Energy projects lead to peace

An interview with the Chairman of the Union of Oil and Gas Producers of Russia, Yuri Shafranik.

“Mr. Shafranik, how do you assess the prospects for production of hydrocarbons in the Mediterranean Sea shelf?”

“The Mediterranean covers a large area. The offshore areas of Egypt, Israel, Lebanon, Syria, Cyprus and Turkey are a subject of wide interest. They are definitely attractive, but we can’t talk about the prospects earlier than when the first wells start to produce oil and gas in a few years time. Russian companies are engaged in exploration and drilling in many countries, and overall experience has shown that on average only every fifth hole produces commercial quantities of hydrocarbons.”

“The geological structure of the shelf extending from Egypt to Israel and Lebanon is proven to hold large reserves of oil and gas. One can’t yet say the same about the area running from Syria to Cyprus and Turkey. Especially impressive resources have been discovered in Egypt, in the southeast of the Mediterranean Sea. Large gas fields, including the "Leviathan" and "Tamar" fields, have been discovered on the Israeli shelf.”

“Work on the undersea continental margins is always very complicated, lengthy, and involves great risks. However, many companies including Exxon, Total, Gazprom and Soyuzneftegaz actively participate in tenders for deepwater exploration of hydrocarbon reserves. So it means that they believe that they will be successful.”

“The Lebanese Ministry of Energy and Water Resources reported that the final list of companies that will participate in the tender for exploration on the shelf of the country will be disclosed only on April 18th. It sounds like they are dragging this event out. At the same time Lebanon has opened tenders for the construction of a pipeline and a terminal for liquefied natural gas...”

“The Lebanese Government, as well as the Syrian government, have for a long time (since 2005) carefully prepared for the tendering for exploration and development of the hydrocarbon potential of their Mediterranean shelves. It is important to emphasize that this care, included the testing of investment legislation and other important "rules of the game" is worthy of respect. However, the plans were destroyed by the wave of the "Arab Spring", which rolled across the Mediterranean from Tunisia and Egypt. The delay is particularly due to the fact that the Lebanese government continues to be in crisis caused by the events in Syria in 2011.”

“Lebanon's political elite, representing various religious interests and polarized due to the Syrian situation, can’t form a government capable of implementing the most crucial deal in its modern history: the distribution and contracting with international energy companies of 10 offshore license blocks. This is a serious problem for the future government, with fateful consequences for the people of Lebanon.”

“Solving this problem can’t be approached with a government formed without a strategic consensus on this particular issue, and the most important political tasks arising from the Syrian crisis. Lebanon and Syria have historically been, and remain even now, almost a single organism, and are hardly able to function as a state excluding mutual interests. To understand their similarities, a similar analogy can be made between Russia and Ukraine or Belarus.”

“Also, we should not forget that Lebanon is part of the energy center of the world, located from Egypt to Iran horizontally, and vertically from Syria to Saudi Arabia. In truth, the role of each state in the energy sector is different. However, the resource capabilities and territorial characteristics of the many countries in the region allow for a variety of energy projects.”

“I recently met with the leaders of Lebanon, and I must admit that they have been able to overcome the main consequences of the tragic civil war of 1975-1985. They have learned how to find a compromise between the various religious and political groups, and on this basis to formulate common interests and to provide a constructive interaction. I see this as a model for a way out of the political crisis and bloody confrontations in Syria and Iraq...”

“So, if I was in the shoes of the Lebanese, I also would seek not only to make a terminal for liquefied natural gas from another country, but also to find oil on our own shelf. Favorable political developments in Lebanon could allow the import of gas from Qatar and Iran, where it would be liquefied and exported by sea. But for this we must defuse tensions in several areas of the mountain range along the Syrian - Lebanese border due to the uncontrolled movement of anti- Assad Islamists, and radical Islamist groups such as "Hezbollah", "Amal", "Friends of March 14th" and other extremist groups between the countries. So far, however, we are talking only about the LNG terminal.”

“We’re talking about projects that are significant and very important for the country, the implementation of which are so far somewhat unrealistic. This is not so much because of technical or financial difficulties (although the necessary calculations have not yet been made), but because of political confrontation. On the other hand, the energy infrastructure projects alone: pipelines, terminals, as well as the development of the fields, unite people, and make them seek compromises that lead to peace and development.”

“Doesn’t the influence of the Syrian problem on the situation in Lebanon scare investors off?”

“No, but all risks are taken into account, and in the negotiation process, each company calculates them carefully (just as the government calculates its position, as oil and gas projects are always political). For example, during negotiations an oilman will never for a moment forget that just one offshore well, depending on the depth, will cost from 50 to 150 million dollars. So now imagine, it is necessary to make costly seismic explorations and to invest in exploratory drilling, but nobody knows whether you will find what you hope for. It is in the exploration that the main risks arise, and political risks lie in the background.”

“Perhaps I need to repeat myself, infrastructure projects are prone to strife, as the companies running the risk of attack try as quickly as possible to reach an understanding and mutual interest with the local authorities at all levels, from all religious denominations, urging them to compromise. My years of experience as an investor in the East, including the Arab East, show that it is crucially important that foreign companies operating on the territory of different faiths should also make them partners (for example, linked by common infrastructure projects, creating centripetal tendencies in the interests of the tribes that could smooth out any contradictions and create a common motivation for long-term cooperation for the benefit of all). This matrix has demonstrated its viability.”

“But there are also political risks of a special nature: for example, a sudden embargo...”

“Can Syria act as an energy hub for oil and gas supplies from the Persian Gulf?”

“I believe that is possible, but given the current situation in the region as a whole, it is a distant prospect. So far we have not yielded the desired result in our attempt to resolve the crisis in Syria that are being made within the Geneva 2 peace conference. Many experts believe that the diplomatic efforts of the Russian Federation, the United States and the UN have a poor probability of success. I disagree. What is most important is that the world’s most influential countries take a unified constructive position in supporting in Syria any forces interested in a peaceful settlement of the conflict and the formation of a transitional government of national unity, as soon as possible. Then, given time there will be a lot of energy projects here. For example, the Iraq - Syria (oil port) pipeline. All the prerequisites to create it are there, again subject to the settlement of the conflict. We have discussed this with the leadership of Iraq and Syria and we came to a full agreement. The project can be implemented with the involvement of Russian and Italian companies.”

“The Kurdistan authorities in Iraq plan to increase the supply of oil to Turkey (and through it) by virtue of the construction of new pipelines. How might this affect the activities of the Russian oil and gas companies in Kurdistan?”

“Only in a positive way. The more infrastructure projects, the better the development and prosperity of the areas of population, and of course, for business. But it is well known that there are problems in the relations between Baghdad and the Kurdish government which can affect the performance of companies. At the same time it must be recognized that Kurdistan is very interested in the development of oil production, and the central government does not question the importance of the activities of foreign energy companies. Both governments understand that the work undertaken by foreign partners benefits the Iraqi people as a whole. As for our companies, acceptable conditions for business activity have been created almost everywhere, thanks to the consistent policies of the Russian leadership. Political risk remains, but I would not consider it to be a major issue.”

“Iraq has followed a hard and bloody path, and explosions continue to take place in the country to this day. However, we should note that they have adopted a constitution, held elections, managed to create a coalition government, and defend their national interests in all projects (even sometimes going too far when it comes to oil companies working in such a difficult situation).”

“At the end of April this year parliamentary elections are scheduled to be held in the country and this will be a very serious test. If they manage to pass it by strengthening the consolidation of society, then it will mean that the leaders of Iraq and Kurdistan will be on the same path as the leadership in Lebanon, allowing multidirectional public interests and goals to seek to move to a compromise. It would be a huge success for them.”

“There is a perception that the leadership of Kurdistan believes that there is room for maneuver with Baghdad because the province works in a production sharing agreement (PSA) with the "big American managers.”

“What was Kurdistan like after the war? And who wanted to go there in 2005? Only small and medium-sized "adventurous" companies which the central government did not conduct any negotiations with, betting instead on the industry giants: Exxon, BP, Lukoil, Total. However, Kurdistan, with little choice, put its faith into small, high risk, but quickly producing firms. Time has passed. Who has won? Kurdistan has been economically revived and has achieved results in the interests of its people and the entire population of Iraq, which I strongly believe in. A year ago, the bigger companies started going there.”

“I think the central government should do the same thing in a number of non-Kurdish provinces.”

“Do the ambitions of American and Western European companies affect the position of the Iraqi leadership?”

“When the coalition forces in the country changed the regime, virtually all the media stated: America has captured, first of all, oil and gas. I said then that this was not the case. Today we see that U.S. companies participate in tenders on an equal footing with other terms. Both the central government and the Kurdish leadership are defending their interests, guided by the presence of various partners: Chinese, Russian, European, American ...”

Today, many people, speaking about the essence of the Syrian conflict, make the simple claim that Qatar is supporting the extreme opposition in order to reach the Mediterranean with its own pipeline. In order to do this, they say, Doha needs to have its "own" government in Syria. This is nonsense. It is inconceivable to imagine that in the Middle East, the forefather of civilization with a complex history and the close intertwining of the destinies of many nations, that the current state leaders can’t understand that the pursuit of such a goal would result in a dead end, a terrible disaster.”

“It is a great tragedy, that today people continue to die, and not only in Syria. The troubles continue in Iraq. However, where foreign companies are working in these countries, the situation has stabilized and energy projects are being implemented, albeit with great difficulty.”

“How could the approach to oil and gas companies working in Iran change, in the event of a positive outcome of the negotiations between Tehran and the West? If that happens, what can Russian companies expect?”

“First of all, I hope that the inclusion of Iran in the negotiation process will finally deliver it from sanctions and isolation. Then, the situation in the energy market of this vast region can change radically. There is no doubt that it will increase competition, but that is a constructive and not a destructive phenomenon. In the meantime, Saudi Arabia sees Iran and Iraq as it competitors, opponents on a battlefield, and they see Syria as a front line to confront the economic competition.”

“Generally speaking, the atmosphere for our companies in Iran today is quite tolerable. Moreover, over the past decade the Russian leadership has done a lot for the promotion of domestic business in the Middle East, and signed many appropriate agreements. So when a Russian company goes there, it is treated normally almost everywhere. That is already a success. However, the fact that Moscow has long contributed to the stabilization of the situation in Iran, does not mean that only Russian companies will work in the country.”

“Regarding Iran and Iraq, Russian policy has always been very consistent and straightforward. Moscow offers a peaceful way out of isolation for the country, and did not change its position even in the most difficult years for Iraq. After the war, our companies took part, on a competitive basis, in many worthwhile projects. I believe that the Russian companies in Iran must win their projects in a competitive manner, with the support of our government.”

“What are the prospects for a pipeline between Iran, Iraq, and Syria? If good, then will their gas be able to enter the European market?”

“I can see two similar projects, and they are both very realistic. Even so there is much to calculate and weigh up. It is very important to consider which state will provide the greatest reliability for the project due to its own political stability.”

“The second (and very profitable) direction for a pipeline is to Pakistan and India.  Both countries would literally bite your hand off for gas. However, serious work is needed by several groups of highly qualified professionals to determine where it is more profitable to sell gas - in South Asia or in Europe.”

“The third area is China, which is already well connected with Iran for oil supplies and is considering options for gas.”

“It is true that there is a fourth interesting project”, a LNG terminal in the Gulf (to compete with Qatar), which probably will be done in the future when Iran is stable.”

“Everything mentioned can be realistically brought to life, but only in conditions of political stability. This applies not only to Iran but also in the transit countries.”

“If their gas starts to flow to Europe, can it undermine the position of Russian suppliers in the EU market?”

“Of course, and not just in this case. For example, if suddenly for us, America would start to produce more gas (no matter how – perhaps from shale) by launching large-scale drilling for hydrocarbon deposits. This would free up gas from Qatar to supply Europe. That’s called competition! It would look like no pipelines would be needed, because America as a consumer would close the door on gas imports. As a result, the balance of gas supplies in the world would be redistributed, and that would hit us.”

“Also, for the sake of stability in Russia’s southern borders and for the implementation of our geopolitical interests, the participation of domestic companies in major infrastructure projects in Iran, Iraq and other countries would be invaluable. This includes the construction of pipelines, if of course, if it will be profitable for us.”

“Given the importance of competitive interaction for world energy development, Russia has for a time long offered cooperation to foreign companies both within and outside its territory. Such offers were made to Qatar, but unfortunately no agreement was reached, which is sad. But on the other hand, today we are cooperating with Exxon, BP, Total, and Shell. This cooperation goes into our projects, and we discuss joint projects outside of Russia. If we continue this line we can become participants in the construction of pipelines and infrastructure in the oilfields in Iran and Iraq.”

“Cooperation does not weaken international competition, but, prevents a dangerous confrontation, and redirects it exclusively to the economic mainstream ...”

“Also, as I have said repeatedly, the hydrocarbons market in Europe is quite saturated. However, active consumption in China, India, and Pakistan is guaranteed for the next 20 years.”

“How do you see the future of Middle Eastern and North African countries in the Mediterranean region?”

“The region is discovering a new life. There is not a parallel, but a largely similar political reformatting in these countries. In the postwar period, in the 1950’s and 1960’s of the last century, they were formed into states, and now a clear reformatting is taking place. Where there is the time to think carefully, these countries quickly stabilize their situation, and favorable political and economic perspectives appear.”

“What I have just said applies to the energy potential of these countries. They are taking a fresh breath. It is impossible, for example, to stop the energy development of, say, Iran, even if the export embargo is increased tenfold. As players on the hydrocarbon market, Iran and Iraq are comparable to Saudi Arabia and Qatar. So how can you keep them down for long? It won’t work.”

“Now we are paying particular attention to the first steps to unblock the situation in Iran and the tragic events in Syria. I believe that in both countries the vector of development will be positive. This is especially so in relation to the positions of the U.S. and Russia, which it seems to me, are coming closer. I wish that other states would act in the same way, helping to restore peace and full economic life.”

“As I have already said, our oil and gas companies are not only able to take risks, but also to find a common language with the authorities at any level, and with groups of different influences, helping ( in the status of a foreign business partner) to build a peaceful life. That’s how it was in Algeria during the period of the worsening of the civil conflict, and in Colombia, which went through a bad time when companies from other countries could not be enticed there by any means. But many times we have realized that energy projects bring states back to life, help promote constructive dialogue between previously irreconcilable forces, and develop international economic cooperation.”