Oil and gas VI study tour by students from Russia Rachid Amui UNCTAD, Special Unit on Commodities

Outline Part 1 Introduction to Oil and Gas – formation, reserves distribution, production, trade flows Part 2 Demand and supply Factors limiting expansion of supply capacity Overview of investments in the oil and gas sector Overview of Russia oil and gas Part 3 UNCTAD and oil & gas development 2

Crude oil, natural gas: How are they formed? Decomposing buried organic material over millions of years through the action of micro-organisms Overlying layers of sand and silt compress lower layers into sedimentary rock; Heat and pressure at depth slowly converts buried organic material into petroleum Petroleum formed deposits may consist mainly of larger (heavy) hydrocarbons, which have the thick, nearly solid consistency of asphalt. As the petroleum matures, and as the breakdown of large molecules continues, successively “lighter” hydrocarbons are produced. In the final stages, most or all of the petroleum is broken down further into very simple, light, gaseous molecules—natural gas. Some natural gas deposits may form from deposits of plant material buried in sediment without association oil 3

World oil reserves - end of 2008 RegionBillion barrels% of World Total North America % South & Cent. America % Europe & Eurasia % Middle East % Africa % Asia Pacific423.3 Data Source: BP Statistical Review

Historical trend of oil reserves Data Source: BP Mid East Total – 754.1bn bbls = 102 thousand million tonnes

World oil production Data Source: BP

Oil production in Europe and Eurasia

World gas reserves - end of 2008 RegionTrillion Cubic metres% of World Total North America South & Cent. America Europe & Eurasia Middle East Africa Asia Pacific Data Source: BP

Historical trend of gas reserves Data Source: BP

World gas production

Natural gas production in Europe and Eurasia Data Source: BP

Peak oil Source: peak oil website 12

Oil trade movements 13 Source: BP

Natural gas trade movements 14 Source: BP

Oil and gas pipelines in Europe Source: EIA

Oil and gas pipelines to Europe

Demand in oil and gas Oil demand in 2009 estimated at 85.0 mb/d (-1.4% or -1.2 mb/d year-on-year) but expected to rise to 86.6 mb/d in 2010 (+1.8% or +1.6 mb/d versus 2009) to 120 mb/d in 2030 gas demand expected to rise by 41% from 3.0 trillion cubic metres in 2007 to 4.3 tcm in 2030 world energy demand is projected to increase by over 40% between now and Non-OECD countries account for over 90% of demand - China and India alone for over half.

Outlook for oil demand 18 Source: IEA Oil Market Report 2010

Oil supply growth non-OPEC 19 Source: IEA Oil Market Report 2010

Factors limiting expansion of supply capacity (1) Geographic and technological challenges – eg. ultra deep waters; very cold & remote regions, undeveloped deserts Challenges in extracting hydrocarbons from complex reservoirs Declining production in certain regions Geopolitical issues causing slowdown of investment Resource nationalism and contract renegotiations OPEC output policies

Factors limiting expansion of supply capacity (2) High operating costs and difficulty in finding and recovering hydrocarbons Economic uncertainty & price volatility on investment -supply growth at slower pace to demand growth Cash flow contraints in host countries for investment A review of investment plans by oil companies because of the credit squeeze

Overview of investment in the oil and gas sector (1) Surge in capital investment in 2007 to 2008 Falling oil and gas prices and volumes took a heavy toll on all producers’ cash flows Many national oil companies, which depend on hydrocarbons for most of their revenue, cut spending or delayed oil and gas projects as a result of falling prices in 2009 and downward revisions in expected profitability The International Energy Agency estimates that investment budgets for global upstream oil and gas sector fell by around 21.0% (or around USD 100 billion) in 2009.

Overview of investment in the oil and gas sector (2) Between October 2008 and April 2009, over twenty large scale upstream oil and gas projects, valued at more than USD USD 170 billion were deferred indefinitely or cancelled (IEA) – 2mb/d oil and 1.0 bcf/d gas Another 35 oil and gas projects were delayed for at least 18 months – 4.2mb/d and 2.3 bcf/d of two years Drop in upstream spending more pronounced in the regions with the highest development costs (eg. Oil sands in Canada) and in small projects dominated by smaller players

Investment outlook for hydrocarbons (1) Large investments continue to be needed to meet growing demand in the medium to longer term, and to offset falling output in many consumer countries Demand uncertainty will complicate investors’ decision making Some NOCs have the necessary financial strength to fund their capital-intensive projects and have continued to spend in the present economic downturn capex activity expected to rise, driven mainly by large National Oil Companies (NOCs)

Investment outlook for hydrocarbons (2) The total capital expenditure by listed NOCs (for which data is publicly available) is expected to register a 16% growth to around $375 billion in 2010 (GlobalData) GlobalData forecasts a 12% growth in the oil and gas sector capital expenditure in 2010 and expects the total capex of the leading listed oil and gas companies to exceed $798 billion. According to the WB, the projected needs for primary energy development in Europe from 2010 to 2030 are estimated to be on the order of almost $1.3 trillion in order to ensure the availability of oil, gas, and coal.

Factors limiting new investment Surge of LNG coming into Europe mostly from Qatar Uncertainty in demand eg. US markets becoming self sufficient with Shale gas Price volatility Geopolitical and regulatory uncertainties Investment environment affected by legislative framework eg. an absence of a functioning framework for production-sharing agreements (PSAs). Environmental issues eg. Unconventional crude sector Government reluctance to allow foreign investors in the energy sector

Overview of Russia gas Russia has the largest natural gas reserves in the world. - proven gas reserves in 2008 estimated at 43.3tcm or 23.4% of the world total (BPStatistical Review) Russia is the second-largest consumer of gas in the world after US, consumed 420.2bn cu metres of gas in 2008 approx 13.9% of global consumption (the US consumed 22% of the global total Gas accounts for well over one-half of Russian total primary energy consumption, with a share in the total of 55% in 2008, according to BP Oil and gas sector makes up two-thirds of Russia’s export revenue and more than 20% of its GDP. Accounts for almost one-half of federal budget revenue

Main players in Russia oil and gas Gazprom owns and controls Russia pipeline network Gazprom produces over 80% of national production and has monopoly on exports - provides about a quarter of the European Union’s gas needs Gazprom provides about 8% of budget revenues Impact of the financial crisis has shrunk demand and Gazprom net income in 2009 expected to have fallen by 23% Oil sector dominated by a a few firms, mostly private owned Rosneft the largest accounts for 20% of national output Rosneft looking to break Gazprom gas export monopoly – control of Kovykta gas field (1.6trn) approx 1% of global gas reserves

UNCTAD and oil and gas development Promote Public-Private dialogue and cooperation Provide a forum to exchange experiences and best practices on innovative financing mechanisms Provide/facilitate technical assistance that will improve the ability of banks to provide financing to small and medium enterprises Provide a forum to exchange experiences and best practices on local content development and also provide policy advice for local content development Give training on using market based tools to mitigate price risk exposure 29

Oil and gas conferences 30

Learning resources World Energy Outlook 2009 (IEA) Country Analysis Briefs - Energy Information Administration Price risk management: UNCTAD training materials Statistics: British Petroleum Statistical Review of World Energy Energy Information Administration: International Energy Association: 31