18 Feb 2014

Сhairman of Union of Oil & Gas Producers of Russia Yury Shafranik: Energy projects lead to peace

The Middle East has always lured investors with its oil and gas resources, but the political risks in this region are also high. The chairman of the Union of Oil & Gas Producers of Russia, Yury Shafranik spoke with Interfax about the outlook for normalizing the situation in the region, the role of major oil and gas projects in the process of reconciling conflicting forces, as well as Russian companies‘ chances on the promising Mediterranean shelf.

Question: What is the outlook for production of oil and gas on the shelf of the Mediterranean Sea?

Answer: The Mediterranean Sea is big. The subject of wide interest are the shelf sections of Egypt, Israel, Lebanon, Syria, Cyprus and Turkey. They are certainly attractive, but it will not be possible to talk about prospects before the first wells yield oil and gas in a few years. Russian companies conduct exploration drilling in many countries and general experience shows that on average only one in five wells yields commercial amounts of hydrocarbons.

The geological structures of the shelf that stretches fr om Egypt to Israel and Lebanon represent an oil and gas province with large proven reserves. This can‘t be said yet of the province that extends fr om Syria to Cyprus and Turkey. Particularly impressive resources have been explored in Egypt, in the southeastern Mediterranean Sea. Large gas fields, including Leviathan and Tamar, have been discovered on the Israeli shelf.

Work on underwater continental margins is always extremely difficult, long and fraught with big risks. Nonetheless, many companies, including Exxon, Total, Gazprom and Soyuzneftegaz are actively participating in tenders for deepwater exploration of hydrocarbon reserves. This means they believe in success.

Q.: Lebanon‘s Ministry of Energy and Water has announced that the final list of companies that will participate in the tender for exploration on the country‘s shelf will be known only on April 18. They seem to be dragging this process out too long. At the same time, Lebanon is calling tenders for construction of a gas pipeline and LNG terminal…

A.: The government of Lebanon, like the government of Syria, prepared long (since 2005) and carefully for holding tenders for exploration and development of the hydrocarbon potential of their shelves. It should be stressed that this thoroughness, including development of legislation on investment and other important rules of the game, is worthy of respect. However, the plans were disrupted by the wave of the Arab Spring that rolled in fr om Tunisia and Egypt. The delay, among other things, is due to the fact that the government crisis triggered by the Syrian events of 2011 is continuing in Lebanon.

The political elite of Lebanon, representing various confessional interests and polarized by the Syrian issue, can‘t form a government capable of carrying out the most important deal in its modern history - distributing and contracting ten offshore license blocks with global energy companies. This is a very important objective for the future government, with fateful consequences for the whole Lebanese nation.

One can‘t approach tackling this objective with a government formed without a strategic consensus on this issue and key political challenges resulting from the Syrian crisis. Lebanon and Syria, historically and now, are almost a single organism and scarcely able to function as nations without considering mutual interests. In order to understand their identities, one can draw an approximate analogy between Russia and Ukraine or Belarus.

One also shouldn‘t forget that Lebanon is part of the energy center of the world, located from Egypt to Iran horizontally and from Syria to Saudi Arabia vertically. True, the role of each nation in energy is different here. However, it is the resource potential and territorial particulars of many countries in this region that make it possible to carry out various energy projects.

I recently met with the Lebanese leadership and I should note that here they‘ve managed to overcome the main consequences of the tragedy of the 1975-1985 civil war, learned to look for compromises among religious and political groups and on this basis formulate common interests and ensure constructive cooperation. I see a model in this for a way out of the political crisis and bloody conflict in Syria and Iraq…

So in the place of the Lebanese, I would also strive not only to build a terminal for receiving liquefied natural gas, but also find oil on my shelf. Given a favorable political turn of events, gas could be shipped from Qatar and Iran to Lebanon, liquefied there and shipped by sea for export. But this requires defusing tensions in a number of parts of the mountain range along the Syrian-Lebanese border due to the uncontrolled movement of radical, anti-Assad Islamists, the forces of Hezbollah, Amal, the March 14 Alliance and other extremists. For now, however, there is only talk of a terminal for receiving LNG.

You and I are talking about grandiose and very important projects for the country, the implementation of which is not yet realistic. And not so much due to technical or financial difficulties, although the relevant calculations have not been made yet, but due to political confrontation. On the other hand, precisely energy infrastructure projects - pipelines, terminals, as well as field development - bring people together, force them to seek compromises that lead to peace and prosperity.

Q.: Investors aren‘t afraid of the impact Syria‘s problems will have on the situation in Lebanon?

A.: No, but all risks are factored in, and in the negotiation process every company calculates them carefully, as does the state that stands behind it, since oil and gas projects are always political. An oilman, for example, in negotiations does not for a minute forget that one offshore well, depending on the depth, will cost from 50 to 150 million dollars. And imagine, you have to do expensive seismic surveys, spend on exploration drilling, but you don‘t know if you‘ll get what you‘re hoping for. It is in exploration that the main risks arise, while political risks are secondary.

But I repeat, infrastructure projects stop strife, as companies, exposed to the risk of attack, try as quickly as possible to reach mutual understanding and mutual interest with local authorities at all levels, all confessions, inducing them to compromise. My many years of experience working as an investor in the East, including the Arab East, show that it‘s fundamentally important that foreign companies working in areas with various confessions are also partners, for example, linked by common project infrastructure that creates centripetal trends in the interests of tribes that can smooth over existing animosities and create a common incentive for long-term cooperation for the good of all compatriots. This model has proven its viability.

But there are also political risks of a special nature - a sudden embargo, for example…

Q.: Could Syria turn into an energy hub for oil and gas pipelines from the Persian Gulf?

A.: I think that this, considering the current situation in the region as a whole, is a remote prospect. Attempts to resolve the crisis in Syria, being made within the context of the Geneva II peach conference, have not had the desired result yet. Many experts believe that the diplomatic efforts of Russia, the United States and United Nations have a weak chance of succeeding. I don‘t agree. The most important thing is for influential nations to take a common constructive position as soon as possible, supporting any forces in Syria interested in a peaceful resolution to the conflict and forming a transitional government of national unity. Then, in time, there will be many energy projects here. For example, the Iraq-Syria (oil loading port) oil pipeline. There are all the prerequisites for building it, again, given the resolution of the conflict. We‘ve discussed this with the leadership of Iraq and Syria and came to complete agreement. The project could be carried out with the involvement of Russian and Italian companies.

Q.: The authorities of Iraqi Kurdistan intend to increase oil shipments to Turkey, and through it, thanks to the construction of new pipelines. How might this affect the operations of Russian oil and gas companies in Kurdistan?

A.: Only positively. The more infrastructure projects the better for the development of a region, the prosperity of the people and, of course, for business. But, as you know, there are problems in relations between Baghdad and the Kurdish government that could affect the operations of companies. At the same time, one should keep in mind that Kurdistan is extremely interested in developing oil production, and the central government does not question the importance of the activities of foreign energy companies. Both governments understand that the work of foreign partners is being done, on the whole, in the interests of the Iraqi people. As for our companies, thanks to the coherent policy of the Russian leadership, acceptable conditions for doing business have been created for them almost everywhere. Political risk remains, but I wouldn‘t even put it in second place.

Iraq has travelled a difficult, bloody road, and explosions in the country have still not ceased to this day. But note, they‘ve passed a constitution, elections have been held, they‘ve managed to form a coalition government, they defend national interests in all projects, even with some overkill in regard to the work of oil companies in such a difficult situation.

The country is supposed to hold parliamentary elections at the end of April this year - this is a very serious test. If they manage to pass it, strengthening the consolidation of society, it means that the leaders of Iraq and Kurdistan are going the way of the Lebanese leadership, are considering the multi-vector nature of public interests and goals, are seeking compromise. This would be a huge success.

Q.: There is the opinion that the leadership of Kurdistan has room to maneuver with Baghdad because "big American managers" are working in the province under production sharing agreements (PSA).

A.: What was Kurdistan after the war? And who wanted to go there in 2005? Only small and medium adventurous companies with which the central government did not hold any negotiations, having placed its bets on industry majors - Exxon, BP, Lukoil, Total…But Kurdistan was forced to bet on small, extremely venturesome, but fast on the ground firms. Time passed. Who benefited? Kurdistan has revived economically and achieved results in the interests of its people and the whole population of Iraq, of which I‘m deeply convinced. And a year ago large companies also started coming here.

I think the central government, along with non-Kurdish provinces should do the same.

Q.: Do the ambitions of American and Western European companies influence the position of Iraq‘s leadership?

A.: When the coalition forces changed the regime in the country, virtually all media outlets said: the Americans are seizing - primarily - oil and gas. I said even then that is not the reason. And today we see that U.S. companies are participating in tenders on equal conditions with others. Both the central authorities and the government of Kurdistan, defending their interests, are intent on the presence of various partners - Chinese, Russian, European, American…

Today many, speaking about the essence of the Syrian conflict, simplify it even to the ambitions of Qatar, which supports the extreme opposition, to gain access to the Mediterranean Sea with its own pipeline, for which, they say, Doha needs to have its ‘own‘ government in Syria. This is nonsense. It‘s impossible to imagine that in the Middle East - the forebear of civilization with a complex history and entwinement of the fates of many peoples - national leaders do not understand that pursuing such a goal would lead to a dead end, a terrible catastrophe.

It‘s very unfortunate that people are continuing to die not only in Syria. Trouble is not leaving Iraq either. However, wh ere there are foreign companies working in this country, the situation is stabilizing and energy projects are being implemented, though with great difficulty.

Q.: How might oil and gas companies‘ approach to working in Iran change if there is a positive outcome to negotiations between Teheran and the West? What should Russian companies expect in that case?

A.: Above all, I hope that Iran‘s involvement in the negotiation process will finally rid it of sanctions, of isolation. And then the situation on the energy market of a huge region could change drastically. There‘s no doubt that competition on it will heat up, but this is a creative, not a destructive phenomenon. And for now Saudi Arabia sees Iran and Iraq as rivals and opponents on the field of battle, and sees Syria as an outpost for opposing economic competition.

On the whole, the atmosphere for the work of our companies in Iran is quite tolerable right now. Furthermore, over the past decade the Russian leadership has done a great deal to promote Russian business throughout the Middle East, signing corresponding agreements. Therefore, when a Russian company arrives, it is met well virtually everywhere, which is already an achievement. However, the fact that Moscow has promoted the stabilization of the situation in Iran for a long time does not at all indicate an expectation that only Russian companies will operate in the country.

Both in regard to Iran and in regard to Iraq, Russia‘s policy has always been extremely balanced and consistent. Moscow proposed a peaceful way out of the country‘s isolation and did not change its position in the most terrible years for Iraq. And after the war our companies took part - on a competitive basis - in very worthy projects. I believe that in Iran as well Russian firms, enjoying the support of our government, should win their projects in competition.

Q.: What is the outlook for the Iran-Iraq-Syria pipeline? If good, will their gas be able to enter the European market?

A.: I see another two similar projects and they are all quite realistic. Although a great deal needs to be calculated, weighed here, and it‘s very important to consider what nations will ensure the greatest reliability for implementing a project thanks to their own political stability.

A second, and extremely lucrative pipeline route is to Pakistan and India. In both countries gas they‘ll jump at the gas. However, serious work needs to be done by several groups of highly qualified specialists to determine wh ere it is more lucrative to sell gas - in South Asia or in Europe.

A third route is China, which has already come to good terms with Iran on oil shipments and is considering options for gas.

However, there is also a fourth interesting project - an LNG terminal on the Persian Gulf to compete with Qatar, which will probably be done in Iran‘s prosperous future.

Everything mentioned is quite realistic to turn into reality, but only in conditions of political stability. And not only in Iran, but also in transit countries.

Q.: If gas flows to Europe, will Russian suppliers‘ positions on European Union markets be shaken?

A.: Of course, and not only in this case. America has somewhat unexpectedly begun to produce more gas (it‘s not important what kind - granted shale gas) through massive drilling and the launch of fields with difficult hydrocarbons. Thereby Qatar‘s gas has become available for shipment to Europe. Competition! It would seem that no one has laid a pipe, but America as a consumer has closed its gates to gas. As a result, there has been a redistribution of the gas balance in the world, which has also hit us.

By the way, for the sake of stability on Russia‘s southern borders and for the realization of our geopolitical interests it would be valuable for Russian companies to participate in the major infrastructure projects of Iran, Iraq and other countries, including the construction of pipelines if, of course, this will be beneficial for us.

Considering the importance of competitive cooperation for the development of world energy, Russia has long been proposing cooperation to foreign companies both on its territory and outside it. Such proposals have also been made to Qatar, but agreement was not reached. A pity. But on the other hand Exxon, BP, Total and Shell now have a presence here. Integration is underway in our projects and joint projects are being discussed outside of Russia. I we continue this line, we‘ll also become participants in the construction of pipelines and the development of fields in Iran, Iraq.

Integration does not weaken international competition, but by restraining dangerous confrontation it puts it exclusively on an economic course…

But in Europe, I repeat, the market is fairly saturated with hydrocarbons. But in China, India and Pakistan their active consumption is guaranteed for the next 20 years.

Q.: How do you see the future of Middle Eastern and North African countries of the Mediterranean region?

A.: The region is taking on a new life. Not a parallel, but in large part similar political reformatting of countries is taking place. In the postwar period, in the 50-60s of the last century, they formed as nations, and now there is a clear reformatting. And there wh ere they manage to think this over well, the situation stabilizes more quickly, favorable political and economic prospects emerge.

This also applies to the energy potential of countries. It is acquiring a new lease on life. It‘s impossible, for example, to stop the energy development of Iran, even if you impose an embargo ten times. Iran and Iraq, as players on the hydrocarbon market, are comparable to Saudi Arabia and Qatar. How do isolate them for long? You can‘t.

Right now we‘re particularly carefully watching the first steps to unlock the situation in Iran and the tragic events in Syria. I believe that in both countries the trajectory of development will be positive, particularly since the U.S. and Russian positions on them, it seems to me, are converging. God grant that other nations also act in this direction, helping to restore peace and a full-fledged economic life.

And our oil and gas companies, as I‘ve already said, are capable not only of taking risks, but also finding a common language with authorities at any level and with various stakeholders, helping to establish peace, as far as the status of a foreign business partner allows. This was the case in Algeria during the escalation of civil strife, and in Columbia, which went through difficult times when companies from other countries could not be lured there under any circumstances. But we once again became convinced that energy projects bring nations back to life, promote constructive dialog between previously irreconcilable forces and develop international economic cooperation.