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CIAO DATE: 12/03
International Affairs:
A Russian Journal
The International Oil & Gas Market and Russia
V. Kaliuzhnyi *
RUSSIA is one of the main players on the international oil and gas market. Our reserves and real per capita production of primary energy resources figures are roughly five times greater than the world average. But that is what God gave us. Our task, the task of the Russian state, is to use this wealth in a thrifty manner.
No important problem can be discussed without taking account of the postwar situation surrounding Iraq. What happens in Iraq directly impacts on the oil market. Russia's position on Iraq was set out by President Vladimir Putin right from the start. There are many forecasts today about likely impacts of the war on the oil industry and the world economy as a whole. While forecasts range widely and some are totally opposite, negative forecasts prevail.
Stability and predictability are the cornerstone of normal development. Iraq accounts for 3 percent of the world market today. The Persian Gulf's role remains quite sizable although its share has fallen in recent years from 40 to 30 percent. Developments in Iraq coupled with the promise in the future of so-called democratization of the Islamic world promise nothing but instability, and reliable oil shipments are unlikely. As a result regions like the Caspian, Central Asia, and Africa are being viewed with growing interest. Increased attention to Russia in this context simply puts me on guard.
It is necessary to revert to reliability and stability. And this requires leading the Iraqi problem as soon as possible into the channel of political settlement on the solid foundation of the UN Charter and international law.
Unlike most of the world oil export leaders, Russia has no government sector that dominates or at least pulls sufficient weight in oil production. The institutional structure of Russia's oil complex is more like that of Western transnational corporations. The only tools the Russian government can control the country's oil companies with are export duties, oil export quotas and its monopoly on transporting oil via trunk pipelines of the government-owned Transneft company.
There is a heated debate in Russia about its energy strategy in the coming ten- and twenty-year periods. Views differ widely but everyone agrees that Russia should remain among major oil and gas exporters and consolidate its positions on the world energy market. The biggest controversy is how much oil and gas Russia should export.
Talking about oil, we should decide how much oil to produce every year over the coming twenty-year period. As many people know, Russia produced 340 million metric tons of oil in 2001 and 380 million tons in 2002 to come second to Saudi Arabia as exporter (188.5 million tons, including 152.9 million tons to Western countries). Some people, I would call them "maximalists," insist that Russia should produce 450 million to 500 million tons of oil a year.
I cannot agree. We should recall that the present high rate of production has been achieved in the oilfields surveyed and developed back in the Soviet times. As regards the opening up of new deposits necessary for future production growth the situation is increasingly deplorable. Beginning from 1994, the rate of production growth has been all the time greater than the rate at which the reserves grew. Over recent years, only 60 percent of the country's oil resources have been tapped. By 2005, we will have 75 percent of hard-to-recover reserves.
There are serious fears about the overall position with regard to developing oil and gas fields. The well stock structure has deteriorated, the overall number of wells has declined and the number of wells out of operation is growing. Let me note that the comparatively small increase in resources in recent years has been achieved through supplementary exploration of the earlier discovered deposits and through placing some of the reserves in the preliminary estimated category into the category of explored reserves. But there is a rapidly growing list of deposits written off as unconfirmed. The generally deplorable position with regard to mineral raw material resources is even more so because of the shortage of investments in exploration and modernization of the fixed capital stocks.
The competitive edge of Russian oil and gas on the world market depends above all on their production, processing and operation costs. Unfortunately, none of the production cost elements grows cheaper. Whereas OPEC countries spend not more than $3 per ton produced it costs to Russia $5 to $7. Increasing production to 500 million tons, the cost will, I think, go up to $15 or $18.
This is why I am against uncontrolled production increases. They can have rather serious impacts. I think that if our oil production reaches 500 million tons by 2010, we will end up producing as little as 250 million or 260 million tons by 2020. Stepping up oil production and export as its resources decline can really cost Russia its oil export niche on the international market.
Another arguable point is the quality of export and how it relates to domestic consumption. I have always advocated greater attention to the domestic market and I am convinced that trying to export more oil is not in Russia's national interests. Export is a hobby of the oil companies. We should not allow the country "take the oil needle" and become purveyor of raw materials for industrialized countries.
Furthermore, the emphasis should be on exporting refined oil products. This is of major importance for developing Russian high technology not only in the fuel and oil complex but for the entire economy and social development of Russia's regions. The present situation where Russian oil refineries are operating at 70 percent of their capacity and the intensity of refining is the selfsame 70 percent cannot be regarded as normal. The position in petrochemical production is even worse. It is pertinent to recall that the great Russian scientist Dmitrii Mendeleev said that using oil for fuel is the same as burning money to heat a home.
I would like to mention separately the ever-growing importance of such a segment of the hydrocarbons industry as the production of liquefied gas. The Russia-U.S. energy summit in Houston devoted a good deal of attention to this matter. The rapidly growing cost of gas production and the limitations of the European pipeline system is a reason to think that liquefied gas can successfully compete with oil and natural gas. Russia is considering big plans to increase the production and export of liquefied gas. In particular, it studies the possibility of building export terminals for liquefied gas on the White Sea near Arkhangelsk and on the Baltic Sea. All Sakhalin shelf projects attach a good deal of importance to liquefied gas.
IN ORDER TO DEVELOP an optimal model of cooperation in the field of energy with the rest of the world Russia should not only meticulously compute the production, internal consumption and hydrocarbons export balance but also select markets and export routes.
Russia's main oil and gas markets are in Europe. They are EU countries, countries of Central and Eastern Europe, and Turkey. The stable demand for fuel in Europe prompts Russia to continue its oil and gas exports there.
One of the important components of cooperation between Russia and European states is the energy dialogue initiated by the heads of the European Union during the Paris Summit late in 2000. We assume that the energy dialogue will promote stability and equilibrium of the energy market, stronger energy security on the continent and further integration of Russia and Europe.
Energy exchange expansion should proceed hand in hand with saving it and calls for its umhinged transit from Russia to the end users in the EU and access for Russian economic operators to internal energy facilities of the European Union.
Practical implementation of agreed cooperation plans has started in pursuance of the Russia-EU Brussels summit (Oct. 3, 2001) decisions. We talk about the development of large-scale pilot investment projects in production and transportation of fuel, joining up both sides' electric power grids, the northern trans-European gas pipeline, and the development of the Shtokmanovskoe deposits.
There are plans to adopt energy-saving technologies in three Russian pilot regions (Arkhangelsk, Astrakhan and Kaliningrad oblasts) and to upgrade the regulatory framework of energy-related cooperation.
An ad hoc group of experts is developing a better model of financial and organizational support for priority projects that produce and transport sources of energy. This is in line with one of the tasks of the energy dialogue - to create favorable conditions for attracting European investments to Russia's energy complex.
Practical studies are under way of technical and organizational aspects of joining up the electric power systems of Russia and the EU. Once they start to operate together, as these sectors in Russia and the EU become liberalized, the general energy security will increase.
In November 2002, Moscow opened a Russia-EU Energy Technologies Center. Cooperation between Europe and Russia in technology and exchange of know-how has great untapped potentials.
At the same time, sustainable development of energy partnership of Russia and the European Union calls for resolving a number of issues.
It is necessary to find as soon as possible an economically acceptable solution to the incompatibility of Gazprom's long-term contracts to some of the EU competition rules. Consultations on this subject are in progress. If unresolved, this issue can derail the Russia-EU energy dialogue with regard to its most important element - the attraction of investments for major production projects and transportation of Russian gas to Western Europe. On the other hand, such contracts have been for decades the foundation of reliable supplies of these resources to Europe and practically contributed to the continent's energy security and economic stability.
Finishing touches will have to be put to the package of measures to provide EU government agencies assistance in real terms, not just in words, to private investors in Russia's energy.
The positive experience accumulated in the Russia-EU energy dialogue can prove useful in discussing avenues and methods of in-depth cooperation between Russia and the EU in some other priority areas. As for energy security of Greater Europe, it can in time become one of the main structural elements of another, even greater project, the creation of a common European economic area.
GIVEN the weight of the Russian fuel and energy complex on the world energy market, it is in our interests not only to preserve but also diversify our markets. The American market seems to be a promising option. Russia's economic cooperation with the United States is growing. As of April 1, 2002 the Russian economy has been given a free market status under U.S. legislation.
One of the basic elements of Russian-American cooperation is the energy dialogue launched by the Russian and U.S. presidents in May 2002. A number of objective prerequisites exist for this.
Above all, tendencies of globalization and increasing interdependence of different world economies are having profound impacts on the fuel and energy sector. A global market of energy sources is taking shape under our eyes. Processes taking place in this sphere are having an effect on everyday life of millions of people. It is hardly too much to say that energy is, as it was before, the key element of sustainable socioeconomic development today.
Globalization of energy markets has quite logically brought our countries to the point where a need for a closer and full-scale Russian-American business partnership will have to be put on the agenda. The basis of this partnership is both countries' shared interests and needs. They consist in bilateral desire to make world energy markets stable and predictable, maintain stable prices of hydrocarbons and, finally, observe a balance of interests of the producers and consumers of energy sources.
But in order to make the dialogue really benefit both parties and thus yield specific results, much work will have to be done and considerable joint efforts will have to go into it.
The statement made by the Russian and U.S. president during their meeting outside St. Petersburg last November stressed that the energy dialogue had been initiated to consolidate in every way relationship between our countries and strengthen global energy security, international strategic stability, and cooperation between regions.
A key energy dialogue event came in early October 2002 in Houston in the shape of the first Russia-U.S, energy summit bringing together representatives of government, business, and academic circles of both countries. More than 70 fuel and energy companies from both countries contributed to its success.
Let me recall some of the summit results. Contracts were signed to sell Russian crude oil and oil products on the U.S. market. These shipments are already contributing in albeit a small way to stabilizing the Russia-U.S. trade as a whole. An understanding was reached to attract considerable U.S. investments in the construction of deep-water ports and extension of the Russian pipeline system.
The major project of the Russia-U.S. energy dialogue is an oil pipeline between Iaroslavl and Murmansk and the construction of a deep-water oil terminal in the ice-free Murmansk port to receive tankers of more than 500,000 tons deadweight to carry Russian oil to the United States among other countries. We expect the project to go ahead before the end of this year. It has been announced that the government will meet sometime during the first six months of this year to examine a program of developing oil and gas provinces in Western Siberia and on the Arctic shelf. The program is closely linked to using the Murmansk transportation facilities.
We approve efforts that are part of the dialogue to train experts and carry out fuel and energy research and in particular to set up a corresponding joint center on the premises of the International Institute of the Fuel and Energy Complex.
A second energy summit is scheduled to meet in Moscow in September 2003. One of its important tasks is to extend the dialogue to some other areas, like for example, the electric power industry. Some of further promising projects have to do with increasing energy efficiency, developing renewable sources of energy, supporting the coal industry, using clean coal technologies, and environmental protection.
The above does not mean that our relationship with the United States is all smooth sailing and there are no differences. They do exist and are of both objective and subjective nature. Some interests do not coincide and views of some or other events differ. Similar problems are still found also in the economic sphere. Specifically, Russia is still subject to the Jackson-Vanik Amendment, which cannot be described other than a Cold War anachronism.
I hope these problems will be finally resolved in the spirit of partnership.
EXPORT OF HYDROCARBONS to the East is a very promising prospect for Russia. China is of special interest there. By 2020, China may need additionally 200 million tons of oil. That would make it the biggest buyer of oil. Plenty of room for Russian oil companies indeed. The China market is especially attractive for Russia because its main oil and gas fields are in Siberia and its Far East. This is virtually next door. We talk about deposits on the Sakhalin shelf, East Siberia platform, Chukotka and the Sea of Okhotsk. Oil production in these areas is expected to grow steadily in the period until 2020 to reach 60 million to 70 million tons a year. Thus, China is likely to import by 2020 approximately 50 million tons and more.
Russian oil exports to the East are small today because there are no pipeline networks and the resources are underdeveloped. The situation will improve once an Eastbound oil pipeline is built from the Irkutsk region. There are debates about where the projected pipeline should terminate. Some people say it should be Daxin, China, while others think it should be Nakhodka. Some also favor both. That is what will finally happen, perhaps. My opinion is that the first pipeline should be built to China.
Russia's strategic energy policy in the CIS favors wider and deeper integration on the entire post-Soviet area. It is very important that Russia and the other CIS countries undertake major joint energy projects, build up their energy security and develop the institutional and regulatory framework of cooperation in fuel and energy.
Especially pertinent it is to jointly design a concept of energy balances of the CIS. This is quite realistic. It is for a good reason that the USSR was developing for decades a single infrastructure of its fuel and energy potential and especially its pipeline system.
Among the Commonwealth countries with which Russia cooperates closely in fuel and energy are Kazakhstan, Ukraine, and Belarus. Azerbaijan and Turkmenistan are its important partners.
Another attractive idea is to set up an alliance of Eurasian producers of gas to include ex-Soviet republics. An important step toward this was the joint statement in Almaty by the presidents of Russia, Kazakhstan, Uzbekistan, and Turkmenistan on March 1, 2002. It stressed the special importance of cooperation between these states in energy policy and protection of natural gas producer countries.
We should mention the strategic pipeline projects already completed and those being currently built. The system of Caspian Pipeline Consortium (CPC) has been operating for more than a year now, the Baltic Pipeline System (BPS) is now operating at full capacity, the unique Blue Stream pipeline across the Black Sea is now in operation, and an agreement has been signed to link the oil pipelines Druzhba and Adria. Talks are in progress on a more efficient use of the oil pipeline between Baku and Novorossiisk. The project gains an even greater importance because of the projected oil pipeline between Burgas and Alexandroupolis.
According to the latest decision, the capacity of existing pipelines should be used to a greater extent to increase the throughput of the Transneft system by 17 million tons a year.
We are interested in a stable partnership both with countries that produce and consume energy resources so as to further develop transportation infrastructures, guarantee safe transportation of oil, maintain favorable prices on world markets and see to it that Russian companies have access to gas and oil fields in other countries.
Russia is expanding business contacts with the International Energy Agency (IEA). An IEA report dealing with Russia's fuel and power industry was presented this spring in Moscow. It contained a detailed analysis of Russia's energy policy now that the country's fuel and energy complex is being run on free-market lines. Importantly, leading Russian experts contributed to compiling this report.
We also maintain relations with OPEC. While we need not join this organization we should stay close to it and participate in setting OPEC's international energy policy. Our interests coincide on many points. Like OPEC, we, naturally, are interested in stability and predictability of oil markets, and most certainly in preventing sharp fluctuations of prices.
Endnotes
Note *: Viktor Kaliuzhnyi, Deputy Foreign Minister of Russia, special representative of the President of Russia on Caspian Sea status settlement. Back