RUSSIAN OIL AND NATURAL GAS:DEPENDENCY ON EUROPE By William M.C. Phillips 30 August, 2007 NS 3041, Professor Robert Looney
RESEARCH QUESTION • What is Russia’s Dependency on Europe’s energy consumption?
Overview • I. INTRODUCTION A. SUMMARY OF CURRENT ISSUES B. CONTEXT OF RUSSIAN ENERGY EXPORT • II. RUSSIAN OIL AND NATURAL GAS EXPORTS A. OIL AND NATURAL GAS RESERVES AND PRODUCTION B. EXPORTS TO EUROPE C. REVENUES D. ENERGY STRATEGY
Overview (cont’d) • III. RUSSIAN OIL AND NATURAL GAS ASSESSMENT A. STRENGHTS B. WEAKNESSES C. OPPORTUNITIES D. THREATS • IV. CONCLUSIONS
II. RUSSIAN OIL AND NATURAL GAS EXPORTS • A. OIL AND NATURAL GAS RESERVES AND PRODUCTION • OIL • 8th in world for known reserves (60 bbl, + 67 unproven) • 2nd for production, 9.5 M bbl/d (Only Saudi Arabia is more) • NATURAL GAS • 1ST in world for known reserves • 27.5% of world’s known supply (Iran is second, at only 15%) • Norway, Algeria, Netherland = only 5% • 1st in Production –21.8% of world production (U.S. 19%, domestic)
II. RUSSIAN OIL AND NATURAL GAS EXPORTS • B. EXPORTS TO EUROPE • OIL • 3/4 (6.7 M bl/d) exported from Russia • 2/3 of all exports goes to Europe (West, Central, East) • NATURAL GAS • 7.1 tcf exported • 65% of all exports went to Europe • Germany, Italy, Turkey, France, Hungary, and Finland (majors) • 100% exported through pipelines • Direct, fast, cheap
II. RUSSIAN OIL AND NATURAL GAS EXPORTS • C. REVENUES • OIL AND NAT GAS • 50% of all export revenue and • 37% of state budget revenues in 2006 • State revenue sensitive to world market prices • Affects reinvestment in infrastructure, technology, and efficiency improvements for future growth • GDP • Steady growth, 6.5% in 2006 • 37% of State Revenue from oil and gas exports • Nearly 2/3 of both export to Europe • 1/4 of state budget depends on exports to Europe
II. RUSSIAN OIL AND NATURAL GAS EXPORTS • D. ENERGY STRATEGY • Moved towards privatization until 2003 • Oil prices higher, critical to state revenues • Shift to state control for protection (51%) • Gazprom • Sibneft, Yukos… • Sakhalin II • Pipelines, 100% • Export 100% • Clear indication Russia aware of oil and nat gas as strategic national interest
III. RUSSIAN OIL AND NATURAL GAS ASSESSMENT • Strengths • Plentiful Oil and Nat Gas Reserves • Revenues in the future should remain high • Robust Pipeline system with diversification plans • Adria pipeline: 300,000 bbl/d increase • Sakhalin II and East Siberia to Asian markets • Druzhba, Yamal II, Blue Stream, Nord Stream
III. RUSSIAN OIL AND NATURAL GAS ASSESSMENT • WEAKNESSES • Tarnished reputation as ‘reliable’ source • Lack of competition, monopolistic practice • No incentives for investment, which = future technology, efficiency, growth • Reduces external financing (high risk, low returns) • Transaction costs due to multi-country transport • Production capacity maxed out, no excess • Inefficient domestic consumption decreases export revenue opportunity
III. RUSSIAN OIL AND NATURAL GAS ASSESSMENT • OPPORTUNITIES • Increase exports to Europe with diverse supply system (contract caution) • Expand more rapidly to Asian market • Kovykta Natural Gas pipline to China, South Korea • Increase revenues • Diversifies revenue source (portfolio protection) • Increase domestic energy efficiency • Nuclear, wind, hydropower • Invest in technology…both slow, but expands exports
III. RUSSIAN OIL AND NATURAL GAS ASSESSMENT • THREATS • Loss of European market share • Alternate oil and natural gas sources (Norway, Algeria, Libya, Iran, Caspian Basin?) • Alternate energy methods: Nuclear, hydro, wind, bio-fuel • Disruption of exports • Accidental, environmental, or terrorism • Reduced ability to meet domestic demands • Decline in oil and natural gas prices
CONCLUSIONS • Russia is heavily reliant on oil and natural gas export revenues • Russia is dependent on Europe, which makes up a large portion of those revenues • Russia must maintain demand stability in Europe and increase growth in other markets such as Asia (China)
CONCLUSIONS • Retain market share in Europe • Meet consumption demand • Increase domestic efficiency • Decrease domestic consumption • Expand excess transit routes to meet future needs • Reinvest in infrastructure and technology • Maintain efficiency, and keep cost competitive • Rebuild reputation as reliable energy power
CONCLUSIONS • Diversify their export regions • China, South Korea, Japan • Seek capital investments for growth • Limited by monopolistic practices and protection • Gazprom 51% state owned, and Consortiums are 51% Gazprom controlled.