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RIA Novosti: Scattered inheritance

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12:14 | 26/ 02/ 2008 

MOSCOW. (RIA Novosti political commentator Maxim Krans) – More than once Russia has confidently promised to meet the demand of European and other countries for oil and gas.

First Deputy Prime Minister Sergei Ivanov has recently confirmed this at the Munich conference on security. But does Russia have enough energy resources?

Senator Gennady Oleinik, who has worked in several oil companies, is not so optimistic. Talking about the problems of Russia’s northern regions at a RIA Novosti news conference, he recalled that the North is the main national storeroom of natural resources, and a good owner should take care to keep it full. It is import to increase natural resources – at least by the amount of what has been put to use. But this is not being done now.

When the reform of the fuel and energy sector was gaining momentum in the early 1990s, the state made private companies responsible for geological prospecting. With rare exceptions, they were not very interested in this because for the most part they had enough raw materials for 10 to 15 years to come. There are no incentives or tax breaks that would encourage these companies to engage in geological studies. At best, they prospect for raw materials within the borders of their licensed territories, and are not undertaking risky projects.

As a result, for the last 15 years Russia has done practically nothing to reproduce its mineral wealth, but has been scattering the inheritance it received from the previous generations.

But the age of easy oil is almost over. There are few deposits where production is relatively inexpensive. The situation with gas resources is a little better. Today, Russian companies are developing more than 70% of the Soviet-explored oil deposits. The relevant figure for gas deposits is 60%. The plum has been picked; leftovers will be picked in the next few years.

In this context, reports about an imminent reduction in oil production in Russia are a source of concern. We have been giving promises to Europeans, Chinese and other foreign partners, but will we be able to keep them?

Major Western companies have also registered a decline in oil and gas production for the same reason.

Well-known energy expert Jeremy Legget wrote in the British Guardian the other day: “ExxonMobil, BP, Chevron, Royal Dutch Shell and ConocoPhillips used more than half of their increased operating cash flow between 1998 and 2006 not on exploration but on share buybacks and dividends.” Geologists have received five times more money from them than their Russian colleagues.

In the meantime, the world’s demand for energy is growing at an unprecedented pace. Analysts from the International Energy Agency believe that by 2030 it will increase by 60%. At present, total world oil production amounts to approximately 85 million barrels per day. Oilmen doubt that the desired goal of 100 million barrels will be achieved. Moreover, they fear that next year the oil production of the OPEC countries will go down by 2 million barrels.

Russia has a third of the world’s resources of gas, one tenth of oil and one fifth of coal. But this data is mostly tentative and will have to be confirmed. Moreover, it will take a decade, if not more to start producing these raw materials.

The same is true of the Arctic shelf riches, on which our oilmen are pinning their great hopes. In tentative estimate, they amount to 100 billion metric tons in the oil equivalent. But out of 15 explored Arctic deposits, only two – Shtokman and Prirazlomnoye – are more or less ready for development. As for hypothetical hydrocarbon wealth in a zone claimed by Russia, this is a pie in the sky. Besides, there is no equipment that can operate in the severe Arctic conditions.

Former Soviet Minister of Geology, Professor Yevgeny Kozlovsky gloomily predicts that a “disastrous reduction in exploration will destroy the Russian economy.” He recalls that about 20,000 deposits of natural resources were discovered in the Soviet times, out of which 2,000 determined the economic growth; no major deposit has been found in the last 17 years.

Economists are aware of this danger. Several years ago, the situation started changing, and the state began to invest huge funds in geological prospecting. But in 2007 and 2008, the growth rates of investment have sharply dropped, and are now merely adjusting for inflation.

Last year, 19.8 billion rubles (over $800 million) were earmarked from the budget for these purposes, and another 130 billion (over $5.5 billion) were added by private companies.

As Oleinik reported at the same conference, the Ministry of Natural Resources is urgently drafting proposals to double this investment. But this will not be enough, because it is necessary to make up for lost time and restore what has been almost totally destroyed.

Exploration in difficult-to-access areas requires special attention. The producers will find it too expensive to conduct it single handed. It is also risky – what if the forecasts do not come true? Such exploration calls for active government involvement. A conference held by the president with government members and oil corporations last January decided to set up a national company for exploration in the Russian continental shelf. The construction of a pipeline to the Pacific is in full swing, but it can be filled with oil by one third at best.

It is an open secret that Russia’s high economic performance in then last few years, huge gold and currency reserves, and the Stabilization Fund have been made possible by skyrocketing prices of hydrocarbons, which make up half of the budget. Long-term programs of economic and social development (up to 2020 and even 2030) are largely based on these prices. If we do not have this oil and gas trump, all our achievements and ambitious plans will come under threat, not to mention the promises that we are giving to foreign partners without thinking.

The opinions expressed in this article are the author’s and do not necessarily represent those of RIA Novosti. and its also non-profit sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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