National Energy Security FundForeign Investment inRussias HydrocarbonSector Konstantin Simonov Chatham House London March, 29 2011

Typical Presentation of Situation in Russia Russia is the land of resource nationalism Restriction of operating conditions for foreign companies Increasing the role of state companies National Energy Security Fund

The Real Meaning of Famous Law Dmitry Medvedevs presidential term in office began with a symbolic act: practically simultaneously with his inauguration the new law On Procedures of Implementing Foreign Investments in Commercial Organizations of Strategic Importance in the RF came into force The matter was probably that while oil prices were high Vladimir Putin tried to make it clear to nonresidents that they could be just junior partners of Russias large state firms or majors with state participation that had preferential rights to acquire licenses of new projects on favorable conditions. It was important for Putin to fix the one-stop principle he personally headed the commission for foreign investments in strategic sectors showing that if nonresidents wanted to work in the oil and gas sector they had to come to him National Energy Security Fund

Sakhalin-2: Case of Resource Nationalism? Gazprom bought 50% plus 1 share in the project from Shell, Mitsui and Mitsubishi for more than $7bn Shell, Mitsui and Mitsubishi are still minority shareholders of Sakhalin-2 All issues related to violations of the environmental legislation were certainly settled Moreover, SE immediately managed to increase Sakhalin-2s budget from $12bn to almost $20bn Meanwhile, the Sakhalin-1 project every year has serious problems with approval of the project budget in contrast to Sakhalin-2 that avoids them National Energy Security Fund

Downstream Nationalism Favorite topic of Putin was asset exchange. He was ready to allow nonresidents into the Russian production sector only following the upstream in exchange to downstream principle. Putin had a strategic task to enter the final user market where the highest profit margin is charged But gradually it became clear that the scheme was collapsing. Actually Putin failed to achieve substantial success. In the gas industry nobody wanted to transfer significant assets to Gazprom National Energy Security Fund

Psychological Confrontation Some kind of psychological confrontation between Putin and nonresidents started. On one side, Putin understands there are very few places in the world where costs of production of hydrocarbons are low and political risks are minimal. Resource nationalism rapidly spread around the planet; political risks in countries rich in oil and gas also increased, while the economic crisis, new kinds of fuel and energy efficiency policies did not substantially reduce the world demand for hydrocarbons. The oil spill in the Gulf of Mexico at a BP platform vividly demonstrates that easily retractable oil reserves are running out; companies are ready to produce oil in rather complicated conditions. Access to deposits is an expensive privilege. And Russia is not the worst place for investments compared to Latin America, Africa and Central Asia On the other side, reserves of cheap hydrocarbons are reducing in Russia too. Production is gradually moving to northern and eastern regions; oil and gas production costs are becoming substantial National Energy Security Fund

2010: Bad news ConocoPhillips withdrawal from LUKOILs share capital E.on withdrawal from Gazproms share capitalNational Energy Security Fund

BUT! 2011: Real U-turn + + + + +National Energy Security Fund

What is Russias Need? Investment Technology Share of risks Market outletNational Energy Security Fund

Instead of what? Tax benefits Investment to infrastructure Liberalization of domestic gas market National Energy Security Fund

Exchange of Shares Interpenetration with foreign companies Putin would like to organise deals involving an exchange of assets and shares in Russian companies for s hares in foreign majors. It is also a question of political stability National Energy Security Fund

Privatization In the period from 2012 to 2015 the government is ready to sell up to 15% of Rosneft shares. After 2015 Russias participation in Rosnefts capital may be reduced. In 2011 a 25% minus one share stake in Sovcomflot A 25% minus one share stake in Russian Railways will be sold soon Zarubezhneft, Aeroflot and Sheremetyevo are to become private in 2011-2015 National Energy Security Fund

BP-Rosneft-AAR CaseTwo big surprises State is trying to involve BP to new project in Russia but private business is struggle against it! We can also remember Khodorkovsky who abolished PSR in Russia Private businessmen is publicly struggling with Putin and there is no doctor National Energy Security Fund

Live after Libya National Energy Security Fund

and Fukushima Increasing of gas consumption in "No nuclear" scenario 250 210,9 200 150 103,2 100 68,8 41,1 37,1 33,9 50 22,5 17,8 0 USA France Japan Russia South Germany Canada China KoreaNational Energy Security Fund

Thank you! www.energystate.ruNational Energy Security Fund