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russian oil and gas
RUSSIAN OIL AND GAS
impacts on global supplies to 2020
Marina Kim
• In the past few years the Russian Federa- Economic growth in the Russian Federation
tion has become an important player in world is projected to slow to about 4 per cent a year to
energy markets. Since 2000 it has been ag- the end of the current decade and then to average
gressively increasing oil output to become 3.4 per cent a year during the 2010s (IEA
the world’s largest crude oil producer and 2004a). This is less optimistic than the Russian
the second largest oil exporter. The Russian Government’s projections of the average rate of
Federation has the seventh largest proven oil economic growth of 5–6 per cent a year over the
reserves in the world. It is also the world’s period 2005–08, which is, nonetheless, a slow-
leading producer and exporter of natural gas down from the average growth rate of 6.8 per
and is expected to maintain its dominant posi- cent a year over the period 2000–04.
tion in the longer term, backed by abundant The projected future deceleration of economic
reserves. growth results primarily from assumptions about
falling world energy prices, in particular oil
• The Russian Federation’s energy supplies
prices, and export infrastructure constraints. The
have major implications for world energy
higher bound of the economic growth projec-
supply security, particularly while the Middle
tions represents gains from the diversification
East remains an area of heightened political
of the Russian economy away from energy and
uncertainty and investment risk. Major Asia
other commodity exports and from further insti-
Pacific energy importers, in particular, are al-
tutional reforms (MEDT 2005a).
ready competing for Russian oil and gas in
The projected slowdown in economic devel-
their pursuit of supply diversification.
opment in the medium to long term can also be
attributed to the assumed slowing of growth in
Economic overview industrial production, as the share of service
After the disintegration of the Soviet Union in activities in the economy increases, and the
1991, the Russian Federation went through a per- expected aging and contraction of the Russian
iod of deep economic recession. By 1999 the feder- population, leading to a decline in the workforce
ation’s economy had largely recovered, enabling and productive potential (IEA 2004a).
the start of robust economic growth, further stimu-
lated by the expansion of natural resource exports
in response to strong world demand. Since 1999 Oil and gas in the Russian economy
the Russian Federation has recorded its sixth Oil and gas is a major sector of the Russian eco-
successive year of economic growth (table 1), nomy that plays a key role in providing state bud-
reflecting robust domestic consumer spending, get revenues and maintaining positive balance
and growth in investments and exports. of payments. The sector accounted for 27 per
• Marina Kim • +61 2 6272 2238 • mkim@abare.gov.au cent of gross domestic product (MEDT 2005b)
australiancommodities • vol. 12 no. 2 • june quarter 2005 361
Russia’s oil fields and pipelines
362
1 Map from World Energy Outlook 2004, supplied by courtesy of the International Energy Agency, OECD, Paris
russian oil and gas
australiancommodities • vol. 12 no. 2 • june quarter 2005
russian oil and gas
Key economic indicators
1 Russian Federation
1997 1998 1999 2000 2001 2002 2003 2004
Gross domestic product (nominal)
– in national currency billion roubles 2 343 2 630 4 823 7 306 8 944 10 834 13 285 16 543
– in US dollars US$b 405 271 196 260 307 346 433 572
Growth in real GDP % 1.4 –5.3 6.4 10.0 5.1 4.7 7.3 7.1
Population million 147.3 146.9 146.3 145.6 144.8 144.1 143.4 na
Energy consumption Mtoe a 596.8 582.9 604.2 615.2 622.7 619.0 na na
a Million tonnes of oil equivalent. na Not available. Sources: IMF (a,b); IEA (2003); World Bank (2004); IET (2005).
and 54 per cent of total exports in 2003 (IMF are included, the estimate rises to 116 billion
2004a). The oil and gas sector is often referred barrels, with West Siberia accounting for about
to as the locomotive of the Russian economy 74 per cent and the rest split among Volga–Urals/
because of its significant contribution to the Precaspian, Timan–Pechora, East Siberia and
growth in industrial output after the financial the Far East regions (IEA 2004a; map 1).
crisis of 1998. Possible reserves, which are in addition to the
Diversification of the Russian economy is abovementioned 116 billion barrels and which
likely to reduce the oil and gas sector’s share are likely to be even less profitable for production,
of gross domestic product, as other economic are estimated at approximately 30 billion barrels,
sectors grow. Further expansion of the sector while undiscovered resources are estimated
may also be hindered by insufficient explora- at 90 billion barrels. Although still dominant,
tion for natural resources, export infrastructure West Siberia’s share in the location of possible
constraints, and lack of new product develop- reserves and undiscovered resources is expected
ment, such as liquefied natural gas (LNG) and to decline, while East Siberia’s share is expected
petroleum products. Nonetheless, maintaining a to increase significantly. These possible reserves
rapid rate of economic growth remains depen- and undiscovered resources are not expected to
dent on strong exports of natural resources, come into production until the second decade of
mainly hydrocarbons and metals. the century. The potential impact of their devel-
The Russian Government’s target of doubling opment on Russia’s production profile is highly
average GDP per person by 2010 (within a uncertain and heavily dependent on the capacity
decade of the election of President Putin in 2000) to convert them to proven plus probable reserves
is also likely to provide an additional stimulus to and on the rate of development (Lambert and
maintain a high level of energy exports at least in Woollen 2004).
the short to medium term.
Oil production
Oil reserves In 1987 the Russian Federation (excludes former
At the end of 2003 the Russian Federation had the Soviet republics) produced 11.5 million barrels
seventh largest proven oil reserves in the world of oil a day, the highest oil production in one
and the largest among non-OPEC producers (BP country in the history of the oil industry (MIE
2004). Various sources estimate Russian proven 2004). Oil production then declined sharply,
oil reserves at 60–69 billion barrels (IEA 2004a), partly as a result of depressed domestic and inter-
equivalent to around a quarter of Saudi Arabian national demand, reaching its lowest level in the
proven oil reserves, the largest in the world. second half of the 1990s (table 2). Since 2000,
Russian reserves are expected to last for 22 years oil output, driven mainly by private oil compa-
based on current production (BP 2004). nies (box 1), has risen substantially in response
When probable reserves, which have a smal- to higher world oil prices and growing external
ler probability of being produced profitably, oil demand (IET 2001, 2004, 2005; figure A).
australiancommodities • vol. 12 no. 2 • june quarter 2005 363
russian oil and gas
Crude oil and refined products industry
World oil prices have been relatively high
since 1999, driving increases in investments
and oil output in the Russian Federation. By
A Russian Federation
2004, Russian oil production was 50 per cent Production
8
above its 1999 level. A new oil price spike in
2004 and 2005 has caused significant uncer-
tainty about future world oil price dynamics. 6
However, it is expected that the high prices Non-CIS export
reached in 2004 and 2005 will not be sustained. 4
Domestic
By 2010, real oil prices are forecast to decline consumption
from their present high levels (IEA 2004a; 2
Burg, Haine and Maurer 2005) and reach levels CIS export
similar to those at the beginning of the current mbd
decade — levels that were nonetheless suffi- 1992 1994 1996 1998 2000 2002 2004
cient to drive the recent expansion in Russian
oil production (table 3). After 2010, world oil
prices are projected to increase gradually in that has already occurred since 1999 is expected
real terms (IEA 2004a). to dampen growth in upstream investment and
Russian oil production is projected to production capacity in the medium term. Addi-
continue to grow to 2020, although at a slower tional downward pressure will be exerted by the
rate than over the period 1999–2003. The current tax system in the oil sector in the Russian
projected easing in world oil prices from their Federation (box 2).
recent highs, along with the rapid expansion
Production, consumption and exports of crude oil and products, and natural gas
2 Russian Federation
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Oil mbd mbd mbd mbd mbd mbd mbd mbd mbd mbd mbd mbd mbd
Production 8.02 7.11 6.38 6.16 6.05 6.14 6.09 6.12 6.49 6.99 7.62 8.46 9.21 a
Exports of crude
oil and products b 3.63 3.41 3.56 3.40 3.67 3.77 3.83 3.84 4.14 4.63 5.28 6.06 6.74 a
– to non-CIS c 1.84 2.31 2.63 2.80 3.22 3.37 3.40 3.40 3.73 4.12 4.57 5.24 5.85 a
– to CIS 1.80 1.10 0.93 0.59 0.45 0.38 0.44 0.44 0.41 0.51 0.71 0.81 0.89 a
Domestic
consumption 4.65 3.95 3.04 3.02 2.64 2.65 2.51 2.42 2.47 2.47 2.48 2.61 2.63 a
US$/bbl US$/bbl US$/bbl US$/bbl US$/bbl US$/bbl US$/bbl US$/bbl US$/bbl US$/bbl US$/bbl US$/bbl US$/bbl
Real world oil
price d 21.48 18.47 17.61 18.48 21.49 19.67 12.64 18.24 27.50 22.16 22.02 24.66 30.43
Gas bcm bcm bcm bcm bcm bcm bcm bcm bcm bcm bcm bcm bcm
Production 641.0 618.4 607.2 595.4 601.1 571.1 591.0 590.7 584.2 581.5 594.5 620.3 634.0 a
Exports 194.4 174.4 184.3 192.2 198.5 200.9 200.6 205.4 193.8 180.9 185.5 189.3 200.8 a
– to non-CIS 87.9 95.9 109.3 121.9 128.0 120.9 125.0 131.1 133.8 131.9 134.2 142.0 144.4 a
– to CIS 106.5 78.5 75.0 70.3 70.5 80.0 75.6 74.3 60.0 48.9 51.3 47.3 56.4 a
Domestic
consumption 453.6 450.0 426.9 407.1 407.2 374.7 393.4 389.4 394.5 404.7 416.2 439.8 442.0 a
a Estimates. b Totals may not add up as a result of rounding. c Commonwealth of Independent States (CIS) refers to Azerbaijan, Armenia, Belarus,
Georgia, Kazakhstan, Kyrgyzstan, Moldova, Russian Federation, Tajikistan, Turkmenistan, Uzbekistan and Ukraine. d Real trade weighted crude
oil prices (in constant 2000 US$). mbd = million barrels a day; bbl = barrels; bcm = billion cubic metres.
Sources: IET (2001, 2004, 2005); ABARE’s estimates based on US Energy Information Administration data.
364 australiancommodities • vol. 12 no. 2 • june quarter 2005
russian oil and gas
Box 1: Corporate structure of the Russian oil and gas sector
The oil sector in the Russian Federation currently company owns and operates a national network of
comprises eleven vertically integrated oil compa- high-pressure interregional gas pipelines and has
nies that produce more than 90 per cent of Russia’s a monopoly over Russian gas exports to non-CIS
crude oil (table below). There are also a number of countries.
project operators under production sharing agree- Oil companies and independent gas producers
ments and about 150 small scale oil producers. account for about 14 per cent of total indigenous
However, their share in total Russian crude oil gas production, almost a quarter of which is
output has been steadily declining as a result of flared. This is largely attributed to unprofitable gas
less favorable business conditions than for oil processing and sales conditions for these producers
majors. The state retains major shares in Rosneft compared to Gazprom. In most cases, these other
and Gazprom, while other companies have been producers will have to sell gas to Gazprom, or
gradually privatised since the start of the 1990s. Gazprom has to provide pipeline access to deliver
At the end of 2004, the oil sector went through gas to non-Gazprom buyers. Nonetheless, in the
significant restructuring after Yukos’s main government’s Energy Strategy it is expected that
producing asset, Yuganskneftegaz, was sold at the share of non-Gazprom gas in production will
auction. Yuganskneftegaz, with a production reach 20 per cent by 2020 (Government of the
capacity of 1 million barrels of oil a day, became Russian Federation 2003). While one of the poten-
part of the state owned Rosneft, which brings the tial sources of non-Gazprom gas is imports from
share of state owned companies in total oil produc- neighboring central Asian countries, it is highly
tion to 18.6 per cent. uncertain whether these supplies will occur as
The gas sector is dominated by Gazprom, planned. The limited throughput capacity of the
the largest gas producing company in the world. pipeline linking central Asian gas reserves with
Gazprom holds licences to fields containing more Gazprom’s network, together with the associ-
than 55 per cent of Russia’s proven gas reserves, ated political issues, raise serious concerns about
provides about 20 per cent of state budget revenues, stability of supplies. If so, the only way to ramp up
produces 86 per cent of Russia’s gas and supplies supplies of non-Gazprom gas would be to improve
it to generate around 50 per cent of electricity pipeline access and gas sales conditions for inde-
in the Russian Federation (OECD 2004). The pendent producers and oil companies.
Corporate structure of oil and gas production in the Russian Federation, end of 2004
Share in Share in
Oil production total output Gas production total output
mbd % bcm %
Russian Federation 9.21 100.0 633.95 100.0
Lukoil 1.69 18.3 5.02 0.8
Rosneft + Yuganskneftegaz 1.47 16.0 10.80 1.7
TNK–BP 1.41 15.3 8.00 1.3
Surgutneftegaz 1.20 13.0 14.31 2.3
Sibneft 0.68 7.4 1.95 0.3
Yukos – Yuganskneftegaz 0.68 7.4 2.01 0.3
Tatneft 0.50 5.5 0.74 0.1
Slavneft 0.44 4.8 0.92 0.1
Bashneft 0.24 2.6 0.36 0.1
Gazprom 0.24 2.6 544.42 85.9
RussNeft 0.13 1.4 0.77 0.1
Other producers 0.52 5.6 44.65 7.0
mbd = million barrels a day; bcm = billion cubic metres.
Source: IET (2005).
australiancommodities • vol. 12 no. 2 • june quarter 2005 365
russian oil and gas
Average world real oil prices
3 In 2000 US dollars
lihood of more rapid expansion in Russian oil
output.
These IEA projections are more optimistic
2001 2003 2010 z 2020 z
than those of the Russian Government in the
US$/bbl US$/bbl US$/bbl US$/bbl Energy Strategy of the Russian Federation for
ABARE a 22 25 21 na the Period up to 2020 (the Energy Strategy),
IEA b na 27 22 26 the main official document that sets out priori-
a Trade weighted crude oil prices. b IEA crude oil import prices. ties and goals for Russian energy sector devel-
z Projections.
Sources: IEA (2004a); Burg et al. (2005) (projections reported in
opment for the period to 2020. However, in the
constant 2005 US$ have been converted to constant 2000 US$). past, both official and private projections have
consistently underestimated the scale of Russian
oil production. Importantly, the Energy Strategy
Oil production in the Russian Federation is was developed before the strong rise in world oil
projected to reach 10.4 million barrels a day in prices in 2004 and 2005 in response to a combi-
2010 and 10.7 million barrels a day in 2020 (IEA nation of sound underlying market fundamen-
2004a; table 4). If, contrary to current expecta- tals and significant concerns about the security
tions, high world oil prices were to be sustained of global oil supply (Burg et al. 2005). These
for a long period, there would be a greater like- factors have driven Russian oil production and
exports to the 2010 levels earlier than projected
in the Strategy.
Box 2: Tax regime in the oil sector Gas reserves
in the Russian Federation
The Russian Federation is extremely well en-
In 2002, a new tax on minerals production dowed with natural gas reserves. At the end of
(equivalent to a royalty) was introduced as 2003, Russia’s proven gas reserves amounted
part of tax reform in the oil sector. It replaced to 47 trillion cubic metres, the largest share of
a number of earlier oil production related taxes total proven gas reserves in the world (26.7 per
and deductions and simplified the overall
cent). These are expected to last for more than
tax system. The reform has established the
maximum rate of oil export tax, depending eighty years at the current rate of production.
on the world oil price. Under the new regime, The country also has an estimated 33 trillion
if the world price for crude Russian Urals oil cubic metres of undiscovered gas resources
rose by US$1 above US$25 a barrel, the state (IEA 2004a).
budget received 68.5 cents of the extra dollar Three quarters of Russia’s gas reserves and a
through the tax on minerals production, export similar share of current production are located
duty and profit tax. in West Siberia, mostly in the Nadym–Pur–Taz
The tax regime in the oil sector underwent region, followed by the European part of the
additional significant changes in 2004, leading Russian Federation (to the west of the Ural
to an increased tax burden on the sector, partic- Mountains), East Siberia and the Far East (IEA
ularly on oil exports. The new, more progres-
2004a; map 2).
sive, scale of taxation is aimed at withdrawing
extra profit from oil exporters when world oil In 2002, 80 per cent of gas was produced at
prices are high. Under the most recent scale, fields with declining production (Government
deductions in favor of the state budget rose of the Russian Federation 2003), which means
above 70 cents of an extra dollar if world prices that significant new capacity will need to come
for Russian Urals oil exceed US$25 a barrel. on stream over the next two decades to maintain
Some sources estimate these deductions at 90 current rates of production. The Energy Strategy
per cent of extra profit. projects that West Siberia will remain the main
Sources: IET (2003a); IEA (2005). gas producing region until 2020, although its
share in total gas production will decline.
366 australiancommodities • vol. 12 no. 2 • june quarter 2005
russian oil and gas
Natural gas industry
The development of gas fields in East Siberia,
the Far East, the European part of the Russian
Federation (including the Arctic Sea shelf) and
B Russian Federation
Production
Yamal Peninsula are expected to become a 600
priority in the next decade (Government of the
500
Russian Federation 2003). The rate of devel- Domestic
consumption
opment of new gas fields will be significantly 400
affected by the ability to raise the required
300
amount of investments (as discussed later).
200
Non-CIS export
Gas production 100
CIS export
Over the period 1992–2004, the Russian Federa- bcm
tion remained the world’s largest gas producer, 1992 1994 1996 1998 2000 2002 2004
accounting for more than a fifth of world gas
production (IEA 2004b). As with oil, gas
production declined after the disintegration of and power generation (IEA 2004a). The less
the Soviet Union. However, the reductions were optimistic projections of future gas output in the
not as great as those for oil (IET 2001; 2004; Energy Strategy can be attributed to concerns
2005; figure B). Gas output fell to its lowest over declining output from the major producing
level of 571 billion cubic metres in 1997 before fields in West Siberia and the limited capacity to
rising to 634 billion cubic metres in 2004 (table incur significant investments required to main-
2). Unlike oil, changes in gas production have tain and further boost gas production.
been driven mainly by domestic consumption,
with low regulated domestic gas prices favoring
the uptake of gas against other fuels. Investment in the oil and gas sector
Gas output is expected to expand further in the Investment in oil exploration and production has
period to 2020, backed by abundant gas reserves. increased in the Russian Federation since the
It is projected to reach 655 billion cubic metres start of the current decade (table 5). Between
in 2010 and 801 billion cubic metres in 2020 2000 and 2003, oil sector investments made
(table 4). Most of the incremental gas produc- up around 35 per cent of total industry invest-
tion is likely to be consumed domestically, as ments in the Russian Federation (OECD 2004)
the country continues to rely heavily on gas as a and led to marked acceleration in oil produc-
primary energy source and the main fuel for heat tion and exports. The robust growth in oil output
Projected growth of oil and gas production and exports to 2020
4 Russian Federation
2004 2010 2020
IEA Energy Strategy IEA Energy Strategy
Oil mbd mbd mbd mbd mbd
Production 9.2 10.4 8.9–9.8 10.7 9.0 – 10.4
Exports of crude oil and products 6.7 7.3 6.1–6.8 7.0 6.1–7.0
Gas bcm bcm bcm bcm bcm
Production 634 655 555–665 801 680–730
Exports 201 182 a 250–265 249 a 275–280
a Net exports. mbd = million barrels a day; bcm = billion cubic metres.
Sources: IEA (2004a); Government of the Russian Federation (2003); IET (2005).
australiancommodities • vol. 12 no. 2 • june quarter 2005 367
Russia’s gas reserves and infrastructure
368
2 Map from World Energy Outlook 2004, supplied by courtesy of the International Energy Agency, OECD, Paris
russian oil and gas
australiancommodities • vol. 12 no. 2 • june quarter 2005
russian oil and gas
Investment in oil exploration and
occurred partly as a result of bringing under-
utilised or idle standing facilities into produc-
tion, and there is still potential for greater and
5 production Russian Federation
Investment Change from 1998
more efficient utilisation of existing facilities.
However, in the longer term it will be necessary US$m %
to increase capital investment in new projects to 1998 2 795 100
sustain high rates of production. 1999 1 821 68
2000 4 143 148
The size of investment in natural gas explo- 2001 6 018 215
ration and production is largely determined by 2002 4 679 167
Gazprom, the dominant player in the domestic 2003 a 4 690 168
gas market (box 1). The company needs to a January–October. Source: OECD (2004).
make significant investments if it is to maintain
current levels of gas production in the medium to
long term, as production from mature gas fields The total level of capital investment in the
declines and infrastructure degrades. Russian Federation, amounting to around 18
The development cost of new large gas fields, per cent of GDP, is still considered low relative
all of which are located in the harsh Arctic zone, to other fast developing economies in eastern
is estimated at US$35–40 billion, excluding Europe and Asia, and relative to the average
necessary gas infrastructure (OECD 2004). Esti- level of investment in OECD countries of about
mated reserves of the new gas fields are signifi- 22 per cent (table 6).
cant. For example, Yamal Peninsula reserves
are estimated at 5.8 trillion cubic metres of gas Concerns over exploration rates for
(Government of the Russian Federation 2003).
The high cost of development and lack of new natural resources
infrastructure may be one of the reasons why The Russian Government views insufficient
Gazprom prefers investing in new smaller fields exploration of natural resources and a growing
in the vicinity of working giant fields in West share of oil and gas fields that are costly to
Siberia to be able to use the existing pipeline explore and less attractive for investment as a
system (IEA 2004a). threat to national energy and economic security
Another issue is that the low regulated (Government of the Russian Federation 2003).
domestic gas prices make it practically impos- For example, after an increase of 33 per cent
sible to raise the required capital for invest- over 2000 and 2001, exploration oil drilling fell
ment, as three quarters of Gazprom’s gas is used by 40 per cent in 2002 and by a further 11 per
domestically. cent and 18 per cent in 2003 and 2004 respec-
Capital investment to GDP ratio in selected countries
6
1995 1996 1997 1998 1999 2000 2001 2002
% % % % % % % %
Russian Federation 21.1 20.0 18.3 16.2 14.4 16.9 18.9 17.9
OECD 21.0 21.7 22.3 22.8 22.5 22.5 22.0 21.0
Japan 27.7 28.3 27.9 26.8 26.2 26.2 25.6 24.1
United States 18.2 18.7 19.1 19.8 20.3 20.5 19.7 18.6
Hungary 20.0 21.4 22.2 23.6 23.9 24.1 23.6 22.3
Poland 18.6 20.7 23.5 25.1 25.5 23.9 20.9 19.1
Korea, Rep. of 36.7 36.8 35.1 29.8 27.8 28.4 27.0 26.8
China 40.7 33.8 33.4 35.7 36.4 36.8 38.8 42.2
Source: OECD (2004).
australiancommodities • vol. 12 no. 2 • june quarter 2005 369
russian oil and gas
tively. Similarly, the number of new oil wells put started to rise slowly in response to the strong
into operation grew by 85 per cent over 2000 and economic recovery and reached 619 Mtoe in
2001 before falling by 22 per cent in 2002, 5 per 2002 (table 7). While this was considerably less
cent in 2003 and 1 per cent in 2004 (IET 2003b, than in 1992, the Russian Federation remained
2004, 2005). the third largest energy consumer in the world
The Ministry of Natural Resources has devel- after the United States and China (IEA 2003).
oped a long term program for the development of During the period 1992–2002, the share of
natural resources for the period 2005–20. It calls oil in the primary fuel mix declined from 29
for total investment of almost US$90 billion in to 21 per cent as a result of reduced industrial
exploration over fifteen years, with US$9 billion consumption and lower use of fuel oil in power
from the budget and the rest from the mine oper- generation. However, the share of natural gas
ators. The 2005 budget provides only US$277 rose from 47 per cent in 1992 to over 52 per cent
million for natural resources exploration, which in 2002, maintaining its dominance in both the
needs to be raised to US$756 million a year by primary fuel mix and heat and power generation
2020 (MNR 2005). It is uncertain whether the (IEA 2004a).
government will be able to significantly increase Total primary energy consumption in the
the exploration budget and whether this initia- Russian Federation is projected to grow by 1.7
tive will stimulate increased investment from per cent a year until the end of the current decade
private investors. and then by 1.2 per cent a year in the 2010s as
High world oil prices and the current tax economic growth slows. By 2020 the share of oil
system are the most commonly cited reasons in the primary fuel mix is expected to be main-
for declining investment in oil exploration tained at 21 per cent, while the share of gas is
(IEA 2004a; Mironov and Berezinskaya 2004; projected to increase to 54 per cent as a result of
Tutushkin, Levinsky and Bushueva 2004). the higher uptake of gas in power generation and
When oil prices are high, companies concentrate the underlying growth in demand for electricity
on production and exports rather than building (IEA 2004a; table 7).
up reserves. The current tax regime and In contrast, the Energy Strategy projects a
macroeconomic conditions also seem to favor decrease in the share of natural gas in the fuel
short term projects and increased production mix to below 50 per cent by 2020, and increases
from working fields. in the shares of coal, oil, nuclear and hydropower
At present, companies do not have the right (Government of the Russian Federation 2003).
of first refusal on reserves that they discover. The government’s desire to reduce the share
That is, they do not have preference above of natural gas in the primary fuel mix reflects
others to obtain the right to extract the oil they concerns over excessive dependence on gas,
have found. This is an additional disincentive which is viewed as an energy security risk.
to exploration. Another potential reason for the
current decline in exploration activity is that
Russian oil companies view their reserves to Oil exports
production ratio as relatively high and therefore External demand for Russian crude oil has been
do not see the need for making large investments steadily recovering after the downturn at the
in exploration. start of the 1990s (figure A). Some of the factors
responsible for the earlier decline included the
loss of subsidised former Soviet buyers, the
Domestic consumption depletion of large oil fields as a result of overpro-
Russia’s economic recession at the start of the duction during Soviet times, and the reorganisa-
1990s resulted in a sharp contraction in domestic tion of the oil sector (EIA 2005).
primary energy consumption. After reaching a Exports of crude oil and refined products
trough of 583 Mtoe in 1998, domestic primary from the Russian Federation have almost
energy consumption in the Russian Federation doubled from the historical low of 3.4 million
370 australiancommodities • vol. 12 no. 2 • june quarter 2005
russian oil and gas
Total domestic primary energy consumption,
7 Russian Federation
1992 2002 2010 2020
Mtoe % Mtoe % Mtoe % Mtoe %
Coal 132 17.0 107 17.2 118 16.7 125 15.6
Oil 221 28.5 128 20.7 149 21.0 171 21.3
Gas 364 46.9 326 52.6 371 52.4 433 54.0
Nuclear 32 4.1 37 6.0 45 6.4 47 5.9
Hydro 15 1.9 14 2.3 16 2.3 17 2.1
Other 12 1.6 7 1.1 9 1.3 10 1.2
Total 776 100.0 619 100.0 708 100.0 802 100.0
Mtoe = million tonnes of oil equivalent. Source: IEA (2004a).
barrels a day in 1995 to 6.7 million barrels a day period compared with relatively low domestic
in 2004, making the country the second largest oil demand.
oil exporter in the world (table 8). Exports of crude oil and refined products are
Non-CIS countries (countries other than for- projected to grow further to 7.3 million barrels
mer members of the Soviet Union including a day in 2010 and then to decline slightly to 7.0
Latvia, Lithuania and Estonia) accounted for million barrels a day in 2020 (table 4). Growth
most of the increase in exports, with their share in domestic consumption, projected to be slower
growing from 51 per cent in 1992 to 87 per cent than growth in production in the first decade,
in 2004 (table 2). will outstrip the pace of production in the second
As well as exports increasing in absolute terms, decade, leaving reduced domestic supply of oil
the proportion of total oil production exported available for export (IEA 2004a).
has also increased markedly. The proportion of
exports in the form of crude oil and refined prod-
ucts in total oil production has grown steadily, Gas exports
from 51 per cent in 1995 to more than 71 per The volume and share of gas exports in total gas
cent in 2004 (IET 2001, 2005). Exports were production have remained relatively unchanged
the main driver of oil sector growth over this since the start of the 1990s. Being sensitive to the
Top ten world exporters of oil and natural gas, 2003
8
Rank Oil exporters Oil exports a Natural gas exporters Gas exports b
mbd bcm
1 Saudi Arabia 8.3 Russian Federation 189.3
2 Russian Federation 5.8 Canada 102.2
3 Norway 3.0 Norway 71.0
4 Iran 2.5 Algeria 63.6
5 Venezuela 2.3 Netherlands 48.3
6 United Arab Emirates 2.3 Turkmenistan 42.8
7 Kuwait 2.0 Indonesia 41.4
8 Nigeria 1.9 Austria 26.6
9 Mexico 1.8 Malaysia 24.6
10 Libya 1.3 United States 19.6
World 45.8 World 783.5
a Net exports. b Exports include pipeline gas and LNG. mbd = million barrels a day. bcm = billion cubic metres.
Sources: EIA (2004); BP (2004); IEA (2004c); IET (2005).
australiancommodities • vol. 12 no. 2 • june quarter 2005 371
russian oil and gas
level of domestic gas consumption, exports were Crude oil export destinations, 2003
sustained over the period 1992–2004 (figure B),
at around 30 per cent of total gas production.
C CIS
Germany
However, the main focus of export supplies has Other central Europe
switched to non-CIS countries, whose share grew Italy
from 45 per cent of total gas exports in 1992 to a Poland
France
high of 72 per cent in 2004 (table 2). Netherlands
Net gas exports are projected to increase further Scandinavia
to 249 billion cubic metres in 2020, maintaining Spain
Greece
their share at 31 per cent of total gas production Other western Europe
(IEA 2004a). In contrast, the Energy Strategy United States
projects higher export supplies of gas, with the Turkey
China
share of exports reaching 38–40 per cent of total Japan
gas production in 2020. Larger amounts of gas Other
are expected to become available for export as a % 5 10 15 20
result of a projected decline in the share of gas
in the primary fuel mix, accentuating the coun-
try’s position as the world’s leading exporter of of Russian gas exports until 2020, the share of
natural gas (table 8). Increased export earnings gas exports to the Asia Pacific region is expected
could also help finance investments in the devel- to reach 15 per cent by 2020 from nil at present
opment of gas reserves (IEA 2002). (Government of the Russian Federation 2003).
The Russian Federation has long been
exploring ways to export oil and gas to the
Export markets Asia Pacific, where China, Japan and Korea
At present more than 90 per cent of Russian are the primary markets. This intent is strongly
oil exports are destined for Europe, including backed by reciprocal interest from large energy
CIS countries (EIA 2005; figure C). However, importers in the region, who seek to diversify
supplies of Russian oil to Europe are unlikely to their supply sources outside the Middle East and
expand significantly over the next ten to fifteen ensure regional energy security.
years. This reflects the partial redirection in oil
exports to other markets, such as the Asia Pacific
Top ten recipients of Russian natural gas
in order to take advantage of oil price differential
and the European market’s preference for higher 9 exports, 2003 a
quality Middle Eastern oil. Rank Country Imports
By 2020, the share of oil exports destined bcm
for Europe is projected to decline to 60 per cent
1 Germany 37.3
(MIE 2004), while the share going to the Asia 2 Italy 19.4
Pacific region is projected to reach 30 per cent 3 Belarus 19.0
from about 3 per cent in 2003. 4 Turkey 12.6
Europe and the CIS are also the main markets 5 Hungary 11.0
for Russian gas exports (table 9). Currently, 6 France 10.6
7 Poland 7.2
Russian gas provides almost a quarter of OECD 8 Czech Republic 7.0
Europe’s total gas needs (IEA 2004a), with 9 Romania 5.8
gas supplied mainly on the basis of long term 10 Finland 5.0
contracts (up to 25 years) on ‘take or pay’ condi- Total of above countries 134.9
tions. Sales volumes under existing contracts Total all markets 189.3
amount to 2 trillion cubic metres of natural
a Data are provisional for the OECD and are estimates for the non-
gas (Gazprom 2004a). Although European gas OECD countries. bcm = billion cubic metres.
demand is expected to remain the primary driver Source: IEA (2004b).
372 australiancommodities • vol. 12 no. 2 • june quarter 2005
russian oil and gas
The IEA has recently urged China, Japan and via pipelines in 2003, either cross-border or to
Korea to work together with the Russian Federa- sea terminals (OECD 2004). Higher oil prices
tion to develop Siberian oil and gas resources, as in recent years have made rail and barge trans-
these are projected to become a major source of port viable economic alternatives despite their
energy supplies to Asia (Hardy 2004). A major higher costs relative to that of pipelines. The gas
deal for supply of Siberian oil to the Asia Pacific pipeline system, the longest in the world (over
region has recently been finalised by Rosneft, the 150 000 kilometres), also serves as the main
new owner of Yuganskneftegaz, with expected transport mode for delivering Russian gas to
exports of approximately 1 million barrels of oil external markets.
to China until 2010, via railroad. With oil production and exports increasing,
The Sakhalin Island projects have resulted in a limited oil transport capacity has emerged as one
major development of oil and gas resources in the of the key constraints to further export expan-
Russian Far East. Sakhalin-1 and Sakhalin-2 have sion. Declining demand from eastern Europe
been implemented by a consortium of Russian and CIS countries has resulted in oil exports
and foreign companies on the basis of production being redirected to other international markets,
sharing agreements which are discussed later. mainly western and northern Europe. Major
The planned Sakhalin-3 oil and gas project is very bottlenecks are occurring at the ports and in the
large and incorporates three smaller projects that pipelines supplying those markets, especially on
are comparable with Sakhalin-1 and Sakhalin-2. the Black Sea.
Sakhalin-4 and Sakhalin-5 are also in the pre- Development of oil export pipeline infrastruc-
paratory stages. The combined output of these ture has been identified as one of the priority
projects will significantly exceed projected local tasks of the Russian Government, with the Baltic
and regional energy needs, with large volumes Pipeline System, East Siberia – Pacific Ocean
becoming available for export to neighboring and West Siberia – Barents Sea routes being of
countries and elsewhere. key importance (table 10).
North America is another important pros-
pective market for Russian oil and gas. The Exports to Europe
promotion of oil and gas exports to the United Russian crude oil flows to Europe through the
States is the focus of US–Russian energy Druzhba pipeline system and via Russian oil
cooperation (White House 2005). However, the ports on the Baltic and Black Seas (map 1).
initiatives underlying this energy cooperation The Druzhba pipeline with a capacity of 1.3
so far seem to lack significant support from the million barrels a day, was built in Soviet times
parties involved. Additional factors associated and remains the main artery for Russian crude
with slow progress in this export direction are oil exports to eastern Europe. The Latvian Baltic
the geographic remoteness of the market, and port of Ventspils was the main outlet for Russian
the United States being a large regional gas crude oil destined for northern European markets
producer itself. However, recent shortages in until Transneft, the state operator of the national
supply of natural gas in the region, followed by oil pipeline system, built its own Baltic terminal
a significant price hike, could stimulate progress at Primorsk, on the Gulf of Finland, as part of its
on gas projects for exports to north America. Baltic Pipeline System (BPS) in late 2001. The
recently approved expansion of BPS capacity to
1.2 million barrels a day is one of Transneft’s
Development of oil and gas export major projects and is expected to be completed
infrastructure by late 2005 – early 2006.
The Russian Black Sea ports of Novoros-
The Russian Federation has an extensive system siysk and Tuapse, as well as the Ukrainian port
of oil and gas pipelines, reflecting the inland of Odessa, are used to reach western European
location of major oil and gas reserves. More markets (IEA 2002). Black Sea ports are running
than 80 per cent of Russian oil was exported at full capacity, and there is little additional
australiancommodities • vol. 12 no. 2 • june quarter 2005 373
russian oil and gas
Major existing and proposed oil pipelines and sea terminal capacities for export and
10 transit of oil from the Russian Federation to non-CIS destinations
2003 2005 2010 2015 2020
mbd mbd mbd mbd mbd
Transport system
Baltic Pipeline System (BPS) – sea port of Primorsk 0.60 1.20 1.20 1.20 1.20
Other north western sea ports 0.12 0.30 0.30 0.30 0.30
Druzhba pipeline 1.27 1.33 1.33 1.33 1.33
Transneft a pipeline system – Black Sea ports 1.26 1.26 1.26 1.26 1.26
Caspian Pipeline Consortium (CPC) b 0.4 0.56 1.4 1.4 1.4
East Siberia (Taishet) – Pacific Ocean 0.6 1 1.6
West Siberia – Timan-Pechora – Barents Sea 1 1.6
Total 3.64 4.65 6.09 7.49 8.69
a Monopoly state operator of the Russian trunk pipeline system. b CPC connects Kazakhstan’s Tengiz oil field with the sea terminal near Russian
port of Novorossiysk. mbd = million barrels a day.
Source: MIE (2004).
throughput potential. Congestion is also occur- greater security of alternative gas supplies can
ring because of bad weather conditions and be ensured.
bottlenecks on the Turkish Straits.
Two major proposals were developed to Exports to Asia Pacific markets
bypass the Turkish Straits — building an oil One of the major proposed projects for supplying
pipeline across the Turkish territory to the Russian oil to the Asia Pacific region is the
Aegean coast (Trans-Frakian Kiyiköy–Ibrikhaba construction of a 1.6 million barrels a day pipe-
route) or building one through Bulgaria and line from East Siberia ending near the Russian
Greece (Burgas–Alexandrupolis route). Neither Pacific port of Nakhodka, enabling shipments to
project has made much progress since they were Japan, Korea, China and the United States (map
proposed several years ago (Transneft 2004; 1). The pipeline’s construction faces several major
Krutikhin 2005), perhaps because of the poten- difficulties, including high pipeline construction
tial decline in the attractiveness of the European costs, technical complexity of the project, the
market for Russian oil supplies in the medium need for costly greenfield oil developments in
to long term. West and East Siberia, and the possibility of
Russia’s natural gas exporting strategy to the pipeline’s underutilisation. In late 2004 the
Europe is based on new large scale projects, Russian Government commissioned a feasibility
offshore resources development in the north and study of the project, with the results expected in
the Yamal Peninsula projects. These undertak- mid-2005.
ings may require investments of tens of billions The major potential sources of Russian gas
of dollars, and their realisation is likely to for Asia are East Siberia and the Far East, which
depend on favorable prices for natural gas and together are scheduled to produce up to 50 billion
large markets being secured to allow investment cubic metres of natural gas a year by 2010, and up
funds to be mobilised. to 110 billion cubic metres by 2020 (Government
In the medium term, however, rising compe- of the Russian Federation 2003). A large scale
tition and liberalisation of European energy project for supplying Russian gas to the Asia
markets do not provide sufficient guarantees that Pacific region involves building a pipeline from
these projects will be implemented. Moreover, it East Siberia to Dalian and Beijing in China, with
is likely that European importers of natural gas an undersea branch to Korea (map 2). However,
will be interested in diversification of supplies the export prospects of the project seem some-
to enhance energy security, thus reducing what unclear at present, as Gazprom, the coordi-
dependence on Russian imports, provided that nator of Russian gas exports to the Asia Pacific
374 australiancommodities • vol. 12 no. 2 • june quarter 2005
russian oil and gas
region, appears to prioritise Sakhalin Island proj- Japan is the proposed destination for Sakhalin-1
ects over East Siberian gas developments. gas, recent reports suggest that the final destina-
The Sakhalin Island projects are renowned tion of Sakhalin-1 gas is not decided yet, with
for their gas export initiatives; however, there are northern China being mentioned as one of the
also plans for oil production and exports. While potential buyers. The limited national gas pipe-
Box 3: Major export projects targeting the Asia Pacific region
East Siberia – Pacific Ocean oil pipeline developments in East Siberia and the Far East and
The proposal for an oil pipeline from Taishet in gas exports to the Asia Pacific region, is report-
East Siberia to the Pacific Ocean was developed edly prioritising Sakhalin projects over Irkutsk
in accordance with the Energy Strategy and gas developments. There are still a lot of issues,
based on the long term forecasts of oil production which need to be resolved before the project can
and consumption in the Russian Federation and proceed. Project implementation is likely to prog-
future demand from Asia Pacific markets. Oil is ress at a faster rate once Gazprom and TNK–BP
to be supplied from the West and East Siberian reach an agreement on Gazprom’s participation in
fields. The Russian Government’s decision in late the project.
2004 to commission a feasibility study for the
East Siberia–Pacific Ocean route has ended the Sakhalin Island oil and gas projects
decade long rivalry between China and Japan for Total recoverable reserves of the Sakhalin-1
the pipeline’s destination, practically supporting project area are estimated at 2.3 billion barrels of
Japan’s option. However, a potential branch to oil and 485 billion cubic metres of natural gas. The
China’s Daqing, favored by China, has not been Sakhalin-1 project is expected to produce approxi-
fully dismissed yet. mately 0.25 million barrels of export quality oil
If built, the Taishet–Nakhodka pipeline would be a day by the second half of the current decade
one of the longest in the world (4130 kilometres), (Sakhalin-1 2005). For gas exports, the Sakhalin-1
over harsh terrain. The state monopoly over oil project consortium plans to build a pipeline with
pipelines eliminates private capital participation a design capacity of 8 billion cubic metres a year,
in the project, which is estimated at US$11–16 which could run to Japanese Hokkaido Island with
billion, and leaves the burden of raising the required an extension to the Niigata or Tokyo area.
funds solely in Transneft. The costs of bringing on The recoverable reserves of the Sakhalin-2 main
additional capacity from greenfield developments project fields are estimated at 1 billion barrels
in West and East Siberia are likely to be consider- of oil and more then 500 billion cubic metres of
ably higher than for existing brownfield projects in gas. The Sakhalin-2 project currently produces
West Siberia (IEA 2004a), leaving aside the possi- about 0.07 million barrels of oil a day during the
bility of underutilisation of the expensive pipeline. summer season, but is expected to produce oil all
The proposed high transport tariff could also place year round from 2006 (Sakhalin Energy 2004).
restrictions on export volumes. The project consortium has recently signed long
term agreements with Japanese and Korean utility
Irkutsk gas project companies for the supply of almost 5 million
The project to supply natural gas to China and tonnes of LNG a year (7 billion cubic metres),
Korea via a pipeline from the Kovykta gas field with the first contracts to start in 2007. The project
near Irkutsk in East Siberia was proposed by consortium has also finalised a contract to supply
RUSIA Petroleum with British–Russian TNK–BP 1.6 million tonnes of LNG a year (2.2 billion
as its major shareholder. Explored reserves of the cubic metres) over twenty years to the Energia
Kovykta field are deemed sufficient to produce Costa Azul future terminal in Mexico on the
more than 30 billion cubic metres of natural gas west coast of north America. This deal brings the
a year for over thirty years (RUSIA Petroleum total volume of natural gas committed from the
2004). However, Gazprom, which was appointed Sakhalin-2 project to 7 million tonnes a year (10
by the Russian Government as a coordinator of gas billion cubic metres).
australiancommodities • vol. 12 no. 2 • june quarter 2005 375
russian oil and gas
line network in Japan and competition from the
East–West pipeline in China create barriers to the Box 4: LNG projects for the east
imports of Russian pipeline gas. The predomi- coast of north America
nant reliance of prospective gas buyers, such as
A potential gas supplier for the north American
Japan and Korea, on LNG also forces Russian market is the Shtokmanovskoye field in the
gas producers to seek alternatives to pipeline Barents Sea shelf, capable of producing up to
supplies, such as LNG. 60 billion cubic metres of gas a year, with the
The Sakhalin-2 project consortium is building full period of development being fifty years
the first Russian LNG plant in Prigorodnoye on (Rosneft 2004). The project envisages construc-
the south of Sakhalin, which is scheduled to reach tion of an offshore production platform, an
its design capacity of 9.6 million tonnes of LNG LNG plant and an export terminal near the ice-
a year in 2008. Sakhalin-2 has already signed free port of Murmansk on the Kola Peninsula.
long term agreements for supply of LNG to Asia Gazprom, the sole owner of the Shtokmanovs-
Pacific and north American markets (box 3). koye field, plans to decide on an international
project partner(s) this year, followed by supply
Exports to north America deals later in 2005 and 2006 (Platts 2004). Start
of production is currently scheduled for 2010,
A major proposal for oil exports to north with the United States a primary destination for
America involves constructing a pipeline with LNG supplies.
a design capacity of 1.6 million barrels of oil a Another potential option to expand LNG
day from West Siberia to the Murmansk port on supplies to north America is building an
Barents Sea, or building a new port at Indiga on LNG terminal in the Gulf of Finland near St
the Barents Sea as an alternative pipeline desti- Petersburg. Gazprom and PetroCanada signed
nation (map 1). The north American project a memorandum of understanding to look at
faces a number of counterarguments including the feasibility of constructing an LNG plant
potentially insufficient reserves of light crude in the Leningrad region and the possibility of
LNG supplies to a terminal in Canada by 2009
oil preferred by the north American market, lack
(Gazprom 2004b). The Canadian terminal
of support from the United States, and more could provide Gazprom faster access to the US
importantly the need to compete with the higher market given the slow pace of approval of new
quality oil supplies from the Middle East (Vain- LNG import terminals in the United States.
shtock 2004), which could result in less favor-
able prices for Russian oil exports.
Although north America is considered the
main market for the West Siberia – Barents Sea north American export projects appear to receive
route, it could potentially become a more cost less priority compared with the Asia Pacific proj-
competitive way of shipping Russian crude oil ects, perhaps as a result of lack of support from
to closer European markets. This, however, may the parties involved.
make it a potential competitor with the Baltic
Pipeline System, Transneft’s current priority,
partly explaining its willingness to put off the Conclusions
project until later in the decade. Since the end of the 1990s the importance of the
North American gas projects envisage LNG Russian Federation as a major world oil and gas
supplies either from the port of Murmansk on supplier has increased. It is currently the world’s
the Barents Sea or from an LNG terminal on largest gas exporter and the second largest oil
the Gulf of Finland near St Petersburg (box exporter. Oil and gas supplies are backed by
4). Before the start of direct exports from the abundant indigenous reserves.
Barents Sea, Gazprom plans to swap its pipeline The potential for future supplies of oil and
gas exports to Europe with LNG to be shipped gas to the international market is significant.
to the United States, with shipments potentially Oil production is expected to continue to grow,
starting as early as this year (Platts 2004). The although at a slower rate than over the past few
376 australiancommodities • vol. 12 no. 2 • june quarter 2005
russian oil and gas
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