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Slovnaft. The Reality of Russia. Lisbon, May 2005. THE MOL GROUP. Ray Leonard 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 - PowerPoint PPT Presentation
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The Reality of RussiaThe Reality of Russia
Ray Leonard Sr. Vice President, MOL Plc.
Lisbon, May 2005
SlovnaftSlovnaft
THE MOL GROUP
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
C1 Russian reserves are 119 billion barrels
As development of past five years has taken place, gap between SPE and SEC numbers and C1 is narrowing
Proven reserves are concentrated in West Siberia with about 70% in difficult to produce reservoirs
► 2
0
10
20
30
40
50
60
70
80
90
W S
iberia
Vo
lga U
rals
Tim
anP
echo
ra
E S
iberia
Ru
ssia Sh
elf
Proven Reserve BB
Exploration Potential
Minimal exploration took place in 1999-2004 period
Lack of guaranteed production rights if discovery is made
Far lower cost to increase production in discovered fields
Fiscal terms not encouraging for upfront capital intensive projects
Large portion of future risked potential of 43 billion barrels is in more costly areas
0
2
4
6
8
10
12
14
WS
VU
TP
ES
RS
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 1999-2004 boom was ruble devaluation
Ruble appreciation is taking away that benefit
In the coming years, production will shift to tighter reservoirs in West Siberia and frontier areas with high costs
0
0,2
0,4
0,6
0,8
1
1,2
1,4
1,6
1,8
2
1998
1999
2000
2004
2005-8
W Sib wells $MM V Urals wells $MM
► 5
Rising Costs (continued) Eskin 2004
0
0,5
1
1,5
2
2,5
3
3,5
4
4,5
19
98
19
99
20
00
20
04
20
05
-8
Lifting Costs WS and VU $/bbl
0
2
4
6
8
10
12
14
W S
ib
VU
TP
ES
RS
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
Under current tax regime, these funds will have to be borrowed
If funds are not available, production will drop -60
-40
-20
0
20
40
60
80
20
05
-10
20
11
-15
20
16
-20
Investment $BBTax collectedCash flow
► 8
Russian Oil Production and Exports
012
34567
89
10
2000 2005 2010 2015 2020
Oil production MMBO/D 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