Konstantin KHARISOV

Director Regional Economics Department Ministry of Regional Development of the Russian Federation

The fuel and energy complex (FEC) and the formation of its infrastructure in the subjects of the Russian Federation play a major role in the social and economic development of the country. Gasification (i.e. the process of gas exploration, mining, transportation, and processing) of Russia's regions is an important element of such infrastructure. Substantial efforts in this area are contributed by the Ministry of Regional Development of the Russian Federation in cooperation with the nonprofit Russian Gas Association.

The priorities of the gasification process of the Russian regions are:

* Generation of economic and, primarily, market signals stimulating a slowdown and a subsequent termination of the growth of the domestic gas demand.

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* Expansion of the scope of deregulated gas prices paralleled by a demonopolization of the domestic gas market.

* Structural transformations which are to eliminate the conflict of interests resulting from the combination of the operation of the gas-transportation infrastructure and an involvement in the gas trade. A fundamentally new organization of access to gas-main and gas-distribution pipelines (a transition to the declarative system of access instead of the permissive one).

* Progress of the domestic gas market, the stimulation of the development of gas deposits primarily by independent producers, who are to contribute most to meeting the domestic gas demand, which is not met by Gazprom, the basic gas company working for exports.

Currently, the issue of the day is the advancement of gasification in Eastern Siberia and the Far East. In this respect, work is carried out in several directions:

* Elaboration of stages of the East-Siberian and Far-Eastern gas resources development and the establishment of a general scheme for the region's gas transportation system.

* Feasibility analysis for the transportation of oil and gas in an integrated transportation corridor.

* Continuation of the infrastructure development (since helium and ethane are present in the major deposits in Eastern Siberia and the Far East, it is expedient to focus on the creation of a network of new gas-processing plants using the cryogenic extraction technology).

Taking into account the urgency of the gas industry problems, the Russian Ministry of Regional Development proposes the following:

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* To perform a fundamental economic analysis of the efficiency of gasification programs including a validation of the pertinent construction costs.

* To analyze the tentative network workloads and to compare the gas sale prices forecast against the costs of alternative fuels.

* To establishment control over the construction of gas-distribution and inter-settlement networks and pipelines.

At present An Interdepartmental Commission for the Gasification of the Regions of Russia is being established by the Russian Ministry of Regional Development in cooperation with the Russian Ministry of Economic Development, the Russian Federal Tariffs Service, the Gazprom company, Mezhregiongaz Ltd, and the nonprofit Russian Gas Association to coordinate efforts to resolve the current problems.

Substantial natural gas, condensate, and oil resources are available in Eastern Siberia and the Far East. The experience of the Russian gas industry shows that the basis for reliable gas deliveries must comprise major deposits with vast proven reserves, so that their development can make it possible to maintain the planned production levels in the long term. Due to the availability of substantial natural gas resources in Eastern Siberia and the Far East, it is possible to establish significant gas production centers in this region.

Since the gas from the deposits of Eastern Siberia and the Far East is rich with such valuable components as helium, ethane, propane, butane, and heavy hydrocarbons, a high-tech gas processing and petrochemical sub-industry with a broad range of valuable products can be created in this region.

The priorities of the energy strategy for Eastern Siberia and the Far East must be as follows:

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* Stabilization of the oil and gas production.

* Development of the giant oil and gas resources of Eastern Siberia and Sakhalin and the establishment of an integrated pipeline and energy system with the countries of the Asian-Pacific region.

* Development of coal strip-mines, deep coal processing, coal-chemistry and petrochemical industry.

* Reform of the electric power industry, including the attainment of a novel technological level, and the restructuring of RAO UES of Russia, which is necessary for this purpose.

* Profound modernization of the fuel and energy industry capacities and an intensification of cooperation with the machine-building industry and the military-industrial complex.

Stages of the Development of the East-Siberian and Far-Eastern Gas Resources and the Overall Scheme of the Region's Gas Transportation System

Currently, a model is available for the gas resources development and the formation of the gas transportation network, based on the East-Siberian and Far-Eastern gas industry potential. This model comprises three stages.

At the first stage, industrial gas production starts at the Kovykta gas condensate field, which is best prepared for this at present, and at the Sakhalin island shelf in the framework of the Sakhalin I and the Sakhalin II projects.

A gas pipeline is launched linking the Kovykta field to the Irkutsk region gas consumption centers. The construction of the first part of the Irkutsk gas processing plant for the extraction of helium from the Kovykta gas is envisioned.

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Gas from the Sakhalin deposits is delivered to consumers in the Sakhalin and Khabarovsk regions via the operating gas transportation network. At this stage, an increase in the capacity of the Okhta - Komsomolsk-on-Amur - Khabarovsk gas pipeline is planned.

The construction of the first part of the liquefied natural gas plant in Sakhalin will be completed in 2007 in the framework of the Sakhalin II project, and deliveries of this gas to the countries of the Asian-Pacific region will begin.

Additionally, a construction of several large gas pipelines is planned during the first stage.

The second stage includes the operation of the gas pipelines, which are to be under construction during the first stage. This will make it possible to deliver gas to domestic consumers and to export it in case the corresponding agreements with China and South Korea are reached.

Construction of the gas-main pipelines between the Kovykta gas condensate fields and Kunerma and between the Urubcheno-Tokhomskoe gas condensate deposit and Achinsk will also begin as a part of the second stage.

A launch of the industrial gas production at the Chayandinskoe oil and gas condensate deposit is also envisioned, as well as the construction of a gas processing plant to extract helium from the gas from this site.

At the third stage of the development of the East-Siberian and Far-Eastern gas resources, a launch of the operation of the Krasnoyarsk region fields is scheduled. In 2011 operations will begin at the Urubcheno-Tokhomskoe deposit, and in 2012 - at the Sobinsko-Payginskoe oil and gas condensate deposit. The

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construction of the Krasnoyarsk gas processing plant is envisioned for helium extraction.

It is planned to link the Krasnoyarsk region gas fields to the Balagansk - Achinsk gas pipeline and to extend it to Proskokovo. Partially, the gas produced at the Kovykta and Krasnoyarsk region fields will be delivered to the Russian Unified Gas Distribution System (UGDS), which will make it possible to balance better the production and consumption of gas in the regions currently serviced by UGDS.

It is planned to finish the construction of the gas pipeline connecting the Kovykta fields and Kunerma during the third stage in order to export gas jointly from Kovykta and Chayanda to China and the Korean Republic and from the Krasnoyarsk region fields to the consumption centers located in the southern part of the region.

At the fourth stage, additional exploration of the Krasnoyarsk region deposits will make it possible to launch the operation of a number of promising enterprises in the region.

The second part of the new Sakhalin - Vladivostok (Khabarovsk) gas pipeline will be constructed to meet the growing demand for gas from the consumers in the Khabarovsk and Primorsk regions.

Estimates of the Potential for the Transportation of Gas and Oil in an Integrated Transportation Corridor

Combining the construction and the operation of an oil and a gas pipeline to deliver oil and gas to the Asian-Pacific countries makes it possible to reduce the overall project costs due to the reduction of the land area to be allotted, the joint use of the

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technical systems and communications, the combination of the environment protection activities, etc.

Three options of oil and gas pipelines constructions are available:

1. Autonomous construction, in which case the costs of oil and gas construction are accounted for separately.

2. Parallel construction, in which case the contributions to the construction of the jointly operated facilities are reflected in the total costs.

3. Construction of an oil pipeline prior to that of a gas pipeline, in which case the calculation of the gas pipeline cost includes a compensation for the oil pipeline facilities to be used.

Lengths of the gas pipeline segments merging with those of the Eastern Siberia - Pacific Ocean oil transportation network may vary depending on the tentative gas transportation route. Expert estimates of the facilities to be used jointly for the construction and operation of the gas and oil pipelines made it possible to define the construction costs and their impact on the economic characteristics in the cases of parallel and earlier oil pipeline construction.

The following remarks can be made using the available estimates.

Two factors influence the outcome of the cost-savings calculation in case an oil pipeline and a gas one are located in an integrated technical corridor.

* As a part of the oil pipeline design, a validation of the investments was presented and, correspondingly, the list and the cost of the pertinent facilities were studied in finer detail, whereas the investments in the gas pipeline were estimated in terms of

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more general quantities, and this estimate is of a conceptual character.

* In some cases, the basic production facilities account for up to 80% of the oil and gas pipeline cost structure. Thus, the cost savings are related mainly to auxiliary facilities, which make minor contributions to the total investment cost.

It should be noted that a promising area of the oil and gas industry is associated with the development of highly efficient enterprises with a broad range of polymer products including methanol, the use of novel technologies and materials in gas energetics, and the replacement of metal pipes by thermoplastic ones.

There are several advantages of thermoplastic materials as compared to metal:

* High corrosion resistance

* Excellent dielectric properties

* Low mass and greater length of pipes

* Smooth interior walls

* Flexibility, elasticity, and frost resistance

* Guaranteed 50 years service term

Development of the Hydro-Power Industry

The list of potential hydro-power projects includes dozens of midsize and large hydro-power installations with 40 gW of total capacity. The Far East is the most promising Russian region for hydro-power construction from the standpoint of the need for new generating capacities.

In the Far East the potential hydro-power construction sites of the highest priority are the Nizhnezeyskiy hydroelectric power plant cascade, the Urals and the Gilyuyskaya hydroelectric power

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plants. The construction of the first hydroelectric power plant of the South-Yakut hydroelectric system is possible as well. In Siberia, a cascade of hydroelectric power plants on the Lower Angara should be mentioned in this context.

Development of the Mining and Metallurgy Complex

Ferrous Metallurgy

The prime task of the ferrous metallurgy in the region for the nearest 10 - 15 years is to restore the production of ferrous metals on a novel technological basis in compliance with the global standards and development tendencies (but, at the same time, in correspondence with the specific character of the situation in Russia). The directions to accomplish this task are:

* Development of a unified metallurgical base in the region comprising the existing integrated enterprises and supplementary mini-plants and service centers.

* Increase in the use of recycled resources in steel production.

* Growth of the production of steel products with a high added value.

Non-Ferrous Metallurgy

The following measures are necessary to raise the operation efficiency of the Siberian non-ferrous metallurgy companies, to increase their profits and payments to the budgets of all levels:

* Allocating higher funding for the Siberian geological survey services in the framework of a Federal Program and focus their efforts on the preparations for the industrial development of non-ferrous metals deposits.

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* Providing for the development of enterprises with a complete cycle of non-ferrous metals production.

* Restoring the cooperation with Kazakhstan and Central Asia countries in mining and production of non-ferrous metals in order to load maximally the available capacities, which currently lack technologically necessary partners.

* Providing for the development of the mineral resources base in the South-East of the Altay Republic in the framework of a business partnership with China.

* Providing for the research in new technologies of mining and processing of complex ores and the development of these technologies to the level of industrial application. Most of the Siberian non-ferrous metal deposits contain ores of this type.

* Due to the availability of low-cost hydro-power in Eastern Siberia and the Far East, it is expedient to adopt long-term energy cost agreements to make the highly power-consuming non-ferrous metal companies more competitive.

On the whole, all of the above will create preconditions for establishing in Eastern Siberia and the Far East the largest gas production center in the Asian-Pacific region. This center will be able to stimulate the social and economic development not only in the Trans-Ural region, but in the entire Russia as well, and to cause a range of positive macroeconomic effects for its regional development, namely:

* Employment growth (creating new well-paid jobs in the gas industry due to the multiplicative effect).

* Improvement of living standards and of the quality of life for the population (due to the construction of new service facilities for the incoming workforce, the gasification of regions, etc).

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Increase in the tax and non-tax revenues of the budgets of various levels.

Growth in the consumer goods and services sector and a 10 - 20% increase in the effective demand.

Improvement of the demographic situation (migration of workforce and specialists from other regions and the population growth due to a better quality of life).

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