Research on the issues of the oil and gas sector at ERI RAS is undertaken by the Center for the Study of World Energy Markets and the Laboratory of scientific foundations of development and regulation of oil and gas supply systems.
ERI RAS’s research on the oil and gas sector is developing towards improving the methodology of system research for the oil and gas industry and adapting this research to the constantly changing business environment in Russia. Many years of expertise in forecasting the development of sub-industries of the oil and gas sector combined with mathematical optimisation industry models and a regularly updated database developed at ERI RAS makes it possible to accurately forecast stable development of the oil industry (including oil transportation and refining) and the gas industry (including gas transportation via major trunk lines and gas processing). These forecasts are made for various time terms (from 5 to over 30 years).
Mathematical models use a complex combination of internal and external interdependencies, including industry-wide and company-wide production programmes and financial resources for their implementation in the conditions of uncertainty of internal and external factors of industry development (process and demand in the external and domestic markets, gas import possibilities, condition of the oil and gas resource base, etc.).
Industry-wide production and investment programmes are based on economic development and fuel and energy sector development forecasts produced at the Institute. These programmes are developed in line with solvent demand for the products of the oil and gas sector in the domestic and external markets. Changing realities of the industries’ operation, for example, appearance of new types of business in the gas industry (production of LNG and SLF from natural gas), changes in taxation and customs regimes, changes in the prices of oil and gas products are all promptly reflected in the oil and gas sector development forecasts.
Based on research results, optimum oil and gas production volumes are determined for the industry as a whole, for individual regions and companies. Financial balances of the industries and the leading companies in the oil and gas sector are developed. An assessment of capitalisation growth and dynamics of rating indicators is made, depending on external factors (taxation, price levels and regulation), as well as production, investment and credit activities of the companies.
One of the main theoretical results of the Institute’s research is developing methods of risk analysis for major solutions in problems of strategic planning of the development of the oil and gas industries. These solutions relate to the organisational structure of the industries, business areas, production and investment programmes, the making of strategic alliances or large contracts. The methodology for risk analysis of industry-wide strategies was presented in a number of articles).
Currently risk-analysis at ER RIAS is a requisite part of research on long-term development strategies for the gas industry. Risk-analysis is conducted on the basis of a combination of performance indicators for the industry – net present value, free cash flow, cash balance, net profit, dividends, borrowed funds, gearing, and annual loans. It is therefore possible to select a strategy with the minimum overall risk based on the combination of the indicator s and in the conditions of highly uncertain external conditions of industry development. Recommendations on priority investment production, transportation and processing projects, which would ensure capitalisation growth, are developed taking into account an assessment of implementation risks and risk management measures.
ERI RAS takes part in work on the development prospects of the oil and gas industries within the framework of the Energy Strategy of Russia for the period up to 2020 and 2030. Key issues are as follows:
• An analysis of dynamics of exploration and development of oil and gas reserves and production in the main oil and gas bearing provinces (and for specific large projects);
• An assessment of the effectiveness of exploration and development projects, risk analysis of production projects, taking into account uncertainty of market prices of gas and oil and taxation conditions;
• Determining optimum production volumes for the industry, by companies, all oil and gas producing subjects of the Russian Federation, oil and gas producing regions and large projects, taking into account production and economic indicators of reserve development and scientific and technological capabilities in reserve preparation and field development.
• Determining oil refining volumes by refineries and regions of Russia, preparation of projected balances of oil, gas and petroleum products (fuel oil, motor oil) by regions of Russia, while taking into account effective export and import volumes of oil and gas resources;
• Forecast of equilibrium prices in hydrocarbon markets, taking into consideration financial performance of large companies. The level of these equilibrium prices should guarantee commercial and social effectiveness of investment projects and production programmes, as well as stability of the selected strategy for the development of the companies and the industry as a whole; an assessment of volumes and effectiveness of oil and gas exports and imports in existing and projected directions;
ERI RAS took an active part in developing export and import directions and making a quantitative assessment of ways to restructure the gas market, using methods of mathematical modelling and various methods of setting prices of gas in the domestic market and their impact on the following:
• Dynamics of energy saving and solvent demand for gas;
• Development of production and financial performance of Gazprom and independent gas producers;
• Economic growth rates and the structure of economic growth, development of the industries-gas consumers and the development of the living standards in Russia.
The above mentioned research allowed ERI RAS to develop a framework for restructuring the Russian gas industry and the principles of setting domestic gas prices. Domestic gas prices would correspond with, but not equal, gas prices in Russia’s main export market of Central Europe, less specific costs, including customs dues, gas transportation charges for gas exports from one or another Russian region. The framework and price setting principles were adopted in the work of Gas Market Coordination non-for-profit partnership and became the foundation for the model of restructuring domestic gas market, currently being implemented in Russia. They were confirmed by a resolution of the Government of the Russian Federation No. 333 of 28 May 2007 “On Improving State Regulation of Gas Prices”. ERI RAS conducts modelling of dynamics of state regulated gas prices and a transition to a price formulae providing equilibrium with either gas prices in external markets or prices of competing fuel types (coal) in the domestic market. There is an obligatory evaluation of the impact of changes in gas prices on the dynamics of development indicators of the industries-gas consumers and on the socio-economic position of Russia.
In recent years ERI RAS has expanded its research on the issue of substantiating economic effectiveness of ways to increase flexibility of gas industry development strategies. These include not only territorial diversification of gas production but also diversification of the gas business towards extending the range of products by an increase in added value – gas to liquids (GTL) and integrated use of associated gases С2-С4. They also include diversification by gas export directions. Using optimisation models enables to offer the most effective ways to extend UGTS towards the east, determine effective volumes of gas imports and exports by types, substantiate integrated measures to adapt gas industry development strategies various scenarios of external conditions.
Research in these directions is undertaken by the Laboratory of scientific foundations of development and regulation of oil and gas supply systems (Head of Laboratory – O.A. Eliseeva, Ph.D. in Economics).