Possibilities of energy dialogue

25/ 04/ 2006

Viktor Khristenko, Russian Minister of Industry and Energy

Russia's energy strategy is coming to the fore on the global agenda,
especially in 2006 when Russia assumed the rotating chair of the Group of
Eight industrialized nations. Global energy security is one of the key
issues on the agenda of the G8 summit. It would be absurd not to discuss it
with Russia, the biggest oil and gas exporter in the group with a major
influence on the world market situation.

This global issue can be divided into several tasks. The current situation
on the global market is noted for four crucial aspects.

First, the energy requirements of the emerging Asian countries are growing
rapidly (up to 45% of the prospective increment in the global oil demand).

Second, the divide between oil and gas consumption and production in the
industrialized countries is growing. By 2020, Europe will import 60-70% of
its gas requirements, whereas the majority of Asian giants already import
more.

Third, this process is compounded by the inadequate oil refining and
transportation infrastructure and the limited additional possibility of oil
production.

And fourth, the global trade in "black gold" is insufficiently transparent.

Taken together, this puts the light on the issue of energy security, which
Russia has raised not only as a domestic problem, but primarily as a common
problem of reliable energy provision to the world's countries and nations,
and therefore a problem of the international community as a whole.

In my opinion, the global dialogue on this issue should stipulate the
drafting of common approaches to a number of comprehensive tasks, such as
the stabilization of energy markets, extended investment into and efficient
development of power generation and infrastructure. At the same time, we
should maintain a balance between the development of the power industry and
the environment.

Some measures taken in this sphere are contributing to the energy agenda of
the G8, and we should encourage this connection. We are holding a relay
baton of kinds. The issue of climate change, which was one of the two top
issues on the agenda of the U.K. 2005 G8 presidency, is closely connected to
the issue of energy security. Two-thirds of the task of reducing hazardous
emissions are connected with the energy sectors. We should not go to
extremes, though. What we need is find a compromise between environmental
problems and the real conditions of economic development, which should take
into account the specific features of all market players, both hydrocarbons
producers and consumers.

Economic and political aspects of energy leadership

The economic importance of energy resources is indivisible from its
political significance. Unfortunately, many players on the energy market are
trying to make the solution of energy problems a political process. Such
decisions should be purely pragmatic and should be taken within the
framework of normal economic relations. Any political speculations on this
issue should be precluded. We have good relations with consumer countries
and hope to keep them good. Populist actions cannot be allowed to undermine
the basis of our cooperation.

What does Russia's energy leadership mean, and how should we regard it?
Leadership does not depend only on the volume of output and sale. Saudi
Arabia not only produces a lot of oil, but also sells a great deal because
its domestic consumption is relatively low, whereas Russia is one of the
world's largest consumers of energy.

First, we should correctly formulate the global issue of energy security.
Second, we should have the resources and possibilities for minimizing
energy-related risks.

Russia's potential leadership in the sphere of energy can and should be
interpreted as "leadership for security." In this sense, a monocultural
exporter of raw materials depending on the world energy prices, or an
industrialized state relying on high technologies and trying to get rid of
deposit owners, cannot be regarded as the leading world power. The leader
should take into account the interests of both producers and consumers.

As regards the issue of global energy security, Russia has an adequate
understanding of the situation and a risk minimization mechanism, which all
countries have.

There are many of them. Everyone sees the differences in prices of Russian
Urals and Western Brent benchmarks. The market is highly volatile, which
engenders the risk of uncertainty. This volatility depends primarily on the
precise assessment of reserves in the producing countries. We assess
Russia's reserves at 13% of the world's total, but the International Energy
Agency assesses them at 8%, which is nearly half of the Russian assessment.
This makes one wonder if the valuator was selling or buying at the time of
calculation. Anyway, the sellers and buyers should operate with the same
figure, otherwise it will be impossible to make forecasts and develop a
policy of energy security.

We can analyze transportation, infrastructure, demand, reserve and political
risks, to which the energy market reacts rather strongly.

This is why Russia regards itself as a major seller and buyer, one of the
biggest transit territories, and a G8 country where such issues can be
discussed. We now understand the tasks that will determine the long-run, not
the spot or speculative, development of the situation.

There is one more thing I want to draw your attention to. The G8 is a
wonderful place for presenting our stand and opinion to the world's leading
countries and for outlining ways to solve problems. However, it is apparent
that the G8 format is not sufficient for the fast growing economies of
non-members, such as China, Korea, India and Brazil. They are major
consumers and producers, and we believe it would be senseless to discuss
strategic energy prospects without them. In fact, the issue is not limited
to the G8. Knowing that it will not be settled overnight, we can assume that
30 years from now the G8 will have a different format.

Eastern direction of Russia's energy policy

The Asian, or rather Asian Pacific, energy and other markets are the most
rapidly developing in the world. Experts say that the energy demand in Asia
is growing faster than in all other countries, including by 3-4% for oil and
4-6% for gas. Russia is closely monitoring these changes and planning ahead.
Although more than 90% of Russian energy exports are delivered to Europe
now, the country plans to devote more attention to Asian Pacific countries.

On the whole, we plan to increase the share of Asian countries in the
Russian oil exports from 3% to 30% in 2020 (to 100 million tons, or 735
million bbl) and in gas exports from 5% to 25% (to 65 billion cubic meters).
We proceed from the assumption that the Asian market is part of the global
market and therefore its problems should be regarded from the viewpoint of
processes underway on the global energy market.

Therefore, we deem it expedient to offer the G8 to set up standing groups on
the main aspects of energy security, which would consist of G8
representatives and delegates from energy producing and consuming countries,
primarily major Asian ones. They will discuss issues of regional energy
security and energy efficiency, in line with the G8 global agenda.

Russia stakes on energy cooperation with EU

Historically, the European Union was founded on the idea of a common market
and common infrastructure. Russia is a large player that carries out
large-scale projects, many of which cannot be developed even by a few
countries together. We are trying to make the most of the opportunities
offered by the Russia-EU dialogue in the system of decision-making on large
commercial projects.

At the Russia-EU summit in Brussels in 2001, the parties adopted a joint
declaration on energy dialogue, which determined a number of specific
infrastructure areas of cooperation, such as streamlining the Russian and EU
energy systems, settling the situation around Gazprom's long-term contracts
and constructing an energy transportation system.

There is evident progress on the preliminary list of projects outlined at
the Russia-EU summit in October 2001. An energy dialogue can be considered
efficient only if it yields tangible results in the form of concrete
projects. Such projects include the Yamal-Europe gas pipeline, which is to
be completed this year, the Burgas-Alexandroupolis oil pipeline, the Baltic
Pipeline System and the Druzhba and Adria oil pipelines.

In relations with our foreign partners, we use such civilized and respected
forms of cooperation as an energy dialogue. There is an extensive energy
dialogue between Russia and the European Union and Russia and the United
States. Their consequences are evident; these are concrete projects, such as
the North European Gas Pipeline. Quite recently, our European colleagues
showed only interest in such projects, but now we have already made the
decision on its implementation - the document on construction was signed in
September 2005. In this regard, NEGP is one of the real routes of
diversifying the supply of Russian gas. It is such schemes of reliable
transit territories or exterritorial zones that should be looked for in the
future.

Russia is now making active steps, many of which take the form of joint
investment projects with foreign partners, both governments and businesses.
It is important to diversify hydrocarbon supply away from exclusive routes
that ship 80% of energy (as is the case with Ukraine, which has actually
monopolized gas transit to Europe).

The experience of the Blue Stream project, which was once dubbed a "blue
dream," has proved that an efficient infrastructure can be built even in
very difficult conditions, at a 2-km depth, in the aggressive hydrogen
sulphide environment of the Black Sea.

The most important area of Russia-EU cooperation within the energy dialogue
is further work to bring their energy strategies and systems closer. A
feasibility study is being prepared to see the possibilities for harmonizing
electricity transmission lines of the West European Union for Coordination
of Transmission of Electricity, the Unified Energy System of Russia and the
CIS and the parallel energy systems of the Baltic countries. The project is
especially important now that the Green Book has been adopted.

It was pointed out at the Russia-EU summit in October that Russian and
European businessmen had finally received and realized incentives for active
and targeted participation in shaping an economic space with an integrated
market. In other words, the goals announced by the Russian and EU official
authorities correspond to long-term interests of the business community.
This means that we can expect major ideas and proposals from corporate
structures and associations.

Shaping an open investment policy

The latest meeting of the Council on Foreign Investment presented a survey
of Western businessmen that showed that 80% of foreign companies operating
in Russia intended to further develop their business there. The opinions of
those who did not work in Russia were divided 50:50. This shows that
Russia's disadvantages lie in communicative coverage rather than in real
activities.

The Russian Industry and Energy Ministry is now working on a bill that
defines conditions of admitting foreign capital in strategic industries. The
bill will be taken up at a government meeting soon. It is based on the
concept of making decisions on specific transactions. This bill requires
that clear criteria are set that describe industries where foreign investors
will have limited access and their maximum participation (a blocking stake,
a controlling stake, etc.). Only proposals that comply with clearly defined
and transparent terms should be submitted to authorities that will make the
final decision. By using this approach, we are in fact trying to restrict
restrictions. As a result, investors will be aware of game rules, and the
amount of non-transparent transactions and approvals will be reduced.

In investment cooperation, it is worth mentioning Russia's successful
experience of working together with Total to develop the Kharyaginskoye
field under a PSA. A successfully completed dialogue can become the starting
point for a new stage in Russia's relations with foreign energy companies,
regardless of the forms of planned or current cooperation. The Industry and
Energy Ministry's work during the past year as regards PSA projects has
highlighted not only the burden of controversies that have accumulated over
the years, but also the outlook for finding new mutually beneficial options
in the sphere.

Developments in Russian energy industry reflect global trends

Developments in the Russian energy industry reflect global trends. If you
look at the latest restructuring of global oil and gas majors, you will see
that their names have become longer. In this sense, we follow not the
tradition, but the challenge related to risks that accompany the largest
projects. Everything is becoming more expensive and more difficult, risks
are increasing and to manage new risks and new projects a company has to be
different. This is an objective process that accompanies globalization.
Everything points to the fact that we join the process to the extent we,
i.e. companies, are ready to join. Everything should be fairly stable, calm
and understandable.

The status and opportunities of Russian companies match those of their
foreign counterparts. They can hold any talks and make any transactions with
their partners, no matter what they are called. This is what we have already
achieved. But our companies have to become transnational in the true sense
of the word. To attain this goal, they should at least acquire a developed
network of projects all over the world. Cooperation with other firms in
carrying out these projects will help Russian companies cover major risks.

As to other tools and aspects, we are not members of OPEC or the
International Energy Agency. However, we are in constant contact with
experts of these international organizations.

I would like to emphasize that energy dialogue is an established and
actively used form of cooperation. Their conclusions lead to discussions at
political, economic and any other levels. Each stage of energy dialogue is
backed by certain decisions. These are consequences of different discussion
sites. Now we have launched a similar dialogue with the largest emerging
Asian economies within the Asia-Pacific framework.

Our further cooperation, including during our presidency in the Group of
Eight, will first of all seek to carry out the initiative of shaping a
single system of measuring key aspects in the energy policy. This goal
alone, if achieved, will eliminate many of the risks I have mentioned.
Russia is willing to mediate the process between all the interested parties.