Exploration is a Major Part of Our Future
During his time in office, both as the Russian president and prime minister, President Vladimir Putin has held a conference every year. The conference is held with members of the press, both Russian and international, and typically involves reporters asking questions of Putin who then responds off the cuff, though it is thought that Putin likely agrees to some questions ahead of time.
Last week, many topics were addressed in this year’s press conference, Putin’s 11th. Topics ranged from ISIS and Syria’s President Assad, to Putin’s feelings on the quality of work being done by his government and the economic crisis facing Russia. Of particular interest to those seeking answers on the Russian economy was Putin’s outlook on Russian oil and gas. Below are excerpts from the conference. The entire text can be found here.
State of the Russian economy
Alexander Gamov, Komsomolskaya Pravda: The country is going through very hard times, and you know this better than we do. What is your forecast for the future?”
Vladimir Putin: “To begin with, I will tell you a very old joke.
Two friends meet and one asks the other: ”How are you?“ The other says: ”My life is all stripes – black stripes followed by white ones.“ – ”So which one is it now?“ – ”Now I’m in the black one.“ Another six months pass, they meet again: ”How’s life? I know it’s all stripes, but which one is it now?“ – ”It’s black now.“ – ”But it was black last time!“ – ”Looks like it was white last time.”
We are having something very similar.
When a year ago we spoke of our plans and how we would move ahead to recover from the crisis, about our prospects, we, knowing that unfortunately our economy is very dependent on foreign economic factors, mainly the prices for our traditional exports like oil and gas, petroleum products and chemicals, which are all calculated based on oil and gas prices, proceeded from the idea that the average price of Brent, our crude oil, would be around $100 a barrel.
This was in early 2014. We used this figure in all our further calculations of macroeconomic parameters, revenue and spending, and social support and support for the economy, and late last year the Economic Development Ministry built its development plans proceeding from these figures. However, by the end of this year we had to rerun all our calculations, and even last year we had to do this as oil prices fell almost by half, not by some percentage, but by half from $100 a barrel to $50.
We calculated the budget for next year based on this very figure, a very optimistic one of $50 a barrel. However, now it is what — $38? Therefore, I believe we will have to make further adjustments.
We will not rush to adjust the budget, as this would lead to a reduction in the funding of both the social and real sectors; however, the government is of course working on different development scenarios. The Government should have this instrument available, to be ready for any developments.”
Privatization still a possibility
Nathan Hodge, The Wall Street Journal: “Now, with the sharp fall in oil prices and the economic crisis, isn’t it time to privatize state-owned companies such as Rosneft and Aeroflot to fill the budget? Will the privatization of state-owned companies improve their management and help withstand the crisis? Thank you.”
President Putin: “As we all know, privatization of large companies solves two problems. The first problem is unrelated to fiscal issues or budget profits, although this is also important. But most importantly it changes the ownership structure, increasing the efficiency of enterprises.
As for Rosneft or Aeroflot, which you mentioned, other companies often recalled in this context, I wrote in my articles back in 2012 that it was possible, and in principle, we are going to continue this work.
We will certainly always ask ourselves whether the market conditions are right to sell these valuable assets, which, so to speak, bring positive results to the economy, the budget, say, Rosneft. It is virtually impossible to say if the situation or conditions are right, although as you know, the Government did not take a decision on privatization this year.
Yet, I do not rule out that the government might go for these decisions to generate income and make some changes in the structure of these large companies, to avoid tapping reserves. I try not to interfere with such decisions, especially as it is not as if the government will lose its controlling stake in those companies anyway.”
Don’t kill the goose that lays the golden eggs
Natalya Menshikova, TV Channel of the Nizhnevartovsk District: “Good afternoon Mr Putin. Natalya Menshikova, the TV channel of the Nizhnevartovsk District, which is in Yugra, the home of the Samotlor oil field. The bulk of Russian oil is produced in our region, but these oil fields were originally explored back in the 1970s. This brings me to my question: Do you plan to invest in exploration, and if so, when?”
President Putin: “Exploration [is] a major part of our future. As you know, we adopted decisions on sour oil several years ago towards a more effective use of the depleting oil fields. We also adopted several other decisions, including decisions on taxation.
I know that the oil companies are not entirely satisfied, because we envisaged the so-called tax maneuver, under which we promised to reduce the export duty on crude oil while increasing the mineral tax. But this decision was not implemented, although we raised the mineral tax on oil and gas. The government has increased the burden [on oil companies]. It’s important that this situation doesn’t last forever, and I agree with some in the industry who say that the oil companies act by inertia when they don’t reduce production, as I said. They don’t revise their development plans. But I’ve noticed they’ve even increased production.
At the same time, we, meaning the government, must look closely at developments in this sector so we don’t kill the goose that lays the golden eggs. We’ll analyze the situation very seriously. Exploration is a highly important part, but the situation is not quite as you described it, that nothing has been done in exploration since the 1970s. No, we have been working on it, and we have invested in the agencies that have been charged with this work at the government.
We try to encourage both private and state-owned companies to do this, and they have been doing it. I can’t cite figures now, but I can tell you that they are quite impressive. Maybe we are not doing enough, but I assure you that we’ve never neglected this.”
Uncertainty over pipelines
Vladimir Kondratyev: “I’d like to ask you about gas – it is also one of the foundations of Russia’s prosperity. Not everything is clear on this issue.
We know that actions by the Ukrainian authorities are unpredictable. This is obvious from what happened in Crimea, where energy supplies were cut off. What if Ukraine stops the transit of Russian gas to Europe? Here’s the problem. The talks on Turkish Stream have been suspended because of the conflict with Turkey, and it is unclear whether they will be resumed. It would be very helpful if you would speak on this.
We have a backup option, Nord Stream-2 through the Baltic Sea, but a group of EU countries has protested against its construction and wants to torpedo the project like South Stream was done away with in the past. What awaits us, and what turn will events take?”
President Putin: “Let’s talk about Nord Stream and those who objected to it. We know that many countries were against the Nord Stream-1 project, but it was carried out. Its implementation turned out to be very helpful at the time. Not all conditions have been fulfilled and the pipes are not 100 percent filled with gas, especially in Germany – it’s 50 percent for Opal and almost none on another route, but I’m confident that these opportunities will come handy.
Regarding South Stream. You know our position: we were ready to implement it, but they simply wouldn’t let us. First, the European Parliament ruled that this project clashed with the European Union’s interests and forwarded the relevant document, and later the European Commission forced Bulgaria to halt the preparatory work, and then, all of a sudden, a Dutch regulator, where South Stream was registered, decided to grant us permission to launch the construction of the marine section. But how could we launch construction at sea, sink billions of euros there and then reach the Bulgarian coast without receiving permission first?
Naturally, they simply put us in a foolish situation, and seeing that, we said: if this is what it is, then we’re also stopping. They didn’t let us, do you understand? And I am surprised at the toothless stance of the Bulgarian Government that chose to neglect national interests for unclear reasons. We had planned to invest three billion [euros] in the construction itself — that means jobs, that means salaries, that means revenues to budgets of all levels, plus they could have had a minimum of 400 million euros per year just for transit. Well, a no is a no, so be it. As a matter of fact, one reason we came up with that project was to support Bulgaria. They don’t want it – well and good.
We began discussing Turkish Stream. You know, this doesn’t depend on us, after all. Not that we broke off the negotiations, but we want the European Commission to give written guarantees that all the routes, including a possible route through Turkey to Europe, are not only realisable, but also that it is a priority route and that the European Commission will back it. If Gazprom’s Turkish partners bring such a document from Brussels, we’ll move further. Unfortunately, so far, this doesn’t seem to be the case.
Regarding transit through Ukraine. True, at a corporate level, I heard it myself, during very serious debates someone would say: we will totally cut off this transit. I am not sure this should be done –cut off transit through Ukraine. But speaking about the capacity of Ukrainian transit and that of, say, Nord Stream-2… Well, everyone demands that Nord Stream in general and the future Nord Stream-2 meet certain requirements. What are these requirements? Reliability, the market nature of the gas transport system’s operation, and legal and administrative regulations that match the highest standards. Are our Ukrainian partners able to do what we together with our European partners have been doing with regard to Nord Stream? If they are able, we’ll continue working with them. If not, then we’ll see what can be done about it.”
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