development and Trade of Russia The liberalization dilemma:  The liberalization dilemma Encouragement of private investors and stimulation of energy efficient consumers’ behavior require liberalization of energy markets However, liberalization is senseless in the total monopoly environment, and may lead to negative economic results – therefore, it requires market restructuring of the liberalized sectors However, energy monopolies’ restructuring has, so far, failed:  However, energy monopolies’ restructuring has, so far, failed Putin: ‘We will not divide Gazprom’ In power sector, ‘entrance of private investors’ turns out to be limited by redistribution of generation assets in favor of Gazprom, as well as narrow circle of the Russian industrial groups After power sector unbundling, not less than 70% of the generation assets will still be controlled by the state and Gazprom After 15 months in operation, limited free power trade exchange is set to close down, and the date of general market liberalization clearly moves to the next political cycle (2009-2010) New wholesale and retail power market models suggested by RAO UES can assist even greater monopolization of the power sector Part II. Energy exports: limitations for growth:  Part II. Energy exports: limitations for growth Oil exports: limited to European direction:  Oil exports: limited to European direction The problem of Danish straits Limited marine traffic in Bosphorus strait, Egey sea traffic problems Restricted continental market Baltic direction (20% of oil exports) Continental direction (40%) Black Sea direction (40%) Europe: not promising oil market in terms of growth:  Europe: not promising oil market in terms of growth European oil market is not growing in terms of demand EU-27 (ЕС-25 + Bulgaria and Romania): oil demand growth in 2015, as compared to 2000, – 12,5% EU-15: oil demand growth in 2015, as compared to 2000, – 10,5% Source: International Energy Agency North American and Asia Pacific oil markets:  North American and Asia Pacific oil markets Dependance on oil imports, % Growth of net imports in USA, China, India in 1990-2015 Provisional; oil consumption in USA and Asia Pacific (incl. China, India, South Korea), 1990-2015, mmtpa Source: International Energy Agency Does the state-backed strategy of oil pipeline development help to maintain further oil production growth in Russia?:  Does the state-backed strategy of oil pipeline development help to maintain further oil production growth in Russia? Baltic direction has limited strategic perspectives due to pure European market orientation, and marine traffic limitations (a ‘particularly sensitive marine area’ as defined in 2004 by the IMO) In 2002-2004, Russian authorities had buried the project of Western Siberia-Murmansk pipeline, the introduction of which in 2006 (as initially planned) would help support 4-5% annual oil production growth rates But now, Russia will build a controversial Taischet-Perevoznaya pipeline, which will not be introduced before 2008, and will pump oil via 3,750 miles from Western Siberia to the Pacific (transportation cost USD 9.8/bbl), as well as transport oil via railroad to China (transportation cost USD 7.5/bbl) LNG market: the fastest-growing energy market in the world:  LNG market: the fastest-growing energy market in the world 7,3% average growth rate in global LNG trade in 1993-2003 12,1% growth 2003 to 2002 Global LNG trade volumes had doubled in 1993-2003 By2010, global LNG trade volumes гre expected to grow 1.6 times as compared to 2003, by 2020 – 2.6 times as compared to 2003 It is the only global energy market which is growing so fast LNG market is globalized and provides unique market flexibility Global LNG market: Source: Ocean Shipping Consultants Global LNG trade in 1993-2020 (after 2003 – provisional) Largest world’s LNG exporters are Indonesia, Algeria, Malaysia, Qatar, Trinidad & Tobago (total exports – 118 bcm per annum). Russia does not produce LNG and is not present on this market LNG projects in Russia:  LNG projects in Russia All the ideas of construction of LNG plants in Russia (except Sakhalin-2, which is a non-Gazprom project) exist only as project ideas. The one project which is the closest to reality (Shtokman) is conflicting with the Gazprom-supported project of the North-European pipeline Shtokman gas field: LNG plant with annual output 12 mt LNG (unclear when and on what conditions it will be build) An idea to build a 23 mtpa LNG plant at Kharasavey, Yamal Peninsula The only real LNG plant project in Russia: Sakhalin-2, where a 9,6 mtpa LNG plant is to be build in 2007-2008 New idea on LNG port terminal in Ust Luga in Lenoblast (joint memorandum of Gazprom and PetroCanada), details yet unclear Part III. Energy sector and The State:  Part III. Energy sector and The State Never-ending liberalization:  Never-ending liberalization Price liberalization started back in 1992 has little affected energy markets in Russia. 85% of the final energy consumption is still associated with supplies by regulated prices In the liberalized and privatized segments of the energy sector, significant growth of production and efficiency has been recorded in 1999-2004 But, despite that, most important energy markets had retained centralized structure and are dominated by state-controlled monopolies, – these segments do not demonstrate neither efficiency, nor growth 2000-2004 period, which had initially provided hopes for further energy sector liberalization, did not bring any results Private oil sector, which gave an unprecedented and unexpected 50% oil production growth in 5 years, is now facing a threat of re-nationalization Liberalization in action: the results in Russian oil and coal sectors:  Liberalization in action: the results in Russian oil and coal sectors Federal budget subsidies to coal sector in 1995-2003, money of 2003 Oil production in Russia after the privatization of main oil assets Oil & coal sectors’ privatization and liberalization provided clearly positive results. However, the centralized state-dominated segments of the energy sector (power and gas sectors) did not manage to achieve such a success Source: Goskomstat, CDU TEK Gazprom vs. independent gas producers:  Gazprom vs. independent gas producers Gazprom gas production in 1999-2004 (including takeovers of independent gas producers) Gas production by independent gas producers in 1999-2004 Gazprom was still not able to reach 1999 gas production level,despite export windfall , and will not reach it in the coming years. Private independent gas producers, who have no access to exports, in 1999-2004 had nearly doubled their gas production. This results prove that the ideology of ‘green channel’ for the development of independent gas producers in Russia, and market restructuring of Gazprom, which was proposed by the Russian Ministry of Economic Development and trade in 2002, was correct Source: Goskomstat, CDU TEK The phantom of centralization:  The phantom of centralization Oil Gas Power Refusal to open privatization of Rosneft and Zarubezhneft Hostile takeover of Yuganskneftegaz Informal ban on private pipelines, unlimited support for new pipeline construction initiatives by Transneft, which have little in common with market interests Support for the administrative model in subsoil practices in the new draft subsoil legislation Openly announced intention to restore state control in Gazprom, instead of getting rid of state control in gas production Informal support for Gazprom’s hostile takeovers of independent gas producers (Purgaz, Vostokgazprom, Severneftegazprom, Nortgas) Gazprom intrusion in power companies, which can already be converted in control over 40-50 GW of installed generation capacity State control in energy has no strategic perspective:  State control in energy has no strategic perspective The performance of the state-controlled segments of the energy sector (power, gas, Rosneft, Transneft) are far worse than the results of the privatized companies State actions in energy are systematically irrational (see next slide) State’s conflict of interests (social, industrial, macroeconomic policies) will hurt sustainable development of the state-controlled energy sectors State interference itself has already became a major factor for decline of interest towards long-term energy investments in Russia State actions in energy are systematically irrational:  State actions in energy are systematically irrational Disintegration of Yukos as a vertically integrated economic organism Forcing Gazprom to acquire new non-core businesses requiring long-term capital investments (power. Rosneft), instead of concentration of investment efforts on the gas production challenge Freezing power and gas prices for 3 years (conservation of consumers’ inefficiency, producers’ expenses growth, capital expenditure underfinancing) instead of fast market liberalization and introduction of competition Refusal of economically promising Western Siberia-Murmansk pipeline project for the sake of economically controversial Taischet-Perevoznaya pipeline, ‘strategically important’ for some political reasons Forcing business to make politically motivated, non-economic energy asset acquisitions on the post-Soviet space Opposing the construction of the Baku-Ceyhan pipeline, which can offload some 0.4 mbd of crude from Russian export pipelines in favor of Russian exporters Part IV. Russian oil downstream sector:  Part IV. Russian oil downstream sector Stagnation in Russian refinery business:  Stagnation in Russian refinery business Refinery product output from 1 mmt of crude oil on the typical refinery… Vertical integration in the Russian oil sector has made refining a secondary business. Russian refineries are uncompetitive both in terms of refinery age and conditions, and in terms of quality of refined products Source: BP, Institute of Energy Policy Monopolization of retail refinery products market: what does it mean:  Monopolization of retail refinery products market: what does it mean Retail prices on gasolines and consumer prices index in 1992-2004 (%, 1992 – times) Retail prices on gasolines and consumer prices index in the low-inflation period – 2000-2003 (%) Source: Goskomstat, Institute of Energy Policy Growth of gasoline prices had always exceeded the overall consumer price growth (except for two years – 1998 and 2001, when overproduction was recorded) *) 11 months of 2004 Sources of problems in Russian oil downstream:  Sources of problems in Russian oil downstream Absence of economic stimulus for refinery upgrade: remaining export duties on refinery products, underdeveloped domestic demand for high-quality products (the state is still afraid to introduce EURO-3 и EURO-4 requirements for motor vehicles), irrational excise tax differentiation for gasoilnes (high-quality gasoline trade is subject to higher taxes) Retail sales regional monopolization, supporting by alliances with regional authorities (maintaining high entry barriers for independent retail traders). Retail sales margin for refinery products in Russia is 1,5-2 times higher than in other countries, and most of the retail product price increases has been associated with the increase of retail sales margin (and are, in general, not linked with the changes in wholesale oil and product prices) Thank you! http://www.energypolicy.ru:  Thank you! http://www.energypolicy.ru

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