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Yuri Shafranik, Chairman of the Council of the Union of Oil and Gas Industrialists Yuri Shafranik reflects on ways of effective development of Russian Fuel and Energy Complex in an interview to ITAR-TASS correspondent Alexey Kravchenko exclusively for the Russian Gazette – Federal issue 3 5139 (60) of March 24, 2010.

— Yuri Konstantinovich, what is your view of the state of our energy?

— There is not much to be proud of. But energy out of all branches of Russian economy is the only industry that has been reformed in a more or less rational way, to be exact its hydro carbon complex. On the other hand, prerequisites for intensive development of middle and small oil and gas business have not been created. This means that besides economic losses we lose a very important political objective – forming of middle class in our society. Anyway…By the Law on subsurface resources there has been created a system that allows the complex to survive and to develop itself to some extent. Let us have a look at miners. Thanks to reform they managed to stay in business even when prices of coal fell catastrophically.

But today one must think not just about survival. Strive to serious development makes you to admit that Russia has no concept i.e. a general and well-understood perception about advance movement, about direction of movement in political and economic circles. Take energy for example. What should look it like in 10-20-30 years? Not in a sense of energy resources production or electric power consumption. The answer to this question you can find in “the Energy strategy of the Russian Federation till the year of 2030”». It is noteworthy that it appeared: the work on it enabled to better understand what and how much do we need to have tomorrow. But where, by whom and how can it be achieved? – This is Hamlet’s question that can be answered neither in high echelons of power nor in the Ministry of Energy. Nobody can for instance “draw” a future structural image of oil and gas complex.

Very important for successful development is also differentiation (first of all tax differentiation) of deposits. They say now that it will increase corruptive component. I do not agree to that in principle. In the middle of the 90-ties I as Minister signed a lot of documents differentiating taxes, and that allowed in particular “to put on their feet” tens of “uninteresting” deposits. And there was no corruption. Given this infection now strengthened its positions everywhere. Well, let us decisively fight it. But to refuse differentiation only because of corruption fear means to have a gigantic fund of idle wells, hundreds of non-operated small deposits that could make the industry more stable not to speak about increase of production and creation of new jobs.

— How?

— An indirect example, one could say, is before everyone’s eyes. Sayano-Shushenskaya hydro-electric station’s accident has turned Republic of Khakassia from a budget contributing region into a subject that needs significant “subventions” of electric power. But if somewhere in place of one power giant (but better with it) electric energy is supplied by ten power stations ( of any type), then by failure of one of them energy potential of the region will be decreased only by 10%.

The same thing with oil business. By failure of a well producing 1000 mt, there will be exactly 1000 mt lost. But if there are 10 oil wells producing 100 mt, the result is clear. Of course in the first case production effectiveness is higher, but in the second – stability is higher. And the industry needs both.

— Well, lets achieve here effectiveness and stability, hence will be able in future to support Russian budget afloat thanks to hydrocarbons.

— Quite an acid, but fair remark. You cannot achieve economic power by squandering subsoil riches. Up to now we live by means of scientific, technical, technological and production potential created in the 50-60-ties of the XX-ieth century, right during the period when the country lacked oil and gas even for inner consumption. Unquestionably everything was created then not on the basis of “humane” market, but on mobilization basis. That is why nobody calls for a return to previous methods of managing economy of the country. You are welcome to use capitalist methods (but not of late Median Age), create a moral-legal field where people would feel a wish and a permanent need to work creatively. I do not mean absolutely everybody. One can not hope that everybody rushes to become a civilized capitalist or an “effective manager’. But the percentage of really creative individuals is quite sufficient to radically change economic situation. Someone will achieve bigger results another one –smaller: the main thing to make the movements vector common and right. This is especially important for socio-psychological orientation of youth, for perspective state development.

Would people believe in meaningfulness of their toil – we shall achieve a lot. But one should not forget the stimuli. Economic (differentiated credits and taxes, for instance) and moral (when honors and awards correspond to real services to society and by that have a weight of social recognition).

— What is your attitude toward resource nationalism?

— I regard it as “objective reality given to us in our senses” and reflections. I recognize existence of resource nationalism (RN) and an obvious trend of its growth during the last 10 years. Does Russia fall out of this trend? No. Does Russian RN have its peculiarities? Yes, it does. As a whole RN is a reaction to atavism of neocolonial attitude of energy resources consumers to producers. This is quite a natural reaction of producing nations because every calculation – biased or objective – shows that income of a resources state from 1 ton of hydrocarbons is smaller than income of consuming state. Earnings from sold volumes of oil and gas are diluted in prices of acquired technologies, equipment and final products of oil- and gas chemical industry. It is understandable that countries-consumers have highly developed industries and highly qualified personnel. Moreover it is more economically advantageous to deliver hydrocarbons to existing oil- and gas chemical complexes in regions with developed infrastructure than to build such complexes for example in the sands of Saudi Arabia. But all this in no way justifies dictatorship of consumer. He first must realize that the world is changing rapidly that globalization does not facilitate a one-sided game, just the opposite in reflecting ever more close ties between people of Earth globalization obliges an equal rights dialogue with producer. It is not enough to come to some country with your equipment and technology. Creative globalization presupposes that not only oil and gas will go in the opposite direction but local high technology products too.

It is being realized in the majority of producing countries that non-renewable resources demand prices adequate to costs of creation of their own modern industry that will provide for prosperity of the state irrelevant to the volume of its oil and gas resources. More over it will provide for entry to XXII century sources of energy.

— What price can be considered adequate now?

— In the OPEC cartel, for example, they say that the price must be “right for us and world economy”. Last year in Houston I listened to Saudi Arabian minister of oil and mineral resources Ali an-Nouami and talked to him. To such a question he answered as follows: “We consider that the price must not be lower than US$ 40 per barrel and not higher than US$ 50 per barrel. This for the time being is bad for us but good for world economy. It must get out of the crisis, then consumption of oil will increase”.

Apropos, I would like to remind that in July of 2008 a number of developed nations approached OPEC with almost a demand to increase oil production to make prices go down. Allegedly, the prices squeezed them. And just 2 months later it became clear to everybody that market is flooded with oil and prices were pushed higher not by OPEC but by financial speculators.

I am not messing the capital, but gentlemen who are trying to control energy resources producers should more precisely analyze situation and more appropriately set accents in reflecting international energy problems. This is not the case yet, that means that constructive dialogue with consumer can not be reached yet. This is exactly where the cause for a strengthening resource nationalism is hidden. It reveals itself differently: limited access of foreign companies to hydrocarbon deposits, nationalization of producing enterprises, harder influence on taxing of “variangians”, on giving them rights necessary for effective activities etc.

— You have reminded in your recent interview that Russia must tie up deliveries of oil products for export with introduction of foreign technologies and equipment. Are there any steps in this direction being undertaken?

— About tie-up I would say that many people understand it rather primitively: “I will let you in my garner and you will provide me with this and that”… But bash for bash business though basically fair is surely outdated for developing relations between producer and consumer. You as producer should create such conditions that consumer could benefit not only from selling to you technologies and equipment but to create this and that together with you or without you on your territory. This, by the way, could be an example of perspective economic globalization. Then a close and mutually beneficial intertwining in technological sphere, in machine-building and equipment construction in capital and market levers management will take place. When we created vertically integrated companies (VIC) an economic slogan was born “From well to filling station!” And to further international integration now for example a politico-economic slogan “Gas Production in Russia – Burner in Europe!” must work. But nowhere producers (not only Russian) are given access to final consumer. Transit mediation and management of distribution networks is the less costly and most profitable business. And it plays not the least important role in sharpening of competition around “surplus” on energy goods market.

— How soon alternative energy sources will “strike” upon oil and gas cycle?

— Not very soon. And it is not worth “striking”. Alternative does not mean opposite, it is simply different. There is a niche for every type of energy on Earth, its own sector. Is there a “competition” between a low grade hydrocarbons and high-grade hydrocarbons? No, there is not. Such is the case everywhere. You will not build a gas pipeline through several thousand kilometers to heat yarangas (Traditional mobile home of northern nomads – Editor’s note), but reindeer-breeder will thank you for an economic power generator. You would not construct an electric power line to Himalayas: it is reasonable there to rely on solar cells or – in the future – on mini hydrogen reactors.

Hydrocarbons cycle will not only not disappear in the nearest century but will strengthen its positions in its market sector due to scientific-technological progress, to more effective utilization of every ton of oil and every cubic meter of gas, to broadening supplly of their products, to creation of ecologically pure production facilities. It is sufficient to throw an attentive professional look at the Earth’s map to competently plot out location of all sources of energy on “parallels and meridians”… Is it possible to heat Moscow by solar energy? Yes it is, if to cover the whole Moscow region with solar cells and forbid the weather from getting cloudy. The star is much more generous in the Crimea but still one cannot consider that it will help to provide with electric power an aluminum or steel factory even if one covers with a photoelectric umbrella the whole peninsula. For this clearly one must produce powerful gas turbines generators. I am referring to naturally the current historic period.

− And what about tomorrow?

− Tomorrow, probably one does not need steel plants anymore.

− You constantly insist on accelerated socio-economic development of Eastern Siberia and the Far East. Are you not afraid that China satisfying its economic and geopolitical ambitions will be first to utilize the infrastructure built there?

− Is there any border for opening up, development and investments into the Far East to avoid what happened to KVZD (A railroad from the USSR to China built on Chinese territory – Editor’s note) that was built by us and in 1945 had become Chanchun’s railroad?

− There is a border. This is a border of time and politico-economic approaches. If you do not manage to fill “emptiness”, it will be filled by others. Suppose you do not manage to produce service equipment – then you will have to buy the Chinese. So to fear or not to fear? With China we have a gigantic common border, and we are friendly countries. Russia has never claimed Chinese territory and China, having received Damansky island in 1969, seems not to have territorial claims to us anymore. But one should never and nothing forswear, especially when your positions are weak. Because of that I for decades tried to facilitate projects in the Far East. And in the meantime always stressed that they should not be isolated be it even a great pipeline or the long suffering BAM (Baikalo-Amurskaya Railroad). To develop this region one needs a concept which provides interrelation of technological, manufacturing, chemical and many other projects. Besides to create and realize every project one must thoroughly – from economic and political point of view – choose partners (to think that we can develop everything without outside help is naïve). As a result, in 10-15 years there arises a solid socio-economic buffer in the Far East.

It is well-known that we are not deprived of resources. But Eastern Siberia and the Far East have a serious particularity. Yes, there are gas and gas condensate and oil and helium but one must extract them as a complex. And the cost of it is completely different. There are rich ore deposits in Primorye and Khabarovsky Kray, but they are polymetallic. You can not mine them separately, suppose, ferrum and zink. So you have to do it in complex. This means one needs a special economic approach, a special and a very expensive business-project. And one can not avoid attracting foreign (I would even say: international) forces and means. Consequently, one has a very important politico-economic mission what partner and where from to invite and how and on what conditions to include him into this business to provide for a steady implementation of the project during 10—20—30 years - whatever time span is in the interests of Russia, this region and, of course, of every partner who invested here equipment, financial and intellectual capital. It goes without saying that one speaks about the task that is the responsibility of the Government of RF.

And the time is ticking away. Despite governments efforts ongoing projects are not integrated. And this is a rather simple problem. More important problems are creation of transport system, construction of processing and chemical plants … The necessity to build giant production complexes is understood by many. But one has not yet managed to start this business competently. Here is Rosneft that designs, tries to substantiate parameters of construction of a complex that is worth some tens of billions of $US. Such a project must not be born inside Rosneft. This is an important task of the state.

The most important, I would repeat, is a complex approach to opening up of Eastern Siberia and the Far East subsoil riches. Because of that it is urgent to approve a general scheme of location of objects of oil and gas industry closely integrated with location of enterprises of other industries … Reflecting about it you unwittingly miss that there is no such coordinating body in our state as Gosplan. A government body is urgently needed deprived of dictatorial powers but capable of providing the government with an economic project totally corresponding to the interests of Russia.