Russia is approaching an historic moment of opportunity as a world energy superpower, according to speakers at a day-long workshop Oct. 25 at Rice University's James A. Baker III Institute for Public Policy. The Petroleum Energy Center of Japan (PECJ) cosponsored the event.
Among the topics discussed were Russia's energy supply and its influences on pricing, security, and oil geopolitics. Amy Myers Jaffe, an energy fellow at the Baker Institute, presented key findings of a new study compiled by the institute and PECJ entitled "The Energy Dimension in the Russian Global Strategy."
Russian crude oil exports, Jaffe said, are expected to rise by 2 million b/d by 2008, based on known resources and existing cash flow. According to the Russian Ministry for Industry and Energy, Russia exported 4.05 million b/d (excluding exports to countries of the Commonwealth of Independent States) between January and October—an 18% increase over the same period last year.
This rise in exports, the study said, could come mainly from production areas currently controlled by OAO Lukoil, OAO Yukos, TNK-BP, and to a lesser extent OJSC Surgutneftegas.
"The capacity for Russian companies to expand their exports varies substantially, and [OAO] Tatneft and Surgutneftegas are likely to struggle even to maintain current export levels," the study said. "Russia's major oil companies vary considerably in their ability to fund capital investment programs from internally generated capital flows.
"For several leading companies, such as TNK, [OAO] Sibneft, and Lukoil, capital demands are projected to rise dramatically relative to capital inflows."
The study stated, however, "US hopes that Russia might be a savior to the inherent problems of relying too heavily on Middle East oil could prove optimistic in terms of the pace at which new Russian export infrastructure can be rolled out or even naïve in terms of Russia's ultimate goals for its oil diplomacy."
Also, state control of Russian pipeline systems is "here to stay," Jaffe said. In addition, questions can be raised about where Russia will procure financing of certain pipeline projects.
"Raising [pipeline] tariffs is not going to be enough," Jaffe said.
Oil production
Russian production, increasing since 1999, helped raise output from outside the Organization of Petroleum Exporting Countries by 700,000 b/d last year, to 48.8 million b/d.
Russian increases were "critical in offsetting declines in production in the US and other mature basins," the study said. "In fact, non-OPEC production outside the Former Soviet Union actually declined over the course of 2003 by 200,000 b/d to 38.4 million b/d, instead of increasing, as had been the norm throughout the late 1980s and 1990s."
FSU output, mostly Russian, increased by 900,000 b/d in 2003, the study said. While non-OPEC production from outside the FSU will be flat in 2004, Russian and Caspian production will again increase by about 900,000 b/d. The 2004 gain will come from further growth from Russia and an export boost from Kazakhstan as throughput increases on the Caspian Pipeline Consortium pipeline.
Noting the recent volatility of oil markets, the study said, "Without the contribution from increasing Russian and Caspian oil production, the supply-demand picture in international oil markets would have been even more unstable."
For 2005, forecasts vary, the study said. "Most analysts agree that non-OPEC production outside the FSU is unlikely to make major gains, leaving oil markets dependent on the policies of OPEC and Russia to meet growing oil demand."
Oil price influences
Russian oil executives and government analysts have suggested that Russia establish a strategic oil reserve, managed by the government, that could be tapped to temper price fluctuations.
"The idea, however, is not one that has received the serious attention of Russia's top leaders," the study said.
"Instead, diplomatic visits with Saudi Arabia have been initiated, perhaps as a hedge against the possibility that major oil consumers like China and the US could develop closer ties."
Price volatility and market uncertainty, the study said, create "an opening for Russia to step in as the world's most important energy provider—a goal aspired to by Russia's President Vladimir Putin, elected to a second term in March."
So far in his presidency, the study said, Putin "has responded to this circumstance by initiating high-level energy cooperation dialogues with important oil consuming countries, including the US, China, Japan, and the [European Union], and by commencing a breathtaking reorganization of its industry at home."
Outcomes of these efforts are far from certain, the study said, adding, "Political, bureaucratic, commercial, and regulatory barriers continue to plague Moscow's ability to deliver the goods."
The study said: "At stake could be Russia's return to superpower status, as well as the stability of the world energy supply. How Russia manages the future of its energy sector will have bearing on both, and choices made in the next year or two will matter tremendously as to whether Russia can become a global supplier of major consequence—rather than remain an important, but limited regional European energy supplier—or whether the Russian industry will lose some of the momentum seen over the past 3-4 years and tread water, passively free riding off high world prices."
Geopolitics
The attacks of Sept. 11, 2001, the subsequent war on terror, and the US invasion of Iraq, the study noted, "have dramatically reshaped oil geopolitics, fostering new alliances and straining old ones."
In addition, "The open-ended US occupation of an Arab country in the heart of the Middle East marks a decisive break with past US policy toward the region," the study said. "The US declaration of the doctrine of preventative war may be even more far-reaching in its consequences. These revolutionary policies could have dramatic—if still emerging—implications for the geopolitics of oil."
International oil companies have been cautious about bolstering their exploration budgets in non-OPEC areas, the study said, "due to pressure from shareholders to provide short-term returns on share prices and dividends, as well as slow response to the possibility that oil prices will remain high for a prolonged period of time."
In late 2005, an oil supply increase is expected from Azerbaijan, the study said, "after the inauguration of the long-awaited Baku-Ceyhan line, and some new production will be coming on line in Kazakhstan, West Africa, Canada, Mexico, and elsewhere in non-OPEC."
However, "With output declines anticipated in the North Sea, Egypt, and possibly the US, it is likely that the level of growth in non-OPEC production will hinge greatly on the policies inside Russia," the study forecast.
Transport bottlenecks
The potential for continued strong oil production growth, the study forecast, is "real" in Russia, given the nation's extensive resource base and currently high oil prices.
"Sustainable growth" in Russia's oil exports, the study said, "hinges squarely on the successful removal of at least two of the three key transport bottlenecks that continue to drive the development of the Russian oil industry."
The first of these bottlenecks "is the absence of a major pipeline outlet linking east Siberian oil with the Asian market." Repairing the other two bottlenecks, the study said, "requires the development of a major Barents Sea outlet to deliver crude oil to ocean-going transport in ultra large tankers and the addition of pipeline routes from the Black Sea to the Mediterranean that will bypass the Bosporus bottleneck to tanker trade."
The study concluded, "Without the development of this infrastructure, Russian production may fail to meet robust projections."
The study said, "Eliminating these bottlenecks is critical if President Putin is to meet his declared, ambitious target of doubling GDP by 2010." In a speech given May 26 to his countrymen, Putin outlined five pipeline projects that could help Russia diversify and increase its oil exports. These included:
Expansion of the Baltic pipeline to Primorsk on the Gulf of Finland.
Construction of a line from West Siberia to the northwest coast of the Barents Sea.
Start-up of a pipeline from East Siberia.
Construction of a bypass skirting Turkey's Bosporus Strait.
Connection of the Druzhba pipeline to Europe by reversing the Adria line to terminate at the deepwater Omisalj terminal on the Croatian Adriatic.
"Today, the fate of export infrastructure development rests squarely with Transneft, the Russian state pipeline monopoly," the study said. "Transneft is still perceived by many experts to represent the single largest impediment to reforming the Russian oil sector to operate according to market principles and to allowing Russia to achieve the full potential of its bountiful energy resources."
