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Russia in Gobal Affairs: The Evolution of the Global Energy Market

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The Evolution of the Global Energy Market
© “Russia in Global Affairs”. ¹ 1, January – March 2007

This material was prepared as part of the project The World Around Russia: 2017. The project is being implemented by a group of experts, headed by Sergei Karaganov, from the Council on Foreign and Defense Policy, the Department of International Economics and International Politics of the Higher School of Economics, the Institute of Strategic Studies and Analysis (ISSA), the Institute of Europe and other organizations, with the support of Rio-Center. The main authors of this material are Vagif Guseinov, ISSA Director; Alexei Denisov, ISSA Deputy Director; and Alexander Goncharenko, expert with the Socio-Economic Information Bureau.

 


 

The global energy market is going through large-scale changes, some of which may reach their final phase by 2017. There are increasing signs that the traditional code of relations between energy producers and consumers, established in the last quarter of the 20th century, is becoming a thing of history. Mechanisms for regulating the global energy market no longer work. Competition between consumers, fueled by the emergence of new powerful players, like China and India, is obviously increasing.

Oil fields that are situated close to the developed countries, where oil price-hikes in the 1970s-1980s prompted oil production, are now near exhaustion. Today, large-scale investment is required in new oil-bearing areas in West Africa, Central Asia, the Caspian region and Russia in order to replace depleting oil fields. A new energy reality is taking shape in the world.

GENERAL SITUATION

The world’s key energy players include:

The United States – the world’s largest oil consumer (24.6%). It imports more than one half of the oil that it consumes. The United States is also the world’s leading importer of natural gas (16% of global imports);

The Middle East accounts for 61% of global oil and 40.1% of natural gas reserves, which makes it a crucial regional factor in the energy strategies of the world’s largest consumers;

The largest oil producers in the Middle East are Saudi Arabia (22% of global proven oil reserves, 13.5% of global oil output), Iran (14.9% of proven natural gas reserves, 11.5 of proven oil reserves), Iraq (9.6% of proven oil reserves), and Qatar (14.3% of proven natural gas reserves);

Russia possesses 26.6% of global natural gas reserves, 6.2% to 13% (according to different estimates) of global proven oil reserves, and about 20% of known coal reserves. The country is the world’s leading pipeline gas supplier and the world’s No. 1 oil exporter (together with Saudi Arabia). More than 90% of Russian energy exports today go to European countries;

China, the world’s fastest growing energy consumer, accounts for 31% of global oil consumption growth in 2004. In the past 40 years, oil consumption in China has grown more than 25 times over and is now at 8.55% of global consumption;

The EU, which accounts for only 3.5% of global proven gas and less than 2% of proven oil reserves (mostly in Norway and the UK). At the same time, oil and gas deposits in Europe are exploited far more intensively than in other parts of the world, which leads to the rapid depletion of reserves. Western Europe consumes 22% of the world’s oil supplies, while Germany is the world’s second largest gas importer (14%). The main problem for the EU is its growing dependence on energy imports: by 2030, oil imports to the EU will grow from 76% to 90%, gas imports from 40% to 70%, and coal imports from 50% to over 70%.

Today, the situation on the global energy market is characterized by the following factors:

  • oil is a global source of energy, and natural gas is primarily a regional source, while coal is a local source of energy;
  • while consumption of hydrocarbons is growing rapidly, there will not be alternative energy sources in the foreseeable future;
  • a rapidly rising need for energy resources in the emerging Asian economies amidst their ongoing economic development, rapid population growth, and the extremely high energy usage of national economies;
  • the widening gap between the volume of hydrocarbon consumption (growth) and production (decline) in developed countries;
  • limited production growth opportunities increase market destabilization risks;
  • the global economy is experiencing a shortage of oil and natural gas;
  • a shortage (temporary) of oil refining and transport facilities, together with a lack of additional oil production capacities;
  • large industrial consumers are showing a marked interest in alternative energy sources;
  • the growing importance of liquefied natural gas production and delivery projects;
  • interest in nuclear energy is reviving in some countries;
  • in the past few years mergers have been occurring exclusively within the limits of one country or a common geopolitical space as assets available for mergers and acquisitions are decreasing; and growing political risks in hydrocarbons-rich regions.[1]

The global energy situation is marked by a deepening of contradictions that will remain throughout the period under review.

[1] The growth of prices for hydrocarbons has shown consistency since 2000,  when a new Arab-Israeli conflict broke out. Since then, periods of high oil prices have always echoed increases in tensions in this region: the U.S. intervention of Iraq, th worsening of the situation involving Iran’s nuclear program, th thirty day war in Lebanon, etc.

The conflict potential inherent in the distribution of oil resources in the world is the primary cause of geopolitical tensions. While the main consumers of oil are highly developed countries or emerging giants, the bulk of global hydrocarbon reserves is concentrated in a relatively small group of developing countries or transitional economies. This contradiction is a basic factor in the behavior of key market players. Such large consumers as the U.S., the EU and China are concentrating both economic and political resources on expanding on the same market, which leads to competition between them. The fact that the majority of resource-rich countries are politically unstable sets the stage for future upheavals on the world energy market, while opening some opportunities for Russian expansion.

The world’s main hydrocarbon resources are controlled by national state companies. Meanwhile, downstream capacities, logistic and transport schemes, as well as distribution of hydrocarbons, are under the control of multinational corporations. This accounts for the differences in market players’ behavior. Large multinationals are striving to strengthen their resource base while state controlled companies, which have the main resources, are striving to expand downstream operations and obtain an equity share in transport and sales structures. This contradiction is a growing trend that will likely continue in the next decade.

There are fewer regions today where hydrocarbon production can be raised sharply without the use of modern technology or production methods that demand many billions of dollars in infrastructure investment. As a result, there are fewer opportunities for maneuver by key consumers on the market, especially after 2013-17. Geostrategic confrontation is developing mainly between China and the United States, and by 2030, China will be importing as much oil as the U.S. At the same time the Chinese leadership is very well aware that further economic growth will be impossible without securing reliable energy sources. This is why energy security and the search for new markets is becoming a matter of survival for one of the world economic leaders. For its part, the U.S. is not interested in China strengthening its positions on the hydrocarbons market and is ready to use political and economic leverage to keep Chinese oil and gas companies off these markets. 

MAIN VECTORS OF DEVELOPMENT IN 2007-2017

The main trends in the global energy sphere will generally continue in the next decade. The share of fossil energy resources (oil, natural gas and coal) will remain at the 2003-05 level, i.e., about 80% of the aggregate consumption of primary energy sources. Until 2017, oil will be by far the most important source of energy in the world (interest in oil may only be expected to decline starting in 2030).

Within the next decade, oil will remain the leading source of energy, accounting for approximately 40% of energy consumption, followed by natural gas (28%), coal (20%), renewable sources of energy (7%), and nuclear energy (5%). The share of natural gas and oil will continue to increase whereas the share of coal and nuclear energy will decline. Possibly, by the end of the decade, the share of nuclear energy will stabilize and alternative energy sources will start to increase, but their growth will not affect global trends for at least the next 15-25 years.

In the longer term (by 2067), the world energy balance structure may change according to two basic scenarios. The first one sees a gradual shift from oil to natural gas, similar to the way coal was earlier replaced by oil. This will be followed by a shift toward renewable sources of energy and possibly to nuclear energy. At the same time, oil will retain its positions as an important energy source at least until the mid-21st century. In the second scenario, if considerable progress is made in hydrogen technology within the next decade and hydrogen fuel cells start replacing gasoline-powered engines, oil production will begin to decline much earlier, perhaps some time around 2025, but thus far this scenario seems unlikely.

While the huge energy demand of the global economy will gradually decline (mostly in developed countries), the dependence between GDP growth and energy consumption will remain. The continuing growth of the global economy will drive energy demand for some time yet, but energy consumption growth is slowing, and falling increasingly behind GDP growth. This means that world economies are beginning to adapt to the use of alternative and renewable energy sources. The share of energy in the GDP of Western powers will continue to fall. This makes it impossible to rely on energy sources as the foundation of national economic development even in the medium term (particularly for Russia).

In the next decade, energy consumption will grow the most rapidly in 2006-12, on average 1.6-2% a year, after which growth will begin to slow, but the main trends in the energy sector will generally remain. On the regional level, energy consumption growth will be the largest in the Asia-Pacific region. Attempts by China and India to solve their energy security problems with internal resources will most likely prove unsuccessful. Oil, natural gas, and coal consumption in the developing countries will exceed that in the industrialized nations.

Global oil consumption growth will be driven mainly by increasing consumption in the Asia-Pacific region (on average 2.8% a year), primarily in China (4.5%) and India (3.5%), as well as in North America (1.4%), Latin America (2.6%) and the Middle East (2.1%).

In the next decade, natural gas consumption will increase the most rapidly around the Pacific Rim (on average 3.6% a year), Central and South America (3.2%), the Middle East (3.1%) and in Africa (4.1%). Natural gas consumption will grow as natural gas (including LNG) transportation and utilization technology systems become cheaper and more advanced. Gas supplies will increase as a number of major production projects are implemented in a number of countries, including Russia (Yamal Peninsula, East Siberia, the Far East, the Kara Sea shelf), Iran, Qatar (North and South Pars), Saudi Arabia, the United Arab Emirates, Kuwait, Algeria, Libya, Azerbaijan, Kazakhstan, Turkmenistan (Caspian Sea shelf), and other countries.

Due to an expected drop in oil production, industrialized states may substantially increase the volume of their oil imports, primarily from politicaly and economically unstable countries in the Persian Gulf. In general, this scenario makes diversification of oil supply a pressing problem. Hence the interest that major energy consumer nations and international corporations take in the energy resources of non-OPEC countries, including Russia and other post-Soviet countries.

Growing hydrocarbon consumption in the world will further aggravate the basic contradictions within the global fuel and energy system. In the future, energy markets will be affected by coordinated terrorist attacks against elements of the oil infrastructure, most likely in Iraq, Iran, Saudi Arabia, Latin America, and African countries, with resulting disruptions in deliveries. Growing hydrocarbon consumption in the world will substantially increase political risks and could cause new regional conflicts. At the same time, oil crises, like those in the 1970s-80s, are unlikely to appear in the next decade.

China will likely do its utmost to strengthen its influence and economic presence in the Middle East, Africa, Latin America and Central Asia. The United States will remain China’s main competitor with respect to geographic expansion. It cannot be ruled out that China will form temporary alliances with India and possibly with Russia in order to expand its presence in the global energy system.

The main source of production growth in Latin America will be around Brazil’s deep-water shelf. U.S. corporations will apparently develop this region in order to lessen U.S. dependence on suppliers from the Middle East with Brazilian hydrocarbons. At the same time, the formation of the Chavez-supported Venezuela-Cuba-Bolivia union could attract other Latin American countries. Thus, high oil prices may cause substantial amounts of South American oil to be re-routed from North America to Asia Pacific. Chavez will most likely retain his position or transfer power to a successor. At the same time, faced with the danger of the complete termination of oil supplies or the formation of a political opposition in Latin America, the United States could take more decisive measures with a view to changing the political regime in Venezuela.

The share of energy sources in the Black Continent in the global energy system is expected to grow considerably. Energy production in the region should be expected to peak by 2020, and then gradually decline. Apart from the existing production projects in North and West Africa (Nigeria, Algeria, Egypt, and Libya), international energy companies will begin to actively invest in geological prospecting and production in East and Southeast Africa (Sudan, Tanzania, and Angola). Oil production should also grow in Chad, Congo, and Equatorial Guinea. Priority will be given to shelf projects. Angola, where deep-water deposits discovered in recent years will reach full capacity, will become the growth leader in Africa. The main competitors in African oil and natural gas projects are the United States and China. The U.S. was the first country to start working in this area, but China is now rapidly expanding its presence in Africa. From every indication, the U.S. will strive to use its political leverage in the majority of African countries to impede Chinese entry into the African fuel and energy complex.

In the Caspian region, oil production will continue to steadily rise. Until 2015, the regional leader will be Azerbaijan, where oil will be produced at the Azeri-Chirag-Gyuneshli fields, while natural gas will be produced at the Shakh-Deniz field. After 2015, the main oil field will be the Kashagan deposits in Kazakhstan. As for natural gas, by 2017 the main suppliers will still be Turkmenistan and Kazakhstan, while Azerbaijan’s shares will fall.

The geopolitical lineup in the Caspian region is generally developing in favor of the West. The Baku-Tbilisi-Ceyhan (BTC) oil pipeline bypasses Russia and Turkish straits; the Baku-Tbilisi-Erzurum (BTE) natural gas pipeline will be put into operation in 2007. Before 2015, a gas pipeline will likely be built from Turkey (subsequently transporting Iranian, Kazakh and Turkmen gas) to Europe (Nabucco project). In this context, the U.S. and the EU will intensify their pressure on Turkmenistan to re-route the gas flow to this pipeline project. At the same time, Kazakhstan and Turkmenistan will implement pipeline projects to carry oil and natural gas to China. Russia’s influence in the Caspian region will be minimized. Russia’s positions will most likely remain at their present level – as a transit country for small volumes of Caspian oil along the Caspian Pipeline Project (CPC). Oil shipments along the Baku-Novorossiisk pipeline will likely stop flowing once the Baku-Tbilisi-Ceyhan oil pipeline reaches full capacity. 

The Broader Middle East will generally remain under U.S. strategic control. In terms of energy security, Saudi Arabia will remain the main energy source until 2017. By 2010, it will put new production capacities into operation. As a result, Saudi Arabia’s share of the world oil market will remain unchanged, despite the fact that substantial U.S., Chinese, EU, and Japanese resources will be spent to reduce dependence on Middle East oil. The majority of countries in the region will largely continue the policy of maneuvering between the principal consumers – the U.S. and China.

With continuing military-political instability in the Broader Middle East, no breakthroughs should be expected with regard to Iraqi oil and Iranian gas supplies to the world market before 2015. One likely scenario in the next decade is that the U.S. will attempt to establish control over strategically important oil and gas regions at minimum financial and political cost. With respect to Iraq, it is the “controlled breakup” of the country into three parts, as a result of which the oil rich north will, as the U.S. hopes, pass under the control of a U.S.-Kurdish administration. Then the Kirkuk-Ceyhan oil export system would expand accordingly.

With respect to Iran, the U.S. will apparently continue to work toward the “democratization” of the country’s political life amid “mild” economic sanctions. One possible U.S.-Iran scenario could be separate agreements and the relinquishment of a number of claims in exchange for long-term fuel and energy projects. Given the long-term nature of these measures, as well as the growing political instability in the region throughout the period under consideration, neither Iran nor Iraq will be able to fully realize their energy production potential before 2017. For the U.S., the Broader Middle East will remain a “reserve” source of hydrocarbons for the long term. Meanwhile, in the next decade the U.S. will be actively developing oil production programs in Latin America, Africa, Canada and the Caspian.

Iran’s role in the world – both in its political and energy dimensions – will continue to grow as Tehran continues with its efforts to expand the geographic base of its energy exports. There are three directions in Iran’s regional gas strategy – western (Turkey, Europe), northern (Transcaucasia and Central Asia) and eastern (Pakistan, India, China, and Southeast Asian countries). The western vector of Iran’s gas policy (the Iran-Turkey gas pipeline with the prospect of moving into European markets) is in the zone of high political risks. Nevertheless, Iran’s reserves are a key to the EU’s independence from Russia. From this perspective, the United States is interested in resolving the “Iranian problem” as soon as possible. Thus, it will be able to use Iran’s energy potential to deal with its own geopolitical problems, specifically, as already mentioned, reducing the EU’s dependence on Russian energy. Even so, projects that may bring Iranian hydrocarbons to the European market can only materialize after Iran’s nuclear problem has been resolved “in a peaceful way.” As long as this ominous problem exists, Tehran will continue to target primarily the markets of the Pacific Rim.

In the next decade, developed consumer countries will give high priority to alternative and renewable sources of energy. Today, this is one of the most dynamic segments of the energy sector. These include wind and hydroelectric power, as well as ethanol, Brazil being its largest producer. Large-scale bio-fuel projects will begin to surface. Investment in alternative types of energy is expected to come mainly from the United States, China and Japan, as well as from the world’s oil and gas majors – BP, ExxonMobil, Royal Dutch/Shell, and others.

New technology will help make energy consumption more effective, but alternative energy sources will hardly be able to meet the world’s growing energy needs: their share in the energy balance will only increase modestly. For renewable sources of energy to meet at least one-half of the required energy growth, their capacity would have to increase 63 times. Such growth is impossible to achieve within a space of 10 years. During this period (until 2017) it will also be virtually impossible to mobilize production of “alternative” oil (super-heavy oil, tar sand, blacks, etc.) or to develop fields and deposits in hard-to-access areas.

The liquefied natural gas (LNG) market is becoming a global market. The main growth in demand for LNG is expected to derive from the United States and the Pacific Rim countries. The U.S., which is already a major LNG importer, will continue to increase its LNG imports (there are 55 new projects for LNG terminals, including LNG re-gasification plants). Japan is likely to remain the LNG market leader until 2020, after which the U.S. will become the No. 1 consumer. Nevertheless, the main volume of natural gas by 2017 will still be delivered to consumers through pipelines. Implementation of LNG projects will be unable to reverse the trend in the next decade.

The share of nuclear energy will fall to 5.3% as developed countries pursue a policy to enhance the technological security and environmental safety of their energy systems. The use of nuclear energy in the world will decrease amid its reduction in Europe (-1.1% a year) and stabilization in North America. The steady reduction in the number of nuclear power plants in Europe (except France) will be offset by the construction of new facilities in Pacific Rim (China, India, Pakistan, South Korea, etc.), as well as in Russia, Iran, and Brazil. Consumption of nuclear energy in North America, Japan, and France will increase to some degree in the next few years, after which it will stabilize. Russia has a unique chance of increasing its share on the global nuclear energy market. But that rare window of opportunity will remain open for a brief period – about 10 to 20 years.

The risk of a major drop of world prices in the medium term is very high. Contributing factors here include sufficient supplies of oil and natural gas, declining interest of developed countries in traditional [fossil] fuels, and the construction of new energy capacities in the Caspian, Africa, and other parts of the world, as well as the policy of consumer countries (above all the U.S.) toward steadily increasing their interest rates. As a result, a considerable number of investors are moving away from the raw materials market, which narrows opportunities for speculative growth in hydrocarbon prices.

In the foreseeable future, Iran will play a major role concerning prices on the hydrocarbon market. The course of events in and around Iran is likely to follow one of three possible scenarios.

Scenario 1 (the more likely): further confrontation between Washington and Tehran, which, however, will not lead to an armed conflict. In this case, the world energy market will see a downward trend with oil prices falling to $40-50 per barrel and fluctuations within the range of $5-10.

Scenario 2: reaching agreement and resolving the conflict by peaceful means, which will lead to a sharp fall in oil prices within a year. But the chances for the realization of this scenario are rather slim.

Scenario 3: an armed conflict. In this scenario, oil prices will exceed $100 per barrel. Subsequently, if the armed conflict becomes protracted, the price could rise to $130-150 per barrel, which would force the U.S. to exert unprecedented pressure on the OPEC to increase production. As a result, competition in non-OPEC production areas will grow considerably. But if the military confrontation in Iran follows the “Iraqi model,” the market will gradually adjust itself and stabilize by 2015-17.

OUTLOOK FOR THE RUSSIAN OIL AND GAS SECTOR

Russia has a large potential on the world energy market. By now, more than 3,000 hydrocarbon deposits have been discovered and prospected in Russia. About one-half of them are being developed. Over 50% of Russian oil production and more than 90% of natural gas production is concentrated in the Urals and West Siberia. Most of the deposits in this region are marked by a high rate of depletion, so while it remains the country’s main hydrocarbons base, it is also necessary to develop alternative energy production areas.

According to Russia’s Energy Strategy for the Period Until 2020, by 2015, oil production in Russia could hit 530 million metric tons with oil exports at 310 million metric tons. The West-Siberian oil and gas province will remain the country’s main oil base. New oil production centers will emerge in East Siberia and the Republic of Sakha (Yakutia) – up to 50 mln metric tons by 2015; on the Sakhalin shelf (25-26 mln metric tons), in the Barents Sea and the Russian sector of the Caspian Sea. Oil production will also increase in the Timano-Pechora Province.

The capacity of main oil pipelines and sea terminals for the export and transit of oil from Russia beyond the CIS could increase 50% by 2015. This will enable Russia by 2015 to export to non-CIS countries about 70 mln metric tons along the western and northwestern lines, about 130 mln metric tons along the Black Sea-Caspian line, about 80 mln metric tons along the eastern line, and up to 25 mln metric tons along the northern line.

By 2015, natural gas production in Russia could reach 740 billion cubic meters, with gas export hitting 290 bln cu m. Gas production in West Siberia during this period will stabilize, therefore, most of the increase will be ensured by putting into operation new fields in East Siberia and Russia’s Far East, as well as the northern and Far East sea shelf. Substantial natural gas reserves in East Siberia and Russia’s Far East make it possible to form new gas production centers in this region.

At the same time, the existing trends in the development of the Russian fuel and energy sector suggest that in the next decade Russia will not be able to strengthen its positions on the world energy market, converting its energy potential into political dividends.

The main impediments to oil production growth in Russia are:

  • the critical condition of the existing oil export infrastructure;
  • mineral and raw materials reproduction problems;
  • political restrictions with respect to construction of private pipelines and access for foreign companies to the Russian market;
  • the low investment activity of oil companies; and
  • the shrinking resource base of Russian oil companies (production has been exceeding reserve growth potential for many years).

The main factor in Russia’s weakening positions on the oil refining market is the obsolescence and general poor condition of most of Russia’s oil refineries. Thus, although some companies have modernized their refineries in the past few years, the general quality of Russia’s oil refining infrastructure is considerably below international standards.

The main impediments to natural gas production growth in Russia are:

  • the policy of Gazprom, which finds it unprofitable to develop the domestic market with the current domestic gas tariffs;
  • the gap between the growth of gas production and consumption;
  • the need to invest substantial resources in development of new deposits;
  • the preference that is given to the purchase of Central Asian gas over investment in production projects;
  • the state policy of barring foreign companies from developing the most promising fields (Yamal, Shtokman) as project operators;
  • the critical condition of the existing gas export infrastructure, and
  • the monopolistic nature of Russia’s natural gas sector.

The upshot of all this is that the existing oil production growth potential will only last for a few more years. Because of a confusing, poorly regulated tax system, and a lack of investment incentives for prospecting work, raw materials companies will be unable to prospect and develop new large deposits. The rate of oil production growth that Russia showed in 2000-04 is unlikely to be maintained in the future. By 2017, Russia will reach the maximum production level of 10-11 million barrels a day (530-550 million metric tons a year) by the end of the second decade, and that level will eventually stabilize. By 2010, Russia will account for about 15% of the world oil market, and this share will fall to around 10% by 2030. Therefore, factoring in global consumption growth, Russia’s share on the world oil market will tend to decline.

By 2010, natural gas production in Russia will stabilize, and by 2010, given domestic demand and export levels, Russia could have a natural gas shortage of 75-150 billion cubic meters.

To maintain or increase energy production and exports, Russia needs to start developing new areas – above all in Siberia and the Northern shelf. This requires a political decision to attract investment (including foreign investment). No drastic changes in this sector are expected before 2010 – or even by 2017.

Despite its leading positions in the production and shipment of hydrocarbons, Russia lags noticeably behind in the implementation of advanced technologies. The country’s leadership puts the main emphasis on oil, natural gas and coal as the principal instruments that allow Russia to attain and retain the status of a great energy power. Meanwhile, the world’s changing energy structure will by 2030-50 substantially reduce Russia’s competitiveness.

Russia’s technological lag, especially in the medium term, also concerns the production and transportation of liquefied natural gas (LNG). By now, about one-quarter of global gas exports come in liquefied form, with the LNG market expanding rapidly. It is not ruled out that by 2017 LNG will become a viable competitor to gas supplies that are transported via pipeline.

Concerning the implementation of large-scale LNG projects in Russia, the outlook is rather pessimistic. Virtually the entire LNG volume within the Sakhalin-2 project (the only Russian LNG project that could be completed within the next five years) has been contracted. As to the situation around other LNG plants, their future is uncertain. For example, it was decided to re-route natural gas from the Shtokman field (the most promising deposit for LNG deliveries to the U.S.) to Europe, to be shipped by pipeline. The LNG project in Ust-Lug, even if it is carried out before 2017, will not be enough to turn Russia into a great gas supplier due to its low capacity. 

While Europe will in the next decade remain the main market for Russian hydrocarbons, Russia’s capacity for oil shipments to Europe is rather limited. The main pipeline, Druzhba, is in need of renovation; the Baltic Pipeline System has already reached full capacity, while in the south all of Russia’s oil export routes flow via Turkish straits with no viable alternatives in the foreseeable future. The throughput capacity of the Bosporus Strait is the most vulnerable part of Russia’s transport policy as Turkey is expected to continue restricting its straits to the passage of foreign oil tankers. Such a scenario will, on the one hand, reduce Russia’s export capacity and, on the other, compel Moscow to use the BTC as a reserve route in the southern direction (should the Turkish straits be closed off completely).

Russia will be able to partially compensate for losses with the Burgas-Alexandropoulos oil pipeline bypassing Turkish straits. But given that the costs involved in Russian oil production and exports exceed analogous costs on the Caspian, it is quite likely that Russian oil will be partially crowded out of the European market.

The second most important market, whose influence will be growing in the period under review, is the Pacific Rim market. Meanwhile, here too Russia has only a limited capacity to ensure the declared increase in energy supply (from 3% to 30%). To meet this target, at least 60 mln metric tons of oil and 65 billion cu m of natural gas a year will have to be “re-routed” to the east. This task is technically unfeasible and financially dubious in the next 10 years.

The Russia-U.S. energy dialog is in its early stages. From every indication, the resources of the Shtokman field will be sent to Europe, while the construction of the Northern Oil Pipeline to Murmansk will be frozen until 2015 – the deadline for putting the Eastern Pipeline into operation (Transneft will simply not have enough money to handle both projects). By 2017, the share of Russian oil and petroleum products on the U.S. market will not exceed 5%. In the most likely scenario, these restrictions will not allow Russia to emerge as a major player on the North American market in the next decade.

Russia will be confronted with growing competition on the gas markets in Europe and the Pacific Rim. European consumers are pinning hopes for energy diversification on the increasing share of North Africa (Algeria, Libya and Egypt), as well as states in the Caspian region, Central Asia and the Middle East. A number of pipeline projects, due to be completed in the next five years (the BTC, the BTE, which is to be linked with Nabucco, and others), are designed to limit Russia’s influence. For its part, China will implement a number of projects, also reducing its dependence on Russian hydrocarbons – oil and gas pipelines from Kazakhstan and a gas pipeline from Turkmenistan. Furthermore, oil deliveries to China from South America and LNG from Iran will increase.

Nevertheless, in Europe, Russia will retain its status as a regional energy leader. The EU will remain the largest market for Russian energy resources in the foreseeable future. It is rather unlikely that an all-European energy market will be created any time soon that would crowd out Russia.

The major contributing factors here are:

  • outstanding problems within the EU framework, and the lack of consensus on ways of ensuring energy security;
  • specific projects on alternative sources of energy in Europe are implemented mainly on the national level;
  • the explosive military-political situation in the Middle East (especially around Iran, which is being closely watched by virtually all Russian gas consumers in Europe and in post-Soviet states as an alternative to Russia in oil and gas supplies) creates a number of political and military risks, impeding the implementation of Western plans to build new energy corridors.

Therefore, the main task facing Russia in the next decade will be to provide conditions to minimize expected losses, first, from its declining presence on world oil and gas markets, and second, from falling world energy prices. In this context, the main priorities for Russia are:

  • a greater emphasis on the domestic oil and gas production sector – both on the state level and on the part of oil and gas majors;
  • incentives to stimulate investment in the reproduction of the mineral and raw materials base and the development of new deposits;
  • temporary deviation from the concept of global energy expansion in favor of investment in national production projects in East Siberia and Russia’s Far East, the Sakhalin, the northern shelf, etc.;
  • at the same time, considering that the Middle East is going to remain the world’s main energy powerhouse, Russia should concentrate on preserving and expanding the presence of Russian energy companies in Iran, Iraq, and other states of the region;
  • reviewing production sharing agreements (PSA) and developing new mechanisms for participation of foreign companies in LNG projects in Russia, taking into account the interests of both sides;
  • special attention needs to be given to LNG production projects as by far the most promising on the global energy market;
  • enhancing technological security and effectiveness of energy transport networks;
  • expanding hydrocarbon deliveries to European markets by building additional energy transport facilities (to northern and southern Europe and the Balkans) and consolidating positions on the Pacific Rim market;

Russian oil and gas companies should take advantage of the favorable external environment to modernize their production capacities, use advanced technology, and develop their sales network, which will help them cut production costs and offer more competitive products on foreign markets.

 
 
  © 2004 “Russia in Global Affairs”.
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