Deputy Minister's of Industry and Energy of the Russian Federation A.G. Reus theses of the Presentation on CERAWeek, Oil Summit, Houston (USA)

I would like to thank Mr. Greenspan for his remarkable speech and I am happy to take this opportunity and address such a highly respected audience and express profound gratitude to the CERA for the kind invitation.

We consider the participation of the Russian delegation in CERAWeek Oil Summit as the continuation of the energy dialogue launched last year within the framework of the Russian Presidency over G8. It enables us, on the one hand, to sum up certain results and, on the other, for Russia to enter a high-level site -  CERAWeek that means proceeding with the work started last year.

You are well aware that on Russia’s initiative global energy security topped the agenda of the G8 Summit. It was targeted at the international cooperation, thus ensuring the world economy and population with energy at acceptable prices with a minimal damage to the environment. Russia proposed this interpretation taking into account its own niche on the global market. We treat the problem of energy security not as our domestic issue, but the one that requires consistent efforts of the world community as a whole.

In one of his latest speeches George W. Bush stressed the urgency of energy security, which is somewhat the confirmation of significance of St. Petersburg G8 Summit agenda that complies with the spirit of the G8 Declaration on Energy Security. The US President emphasized the importance of diversification of both energy markets and supply routes, and the necessity to develop and build up strategic reserves as a “safety cushion” for the global energy system. Today we bear another notion of these words from Mr. Greenspan, it was connected with gasoline prices.

I would like to say that the strategic reserves are created to secure against force majeure situations and the latter cannot prevent a "creeping" rise of prices on energy carriers. That is a short-term tool being unable to avoid crises. It is impossible to lock yourself up in “an energy fortress” and survive difficult times on your emergency reserves. Isolation is impermissible in the global world. We have to enter the market, pursue a constructive dialogue and find compromises. And if integration of assets is not today’s  concern – since national security interests are directly involved here – and it is for every country to make a decision whether it is ready for it or not. Then the implementation of significant measures in the sphere of information integration is quite feasible in the nearest future, provided world energy market players are duly interested in it.

Energy diversification is a major trend, which also complies with our objectives. Nevertheless, transition to new kinds of fuel is a long-term process and is not always economically expedient. It has to be confirmed by the research carried out by leading international energy organizations, such as IEA, CERA, etc.

An attempt to use ethanol in the USA having been revealed in CERA materials is a good example of it. Yes, ethanol has made it possible to lower consumption of gasoline and diesel fuel. However, instead of gathering sawdust and grain for ethanol production American enterprises busied themselves with building up gas import for the only reason – economic expediency.

The market will continue depleting hydrocarbon resources unless efficiency – the most powerful judge– says otherwise. But this moment will not come soon. We are still living in a hydrocarbon world.

We have analyzed the materials of the leading international energy organizations, including CERA and IEA, made our own analysis and came to the conclusion that in the forthcoming decades the energy security situation will be determined by the two key factors.

Firstly, the world economy will require more and more energy for its sustainable development. The growth of demand for energy in developing countries to 2030 will account for over 70% (China alone – 30%).

Secondly, in the period to 2030 fossil fuels will still dominate the structure of the world energy balance.

Such will be the development of energy in the forthcoming decades, despite the aspirations of many countries (including Russia) to develop alternative and renewable energy sources. That implies that the solutions to the challenges of global energy security should be sought within the framework of the existing energy structure alongside with continued search of new breakthrough and economically expedient alternative solutions.

According to the materials of the International Sustainable Energy Development Center (SEDC) newly established in Moscow, there are two major ways of development: increase of the efficiency and stability of the energy market and rise in the efficiency of energy consumption. And these processes should be parallel. The key tools here are transparency of the market and diversification of both energy markets and supply routes.

As far as the improvement of the global energy market is concerned, Russia suggests that the world community should coordinate its activities in the energy sector. The aim of this coordination is to ensure predictability and reliability of the energy market. Among active participants in this process there should be international energy organizations.

Following the principles recorded in the G8 Summit documents we have started the dispute and coordination of our energy strategy with the long-term strategies of other key players on the world energy market to minimize the risks of energy carriers. Last October we held the conference Complementaries of the EU and Russian Energy Strategies. We do hope to perform a similar work with OPEC and other key players on the market of energy carriers. I hope we’ll discuss this issue with our OPEC partners in this March during the Organization Annual meeting. Besides, we are undertaking a set of measures targeted at specifying Russia’s Energy Strategy to 2030. The process is absolutely transparent, and besides we will take into account the results of consultations with our partners.

During these consultations we reiterate again and again that identifying “energy security” with “security of supply”, which in its turn is interpreted as “energy independence”, is non-productive. Concentration of all the risks on a supplier’s side is unable to improve the security of supply in the long run. Therefore we are using risks sharing mechanisms, including mutual participation in the assets of energy companies of both countries-suppliers and countries-consumers. This is one of the ways to enhance stability in global energy supply. Among the recent achievements in this sphere we’d like to mention agreements of Gazprom with its Algerian, German, Italian and French partners, as well as Russian oil companies activity in the downstream sector on the US and European markets.

According to the IEA estimates, representing interests of the major oil consumers, total investments into the world oil industry for the first three decades of the 21st century can amount to 3.1 trillion dollars. About 70% will be invested into building up new upstream capacities. Construction of new tankers and oil pipelines will approximately cost 260 billion dollars and development of new oil refining capacities - over 400 billion dollars.

In order to attract such enormous financing to the oil sector it is necessary to convince the investors that all the new capacities will be used to a full extent and will enable to pay the investments back. That means we need a supplier – consumer dialogue based on the above-mentioned principles. We have to coordinate the energy strategies.

At that we can endlessly discuss the level of fair prices for oil, i.e. the prices, which to a large extent will promote sustainable economic development, stimulating rational and efficient consumption of oil, etc. One thing is obvious: the world oil market needs stability and predictability, which can be provided only by collective efforts of all its participants, suppliers, consumers and transiting countries.

Russia’s contribution to this stability is 2% of the annual increase of “black gold” production (which is above the world average level) and diversification of the oil infrastructure. Once more we can note a considerable progress achieved by Russia in development of some oil infrastructure projects:

• Capacity of the Baltic pipeline system was augmented from 12 million tons a year in December 2001 to 65 million tons a year in April 2006, which allowed us to considerably increase the supply of oil to the market of Northwestern Europe. At the end of November 2006 the capacity of this system reached 74 million tons a year, which made it possible to increase considerably the deliveries of oil to Western Europe;
• Substantiation of investments into the construction of Khariaga-Indiga oil pipeline with the capacity of 12 million tons a year was presented for a state expertise. The project will help to realize the export potential of Timano-Pechora region;
• Eastern Siberia–Pacific Ocean main pipeline is under construction (the first stage capacity is 30 mln ton per year, the overall capacity of the project after completing its two stages is 80 mln. ton)
• Burgas-Alexandrupolis project with the capacity of 35 million tons and potential of 50 million tons is being carried out. When finished, it will help to solve the traffic problem of the Black Sea Straits.

By the end of 2005 the export oil supply capacity of Transneft Company was 221 million tons a year and this capacity has a tendency of further growth (by the end of 2006 - about 230 mln ton). In view of the expected growth rates of the world oil market, provisions of the Russia’s Energy Strategy to 2020 concerning diversification of export supply routes and an insignificant increase in the volume of transit we are planning to maintain the level of the oil supply to the European market and increase in oil deliveries to Asia-Pacific region and the USA. This will ensure the share of the Russian oil export in the volumes of final consumption in Europe at the level of 20%.

Besides, Russia continues to work on creating a transparent investment climate. The work implies development of an advanced stable legislation, clear and consistently applied taxes, removal of unreasonable administrative barriers, complete implementation of contractual obligations and access to effective procedures for dispute settlement. We are carrying out a number of measures on improving legislation, creating transparent and effective domestic energy market, taking into account specific features of different branches of energy sector.

I would like to dwell upon one more kind of diversification – a ‘diversification’ of attitude towards the issue of energy security and information flows. In 2006 we managed to avoid a utilitarian perception of energy security as just a problem of raw materials, and we mentioned energy security in technological, social and humanitarian aspects. Finally, putting aside the above-mentioned isolationist models, “energy autarchy”, development of ability to come to an agreement, improvement of energy use culture – all this is to a large extent a humanitarian sphere. And the information monopoly in the world of energy can only aggravate the market misbalances.