RUSSIAN OIL AND NATURAL GASRUSSIAN OIL AND NATURAL GAS:: DEPENDENCY ON EUROPEDEPENDENCY ON EUROPE

ByByWilliam M.C. PhillipsWilliam M.C. Phillips

30 August, 200730 August, 2007NS 3041, Professor Robert LooneyNS 3041, Professor Robert Looney

RESEARCH QUESTIONRESEARCH QUESTION

What is Russia’s Dependency on Europe’s What is Russia’s Dependency on Europe’s energy consumption? energy consumption?

OverviewOverview

I.I. INTRODUCTIONINTRODUCTIONA.A. SUMMARY OF CURRENT ISSUESSUMMARY OF CURRENT ISSUESB.B. CONTEXT OF RUSSIAN ENERGY CONTEXT OF RUSSIAN ENERGY

EXPORTEXPORTII.II. RUSSIAN OIL AND NATURAL GAS EXPORTSRUSSIAN OIL AND NATURAL GAS EXPORTS

A.A. OIL AND NATURAL GAS RESERVES OIL AND NATURAL GAS RESERVES AND AND PRODUCTIONPRODUCTION

B.B. EXPORTS TO EUROPEEXPORTS TO EUROPEC.C. REVENUESREVENUESD.D. ENERGY STRATEGYENERGY STRATEGY

Overview (cont’d)Overview (cont’d)

III.III. RUSSIAN OIL AND NATURAL GAS ASSESSMENTRUSSIAN OIL AND NATURAL GAS ASSESSMENT

A.A. STRENGHTSSTRENGHTS

B.B. WEAKNESSESWEAKNESSES

C.C. OPPORTUNITIESOPPORTUNITIES

D.D. THREATSTHREATS

IV.IV. CONCLUSIONSCONCLUSIONS

II.II. RUSSIAN OIL AND NATURAL RUSSIAN OIL AND NATURAL GAS EXPORTSGAS EXPORTS

A.A. OIL AND NATURAL GAS RESERVES AND OIL AND NATURAL GAS RESERVES AND PRODUCTIONPRODUCTION– OILOIL

88thth in world for known reserves (60 bbl, + 67 unproven) in world for known reserves (60 bbl, + 67 unproven)

22ndnd for production, 9.5 M bbl/d (Only Saudi Arabia is more) for production, 9.5 M bbl/d (Only Saudi Arabia is more)

– NATURAL GASNATURAL GAS11STST in world for known reserves in world for known reserves

27.5% of world’s known supply (Iran is second, at only 15%)27.5% of world’s known supply (Iran is second, at only 15%)

Norway, Algeria, Netherland = only 5% Norway, Algeria, Netherland = only 5%

11stst in Production –21.8% of world production (U.S. 19%, in Production –21.8% of world production (U.S. 19%, domestic)domestic)

OIL PRODUCTION AND OIL PRODUCTION AND CONSUMPTIONCONSUMPTION

II.II. RUSSIAN OIL AND NATURAL RUSSIAN OIL AND NATURAL GAS EXPORTSGAS EXPORTS

B.B. EXPORTS TO EUROPEEXPORTS TO EUROPE– OILOIL

3/4 (6.7 M bl/d) exported from Russia3/4 (6.7 M bl/d) exported from Russia2/3 of all exports goes to Europe (West, 2/3 of all exports goes to Europe (West, Central, East)Central, East)

– NATURAL GASNATURAL GAS7.1 tcf exported7.1 tcf exported65% of all exports went to Europe65% of all exports went to Europe

– Germany, Italy, Turkey, France, Hungary, Germany, Italy, Turkey, France, Hungary, and Finland (majors)and Finland (majors)

100% exported through pipelines100% exported through pipelines– Direct, fast, cheapDirect, fast, cheap

II.II. RUSSIAN OIL AND NATURAL RUSSIAN OIL AND NATURAL GAS EXPORTSGAS EXPORTS

C.C. REVENUESREVENUES– OIL AND NAT GAS OIL AND NAT GAS

50% of all export revenue and 50% of all export revenue and 37% of state budget revenues in 200637% of state budget revenues in 2006

– State revenue sensitive to world market pricesState revenue sensitive to world market prices– Affects reinvestment in infrastructure, technology, and Affects reinvestment in infrastructure, technology, and

efficiency improvements for future growth efficiency improvements for future growth – GDPGDP

Steady growth, 6.5% in 2006Steady growth, 6.5% in 2006– 37% of State Revenue from oil and gas exports 37% of State Revenue from oil and gas exports – Nearly 2/3 of both export to EuropeNearly 2/3 of both export to Europe

1/4 of state budget depends on exports to Europe1/4 of state budget depends on exports to Europe

II.II. RUSSIAN OIL AND NATURAL RUSSIAN OIL AND NATURAL GAS EXPORTSGAS EXPORTS

D.D. ENERGY STRATEGYENERGY STRATEGY– Moved towards privatization until 2003Moved towards privatization until 2003– Oil prices higher, critical to state revenuesOil prices higher, critical to state revenues– Shift to state control for protection (51%)Shift to state control for protection (51%)

GazpromGazprom

Sibneft, Yukos…Sibneft, Yukos…

Sakhalin IISakhalin II

Pipelines, 100%Pipelines, 100%

Export 100%Export 100%

Clear indication Russia aware of oil and nat gas as Clear indication Russia aware of oil and nat gas as strategic national intereststrategic national interest

III.III. RUSSIAN OIL AND NATURAL RUSSIAN OIL AND NATURAL GAS ASSESSMENTGAS ASSESSMENT

StrengthsStrengths– Plentiful Oil and Nat Gas ReservesPlentiful Oil and Nat Gas Reserves

Revenues in the future should remain highRevenues in the future should remain high

– Robust Pipeline system with diversification Robust Pipeline system with diversification plansplans

Adria pipeline: 300,000 bbl/d increaseAdria pipeline: 300,000 bbl/d increase

Sakhalin II and East Siberia to Asian marketsSakhalin II and East Siberia to Asian markets

Druzhba, Yamal II, Blue Stream, Nord StreamDruzhba, Yamal II, Blue Stream, Nord Stream

III.III. RUSSIAN OIL AND NATURAL RUSSIAN OIL AND NATURAL GAS ASSESSMENTGAS ASSESSMENT

WEAKNESSESWEAKNESSES– Tarnished reputation as ‘reliable’ sourceTarnished reputation as ‘reliable’ source– Lack of competition, monopolistic practiceLack of competition, monopolistic practice

No incentives for investment, which = future No incentives for investment, which = future technology, efficiency, growthtechnology, efficiency, growthReduces external financing (high risk, low returns)Reduces external financing (high risk, low returns)

– Transaction costs due to multi-country transportTransaction costs due to multi-country transport– Production capacity maxed out, no excessProduction capacity maxed out, no excess– Inefficient domestic consumption decreases Inefficient domestic consumption decreases

export revenue opportunityexport revenue opportunity

DOMESTIC CONSUMPTIONDOMESTIC CONSUMPTION

III.III. RUSSIAN OIL AND NATURAL RUSSIAN OIL AND NATURAL GAS ASSESSMENTGAS ASSESSMENT

OPPORTUNITIESOPPORTUNITIES– Increase exports to Europe with diverse supply system Increase exports to Europe with diverse supply system

(contract caution)(contract caution)– Expand more rapidly to Asian marketExpand more rapidly to Asian market

Kovykta Natural Gas pipline to China, South KoreaKovykta Natural Gas pipline to China, South Korea

Increase revenuesIncrease revenues

Diversifies revenue source (portfolio protection)Diversifies revenue source (portfolio protection)

– Increase domestic energy efficiencyIncrease domestic energy efficiencyNuclear, wind, hydropowerNuclear, wind, hydropower

Invest in technology…both slow, but expands exportsInvest in technology…both slow, but expands exports

III.III. RUSSIAN OIL AND NATURAL RUSSIAN OIL AND NATURAL GAS ASSESSMENTGAS ASSESSMENT

THREATSTHREATS– Loss of European market shareLoss of European market share

Alternate oil and natural gas sources Alternate oil and natural gas sources (Norway, Algeria, Libya, Iran, Caspian Basin?)(Norway, Algeria, Libya, Iran, Caspian Basin?)Alternate energy methods: Nuclear, hydro, wind, Alternate energy methods: Nuclear, hydro, wind, bio-fuelbio-fuel

– Disruption of exportsDisruption of exportsAccidental, environmental, or terrorismAccidental, environmental, or terrorism

– Reduced ability to meet domestic demandsReduced ability to meet domestic demands– Decline in oil and natural gas pricesDecline in oil and natural gas prices

CONCLUSIONSCONCLUSIONS

Russia is heavily reliant on oil and natural Russia is heavily reliant on oil and natural gas export revenuesgas export revenues

Russia is dependent on Europe, which Russia is dependent on Europe, which makes up a large portion of those makes up a large portion of those revenuesrevenues

Russia must maintain demand stability in Russia must maintain demand stability in Europe and increase growth in other Europe and increase growth in other markets such as Asia (China)markets such as Asia (China)

CONCLUSIONSCONCLUSIONS

Retain market share in EuropeRetain market share in Europe– Meet consumption demandMeet consumption demand

Increase domestic efficiencyIncrease domestic efficiency

Decrease domestic consumptionDecrease domestic consumption

Expand excess transit routes to meet future needsExpand excess transit routes to meet future needs

– Reinvest in infrastructure and technologyReinvest in infrastructure and technologyMaintain efficiency, and keep cost competitiveMaintain efficiency, and keep cost competitive

– Rebuild reputation as reliable energy powerRebuild reputation as reliable energy power

CONCLUSIONSCONCLUSIONS

Diversify their export regionsDiversify their export regions– China, South Korea, JapanChina, South Korea, Japan– Seek capital investments for growthSeek capital investments for growth

Limited by monopolistic practices and protectionLimited by monopolistic practices and protection– Gazprom 51% state owned, and Consortiums are 51% Gazprom 51% state owned, and Consortiums are 51%

Gazprom controlled. Gazprom controlled.

QUESTIONS?QUESTIONS?