Yury Trutnev, the Minister of Natural Resources

T

he Russian Federation Ministry has worked out a draft long-term state program “On Exploration and Prospecting of Subsoil Reserves and Reproduction of the Mineral Resources Base for a Period until 2020”. When presenting this document Yury Trutnev, the Minister of Natural Resources of the Russian Federation, outlines that even now Russia has got no clear strategy towards further development of its mineral resources base. Meanwhile, an intensive exploitation of oil resources and base metal ore reserves leads to their quick exhaustion.

Today Russia ranks among leaders in production and supply of key minerals to the world market. In 2004 production volume of this branch of the Russian industry totaled $150 bln. USD to constitute the major item (70%) in the Russian export. Out of this oil and natural gas accounted for 77 % while the remaining share was referred to solid minerals, with aluminum, nickel, uranium, platinoids and iron ores being the most profitable ones.

The minister emphasizes an important role of the natural resources branch in forming the federal budget: out of 2.6 trillion Rubles in the budget income (at an exchange rate of 27.5 Rubles for one US dollar), 1.4 trillion Rubles are provided by this industry branch in the form of customs duties, taxes, dividends on shares owned by the state, income from sales of minerals for which the state has exclusive rights. In the regions where such mining and production companies operate they provide for up to 75% of jobs and thereby guarantee social and economic stability in the regions. Thus, minister Trutnev concluded that the economy of our country to a significant extent depends on the subsoil use.

To what extent will such a state of affairs remain stable? The minister believes that to date a number of serious problems has been accumulated to change the situation for the worse in the near future. One of the problems is poor reproduction of natural resources and a reduction in advanced prospecting. There are only those reserves left undistributed in the state fund, which are difficult to develop and therefore not interesting for investors. While oil and gas fields are being exhausted in the Volga Ural region and in Western Siberia, gold and platinum deposits have nearly been mined out in Ural. Other Russian mining regions also demonstrate poorer mining conditions and lower ore quality.

At the same time Russia imports significant volumes of manganese ore and raw materials for smelting titan, chrome, niobium, zirconium while its own reserves of these materials remain undeveloped. The state, which is still the key disposer of subsoil reserves in Russia, has never accumulated funds required to carry out additional exploration of mineral reserves and put them into commercial production accepts Mr. Trutnev.

He also refers to a number of acute issues relating to the subsoil use which also affect the state of the mineral resources base of the Russian Federation. First of all, it is a drop in the oil recovery factor. While in the late 1980s it amounted to 50 % today according to some experts` estimations this factor does not even exceed 30%. Partly it is due to "the aging" of major deposits and deterioration in quality their reserves. However, in the opinion of the minister such a result is mainly due to reasons of "the general nature".

Before 1992 the volume reproduction of oil and gas reserves had exceeded the volume of hydrocarbon production. Then, exploration activities suddenly slowed down. Dozens of prospecting and exploration projects were suspended with exploration equipment manufacturing stopped. That is why, now we are talking about an urgent need to make up the lost potential of our exploration, including training exploration and prospecting specialists and placing orders for manufacturing up-to-date exploration and prospecting equipment.

While presenting the current state of the mineral resources base in the metallurgical industry Mr. Trutnev pays attention to the share of the natural resources still left undistributed and the time required to mine out economic reserves which are being mined now (see Fig. 1). To date 90% of oil, diamond and nickel reserves, more than 70% of gold and palinodes reserves and more than 80% of natural gas resources have already been distributed. We are approaching the moment when economic reserves of a number of minerals will have been completely depleted. Thus, by 2010 we will have run out of commercial reserves of alluvial gold while those of oil, uranium, copper and vein gold will have been depleted as soon as by 2015. If the pause in reproduction of mineral resources continues, subsequently no financial investments will help overcome the shortage of raw materials in respective branches of the Russian industry.

Respectively, Mr. Trutnev believes it necessary to bridge the 10 year gap in exploration works which was committed in the 1990s.

The minister reminds that as per statistics only 30% of probable reserves would be transferred to the category of proved reserves. Thus, to maintain a simple reproduction of mineral reserves when the level of their production gets equal to that of putting newly explored deposits into production, the current mineral resources reproduction process should be intensified more than thrice.

In the opinion of Mr. Trutnev there is a need for a higher competition in the sphere of subsoil use. "If one or two companies, which mine this or that mineral, keep control over the whole market of this mineral in the country with practically all the proved reserves of this mineral being in their possession, one cannot expect them to invest either into development of the resource base or exploration and prospecting," – states minister Trutnev calling these company monopolists. First of all it deals with Gazprom, which controls the entire production of natural gas in Russia, and Norilsk Nickel mining and metallurgical company, which produces 100 % of all Russian nickel and palinodes. The minister believes that copper and diamond production is also excessively monopolized now. In his opinion in this sense today the more favorable situation is with production of coal and alluvial gold.

The long-term state program on exploration and reproduction of mineral resources in Russia put forward by the Russian Federation Ministry of Natural Resources pursues several objectives. The first one is to ensure a simple reproduction of mineral resources when the volume of production is equal to that of newly discovered mineral resources put on balance. The second objective is to meet the demand of basic industries of the RF economy for mineral raw materials. Finally, the third objective is to maintain the level of income to the federal budget and increase currency revenue from exporting products of mining and production companies.

While elucidating on the need to adopt this program, Mr. Trutnev puts a specific emphasis on peculiarities of arranging exploration and prospecting works. The entire circle from discovery of a prospective area or a new deposit till its development and mining when the mined products start to be sold on the market to return on investments would take 15 to 30 years and can be split into four stages.

The first stage implies remote sensing of the prospective territory, airborne geophysical surveys, stratigraphic drilling and seismic surveys. Though constituting only 5% in the overall exploration costs, these operations are most risky in terms of the expected result. In all countries of the world these operations are usually financed from the state budget.

The second stage is prospecting for specific deposits which implies geochemical surveys, "simple" drifting operations (e.g. trenching or sinking shallow shafts) and exploration drilling. Today in Russia these operations are mainly performed by non-state companies.

The third stage is estimation and exploration of deposits to transfer them for commercial development and production. All works implied at this stage, including underground mining, hole drilling, geophysical surveys, are to be performed by the subsoil user itself at its own expense. At the output of this stage investors get an estimation of the expected costs and make a decision about investment appeal of the project.

The fourth stage is preparation and development of the deposit to put it into commercial production. At this stage along with approval of feasibility study and the deposit mining plan, the operator builds an infrastructure, places orders for requisite equipment, mechanisms and machines. Whatever predictable this stage could seem, it can prove the longest one.

According to the program the ministry has come up with, until 2010 budget allotments are to be distributed between specific objects and then top priority territories are to be outlined for the purpose of exploration. In particular the program also implies to use federal budget funds to finance space and airborne geophysical surveys, including 2D and 3D seismic surveys, geochemical measurement and stratigraphic drilling for oil and gas.
Assuming prospectiveness of specific basins and areas top priority in the mineral resources base survey will be given to some particular regions. For oil and gas this priority will be obviously given to Western Siberia, Eastern Siberia, the Timan-Pechora province and sea shelves, for uranium to the Far East region and the Siberian Federal District, for gold to the same two areas plus some regions in the Southern Federal District, for diamonds to North-Western and Eastern Siberia.

The Russian Federation Ministry of Natural Resources calls to restore geological disciplines of the Russian science, which used to be acknowledged the best in the world, and sets itself a task to ensure technical and scientific re-equipment of specialized institutes and scientific research centers. Today Russian geological survey specialists still keep a high level of their qualification. However, there have been new exploration technologies and new methods for prospecting minerals resources, which are worthy being mastered and implemented in Russia. Therefore, one of the main objectives secured in the program offered by the ministry is to ensure a scientific and methodological advance.

There are two options offered for financing the long-term program. The first option, a so called "slow response" scheme, implies moderate investments into reproduction of the mineral resources, namely: to invest US$390mln. every year until 2010 and then increase the sum of yearly investments up to US$ 460 mln. until the year 2020. In view of Mr. Trutnev it will not be enough even to maintain the existing level of key natural resources like oil, nickel, platinum and zinc. The second option, a "prospective" scheme, offers to finance exploration woks at a level of US$600 mln. a year until 2010 to then increase the sum up to US$ 745 mln. a year in the following decade. It is the second option which provides for investments sufficient not only to keep the balance between production and reproduction of natural resources but also to improve this ratio in some cases.

To explain demands for investments forecast in each option, minister Trutnev compares financial parameters of exploration works typical of different countries rich in natural resources. Thus, for example, compared to Canada, Australia, USA, Brasilia and the Republic of South Africa, governments of which would spend on exploration works 5% to 8% of the value of production, Russia spends only 2% at the cost of the minerals produced estimated at US$ 150 bln. (as per 2003 statistics). Financing after "the low response scheme" allows keeping this figure only at a level of 0.4% while the "prospective" scheme permits in 2010-2020 bringing 5% of the extraction tax revenue back into reproduction of the mineral resources base.

According to estimations of the Russian Federation Ministry of Natural Resources with this program in effect over a period of fifteen Russia will have to spend for exploration purposes US$6.4 bln. to US$9.3 bln. from the federal budget. Taking into account the fact that each ruble invested by the state into exploration and prospecting yields 10 rubles, the Russian exploration industry may get more than US$ 80 bln. so that in this case Russia will invest into reproduction of its mineral resources base as much as it used to in the early 1980s, the best years for the national exploration.

On setting top priority directions for investing authors of the program presume availability of prospective areas and economic advisability of production of these or that natural resources. They suggest that more than 70 % of the funds to be allotted should be used for reproduction of oil and natural gas reserves, about 15 % for that of precious metals with the remaining part being spent for other types of mineral resources.

Minister is confident that the final result will justify the expenses and draws an example. For the moment there are dozens of copper and precious metal deposits on the state balance, which are of no interest for investors due to poor quality of their reserves, significant depths of their occurrence and remoteness of their location. However, if additional exploration yields more localized and thoroughly surveyed reserves, most of these deposits may prove very competitive.

According to minister Trutnev the scope of exploration works envisaged by the program shall bring value of the Russian natural resources up to US$5.5 trillion. In his opinion this is the most important task. "First of all implementation of this program will permit a reliable basis for sustainable development of the Russian economy, secure a stable income to the federal budget, ensure 250 to 300 thousands of new jobs and facilitate development of other industries associated with this sector. That is more important this program will solve the main task i.e. it will stop "eating away" natural resources accumulated in the Soviet era and Russia, as it is becoming to a responsible state, will take reasonable steps to ensure a decent life for its generations to come," – concludes Mr. Trutnev.


In the margins:

The share of Russian subsoil resources in the world reserves is as follows: 30% for natural gas, 50% for diamonds, 25 % for nickel, 17 % for tin and approximately 10 % for oil.

Fig 1. The Modern State of Reserves of the Main Minerals
A share of subsoil reserves distributed to date, % The year when economic reserves will have been depleted
9 manganese ore 2008
12 Coals >2025 the last year of the program
27 Tin 2015
27 Uranium 2015
32 Zinc 2011
35 Phosphatic raw materials >2025
40 Sodium Salt >2025
44 Potassium Salt >2025
50 Bauxites >2025
52 Molybdenum 2016
55 Tungsten 2016
58 Iron ores >2025
60 Lead 2007
62 Copper 2016
65 Alluvial Gold 2011
70 Kaolin 2020
72 Vein Gold 2015
74 Platinoids 2018
80 Barite 2021
83 Fluor Spar >2025
83 Natural Gas >2025
88 Magnesium Carbonate 2016
89 Vanadium >2025
90 Boric Ores >2025
92 Nickel 2016
92 Oil 2015
92 Graphite 2018
95 Diamands 2013
95 Quartz Rocks 2023
100 Chrome Bearing Ores 2013
100 Concrete Stone 2010

Fig. 2. The Level of Competition and Monopolization of Production of the Main Types of Naturl Resources
The number of main mining and production companies Their Share in theb Yearly Production, %

Coals 90 81
Alluvial Gold 18 31
Oil 9 82
Quartz Raw Material 9 100
Copper 9 100
Vein Gold 6 72
Iron Ores 5 73
Sodium Salt 5 88
Zink 5 84
Kaoline 9 100
Tungsten 2 65
Barite 3 100
Phosphatic Raw Materials 3 100
Chrome Bearing Ores 2 75
Lead 2 73
Concrete Stone 2 100
Graphite 2 100
Diamonds 2 100
Potassium Salt 2 100
Bauxites 1 70
Molybdenum 1 73
Manganese Ore 1 79
Fluor Spar 1 84
Tin 1 90
Natural Gas 1 90
Magnesium Carbonate 1 92
Nickel 1 >90
Vanadium 1 95
Platinoids 1 >90
Uranium 1 97
Boric Ores 1 100

0 35 % 100%

Maximum level of monopolization permitted by the antimonopoly legislation