The Reality of Russia
THE MOL
GROUP
Ray Leonard
Slovnaft
Lisbon, May 2005
Sr. Vice President, MOL Plc.
Russia has entered a new era
►
1980’s: Soviet Empire with 20% of world oil
production
►
1990-1998: Collapse and reorganization as
production drops from 12 to 6 MMBO/D
►
1999-2004: Industry revival in Russia with
production increase to 9 MMBO/D
►
2005-?: State re-asserts control and production
stabilizes
►1
Russian Reserves
Two sets of calculations: Russian
C1(proven) accurately measures
reserves without economic filter
while SPE and SEC measure
economically recoverable
reserves and actual developed
reserves
90
80
70
60
50
C1 Russian reserves are 119
billion barrels
20
10
Russia Shelf
E Siberia
Timan
Pechora
0
Volga Urals
Proven reserves are concentrated
in West Siberia with about 70% in
difficult to produce reservoirs
30
W Siberia
As development of past five years
has taken place, gap between
SPE and SEC numbers and C1 is
narrowing
40
Proven Reserve BB
►2
Exploration Potential
Minimal exploration took place
in 1999-2004 period
14
Lack of guaranteed production
rights if discovery is made
12
Far lower cost to increase
production in discovered fields
8
Fiscal terms not encouraging
for upfront capital intensive
projects
4
10
6
2
RS
ES
TP
VU
Large portion of future risked
potential of 43 billion barrels is
in more costly areas
WS
0
Risked Expl Reserves BB
►3
Infrastructure
Limitation of production increase in 1999-2004 period
was pipeline access
With production flat or slightly declining, this is no longer
a problem
Combination of export tariff (now $120/ton) and high rail
transportation costs have made rail export unattractive
economically
►4
Rising Costs (Eskin 2004)
Part of the reason for 19992004 boom was ruble
devaluation
Ruble appreciation is taking
away that benefit
2
1,8
1,6
1,4
1,2
1
In the coming years,
production will shift to tighter
reservoirs in West Siberia and
frontier areas with high costs
0,8
0,6
0,4
0,2
2005-8
W Sib wells $MM
2004
2000
1999
1998
0
V Urals wells $MM
►5
Rising Costs (continued) Eskin 2004
4,5
14
4
12
3,5
10
3
2,5
8
2
6
1,5
4
1
RS
ES
TP
VU
Lifting Costs WS and VU $/bbl
W Sib
2005-8
2004
0
2000
0
1999
2
1998
0,5
Capex per new unit prod $/bbl
►6
Investment 2005-2010
Investment will not increase despite high oil prices during
the 2005-10 period
Export tariffs and other taxes remove 90% of value of oil
above $25/bbl
Russian investment laws remain unfriendly to long-term
high front end cost projects
Limited number of projects for foreign investors to
operate
For this period, Russian companies will use available
capital to cover rising costs and pay taxes
►7
Future Investment
Shift from mature to frontier
regions will require greater
investment after 2008
80
60
40
20
Under current tax regime, these
funds will have to be borrowed
-20
-40
2016-20
2011-15
-60
2005-10
If funds are not available,
production will drop
0
Investment $BB
Tax collected
Cash flow
►8
Russian Oil Production and Exports
10
9
8
7
6
5
4
3
2
1
0
2000
2005
2010
Oil production MMBO/D
2015
2020
Crude exports MMBO/D
►9
Conclusions
Current Russian policies have ended period of production growth
With production flat or slightly declining, no new pipelines are
needed, although East Siberia line may be built for political reasons,
reducing exports to Europe
State has assumed control of industry with limited opportunities for
foreign investment
Russia will be able to use industry as cash generator for next five
years as lower cost areas are produced
Crisis will come at the end of decade when lack of investment during
2005-10 needed to maintain future level of production by
development of new areas becomes apparent, unless current
policies are changed
► 10