Introduction to Russian Oil
Being the largest country in the world, Russia or formerly known as USSR has been a major player in the global energy sector. The significance of Russia as a key kingpin in the energy sector can be vindicated from the fact that in the year 2009 the country was the second largest exporter of oil and the first largest exporter of natural gas of which it has the highest reserves. In addition to this, it is also worth mentioning that the country is the third largest consumer of crude and petrochemical products.
With a daily production of 9.93 million barrel of oil as estimated in the year 2009, Russia has been labeled as the largest oil producer in the world. An approximate of 12% of oil share is contributed by Russia and it occupies a similar position in global exports also.
The economic revenues generated from the exports of natural gas and petroleum mounted to such phenomenal amounts that enabled the country to register an increase of approximately 8.1% in its Gross National Product (GNP), surpassing the growth rates of all other most industrialized and developed countries of the world that constitute the forum of the G8. The economic growth and progress demonstrated by the country over the last seven years has largely been occupied by the export of energy.
Other allied factors like relatively high oil prices and the successful exploration of different oil and gas fields in the country catalyzed the process of financial rejuvenation in the country, making Russia once gain a vital stakeholder in the global energy sector not only as a producer but also as a consumer. At an internal level much of energy requirements of Russia are fulfilled by natural gas which in the year 1992 was estimated to contribute 49% of the cumulative energy requirement needed by the country.
Since then , with the subsequent exploration of different and diverse ways of energy production and other natural gas reserves, the share of natural gas had surged up to 55% in the year 2005, whereas due to substantial contribution from multitude energy resources such as nuclear and hydroelectric the share of petroleum has slumped from 27% to 19%.
Russian Oil and Economy
From the statistics that have been presented, it might not be very difficult to comprehend that the economy of Russia is overwhelmingly dependant on the exports of natural gas and petroleum exports. Realizing the pivotal importance of petroleum to the economy of the country, the state issued orders of forming a special fund which would manage and keep an account of the windfall receipts that are going to generate from these exports.
It was estimated that by the year 2007, the net worth of the fund would reach to $158 billion, which would be almost 12% of the country’s nominal GDP. According to the assessments made by Alfa Bank the energy sector of the country contributes to around 20% of the total GDP of the country. Evaluations and analysis made by World Bank and International Monetary Fund concluded that the energy sector contributes to around 60% of the export revenues generated by the economy and has a handsome share of 30% in the Foreign Direct Investment (FDI) that influxes the country.
Nevertheless it is worth mentioning here that the performance of the sector has been of displaying signs of fluctuating performance depending on the sector under the banner of which the project is being developed. Being an advocate of the public market economy, all projects of the energy sector taken up by government agencies or state run organizations progress at a rampant pace, but facilities and incentives being offered to private sector investors are still not very gratifying.
The percentage of taxes imposed on extraction and exports is high and there are other related complications involved which are encountered during the developmental phases of the project in due course. In addition to this, the gravity of the situation further aggravates for private investors due to policies formulated by Kremlin which are always inclined to safeguard the economic interests of major state-run oil and gas multinationals due to their extraordinary influence and contribution in bolstering the economic progress of the country.
As a result of this, many projects that were once owned by private investors were shifted to state sector and state owned corporations who have always been major stakeholders and moguls of the entire energy sector.
Moreover due to the inauspicious environment for private investment, projects initiated by these investors take a long time to reach their completion and in most of the cases which beget project postponement and delay, the roadblocks and different kind of hurdles are inserted by these multinational corporations who cannot resist their leverage and monopolistic hegemony being challenged by any other major contender.
If the impact of oil and petroleum on Russian economic progress is being considered a look at the export figure will be helpful in providing us a greater analysis as to the implications and future progress phases of the country.
According to experts and prominent Russian economists a major determinant factor which will decide the future revenues that Russian economy can extract from their energy sector will be dependent on the viability of the export routes of the crude oil and the state owned company called Transneft possesses the monopoly over the pipeline networks through which oil is exported. During the year 2007, Russia exported over 4.4 million barrel of oil and over 2 million bbl/d of petrochemical products. Out of these exports of worth 1.3 million bbl/d were transported through the Druzba pipeline that provides Russia the accessibility of invading the markets of countries like Belarus, Germany, Poland, and Ukraine.
In addition to this the pipeline also provides easy routes to Central and Eastern European nations like Czech Republic, Slovakia and Hungary. Along with this another major pipeline known as Primorsk transports and exports around 1.3 million bbl/d of oil to other countries whereas 900,000 bbl/d of oil is exported via the Black Sea route. It is however worth keeping in mind that the majority of Russian oil transport is supervised by the state owned and run Transneft, but simultaneously over 300,000 bbl/d is transported via non-Transneft owned sea routes or rail networks. In recent times due to a surge in oil prices the most favorable route of transport being used for oil transportation is rail road through which 170,000 bbl/d is transported.
Fuel categories mainly exported by Russia consist of both fuel and diesel oil. Both these fractions of crude oil are used for heating purposes on a large scale in many European countries and on a limited scale in the United States.
It is important to bring into notice that the export of Russian oil to United States has almost doubled since 2004. In the year 2007 the Russian exports inflowing to United States mounted to 400,000 bbl/d of crude oil and petroleum related products. Some experts suggest that the recent rise in exports can be credited to political implications and to maintain higher oil prices globally.
Even though the frontiers of production are highly encouraging and sanguine for the Russian economy, the problem that can create a deficit between imports and exports are the functions of the refinery.
A draft plan that was formulated for the year 2005 till 2008 predicted an increase in the production of petrochemical products including high quality octane, catalysts and raw materials, but as refineries are only capable of meeting half the demand of the octane required, the remaining fraction has to be imported. (EIA 2008)
Major Russian Oil Companies and Future Expansion Projects
Some of the major energy sector corporations that are the backbone of the Russian economy include Gazpron which is the largest Russian state owned monopoly. Apart from this the organization also holds the credit of being the biggest gas exploration and distribution company of the world. Lukoil is another key player in the energy based and driven economy of Russia as it has the honor of being the largest oil producing company in the country.
In addition to this, there is Transneft which holds the monopoly over the pipeline contracts and agreements through which crude oil and natural gas are transported to other countries. Then there are refinery companies, out of which the most prominent is Yukos Oil which specializes in the exploration, production, marketing and distribution of the oil that is being produced.
Even though all the organizations mentioned are owned by the Russian State and therefore have an overwhelming influence on the energy policies that the State formulates, there are also examples in which mergers have been triumphant in the country and a prominent example of this is TNK-BP which was formed in the year 2003 by the merger of Tyumen Oil Company and the British oil corporation British Petroleum.
Realizing the importance of the energy sector to the economy of Russia there has been periodic and fruitful investment going in this sector of the country. A wide and sophisticated network of pipelines has been laid down which provides connectivity and transport facility for the transportation of oil and natural gas to various countries located in Asia and Europe whereas to countries located in American continents it is usually transported via oil tankers or railroads. Some of the major projects that are presumed to take this sector of the country to greater zenith and development and are currently in pipeline include the modification of some pipelines whereas development of the others.
One of such projects, the future of which is oscillating includes Adria Reversal Project. Spanning a length of 470 miles the renovation of the pipeline will allow an expansion in its capacity to increase from 100 bbl/d to 300 bbl/d. In addition to this, the completion of the project will provide Russian oil to invade the markets of countries like Hungary and Croatia along with the Adriatic port of Omisali. Concerns are looming regarding the completion of the project but it is being said that as soon as the project is approved the entire process will proceed at a breakneck speed. Another major project that is scheduled for completion in the year 2011 is a sequel of the Baltic Pipeline System.
Possessing a length of 1600 miles, the project will acquire completion by a massive disbursement of $500 million through which the expansion of the pipeline will take place increasing its capacity 1000bbl/d to 1,300 bbl/d. in addition to this the pipeline will provide accessibility and facilitate exports of products like natural gas and oil from Timan-Pechora region via Baltic sea to the sea port of Primorsk.
Another prominent project is that of Kharyada-Indiga required to be completed over an indefinite time period with an expenditure of $2-6 billion and spanning over a massive length of 320 miles.
The multi-billion dollar project of Murmansk is also underway; the project under the umbrella of which a wide and complex network of pipelines will be established is anticipated to reach its completion by a heavy expenditure of $6 billion. Pipelines which will possess an expansion capacity of 3,000 bbl/d will connect the port of Primorsk to the North East area of Baltic Sea.
After the completion of the initial stage of Eastern Pipeline Taishet-Skovorodino- Perevoznaya in 2009, the subsequent developmental stages of the project are also in their multitude construction phases. With a total length of 2,480 miles and expansion capacity of 1,000 bbl/d, the entire project will reach completion after an expenditure of $16-18 billion. The first phase of the project provided access to Taishet to Skovorodino whereas the following stage will involve the connectivity of Skovorodino to Pacific Coast. Due to some environmental concerns and hazards the developmental stages of preceding projects could not be initiated. (EIA 2008)
The importance of Russian oil offshore
Even though exploration of oil and gas reserves in Russia has taken place on an extensive scale, there are always more venues to explore in the country. It is important to stress here that that practically everywhere on the Russian shelf there is flawless synchronization between provinces that contain petroleum reserves and their geographical and geological conditions which are highly auspicious for the exploration of such reserves from the provinces.
Another important thing to mention here is that much of these resources have still failed to attract the attention of explorers and engineers primarily because of the harsh climatic conditions and remote geographical locations in which these reserves are deposited.
However some of the major explorations that have taken place especially in the two enormous oil and gas containing basins located in the West Arctic that span over an area of 2 million square kilometers contain resources worth 50-60 billion tons of conventionally used fuel in which oil occupies the greatest percentage.
In addition to this further drilling and exploration of the area revealed that it contains up to ten oil and gas fields which are ready for consumption. Some of the gas fields explored such as that of Rusanovskoe and Leningradskoe contain an estimate of 5 trillion cubic meters of gas. This is highly beneficial as the annual consumption of gas in the world is calculated to be 2 trillion cubic meters. On the other hand, geological surveys have disclosed that some oil fields such as that of Prirazlomnoe oil field contain oil reserves more than 200 million tons whereas progress and extraction works on the field have been underway since 1992.
Apart from these locations the Far East and Eastern places of Siberia have in particular impressive features that favor the development and exploration of offshore oil and gas fields. It is estimated that this region accommodates more than 20 oil and gas bearing basins due to the different geotectonic nature that has been discovered in these areas.
Some of the oil reserves and gas reserves which have been repeatedly exploited for extractive reasons in the country include those offshore fields located on the shelves of the Caspian, Black and Baltic Seas.
Out of these Caspian needs to be mentioned in particular as recoverable hydrocarbon resources from the area have estimated to be around 2-3 billion tons out of which oil has the largest share of over 70%.
Till the nineteenth century the continental shelf was fulfilling its conventional function of providing valuable sea food products and species to the people of Russia, but with the start of the new millennium, this function and purpose of the continental shelf took a drastic turn and with greater exploration and innovations taking place in the field of technology the scale of advancements in this field also reached to unprecedented levels.
As a result of such progress the continental shelf turned and transformed into a haven oil and gas reserves and its subsequent large scale production. But with the simultaneous emergence of economic progress and trade bolstering frontiers a concomitant issue related to ecological balance and environmental sustainability especially to marine organisms took pace.
The debate was based on the fact whether both these functions can peacefully co-exist together and for some reason or the other it is obvious that their co-existence is highly unlikely probability. Along with these there are some other environmental issues at the same time which need to be addressed on a suitable platform before the it is either too late to repent or the financial dependence of the economic conditions relies overwhelmingly on the benefits generated through these resources and their over-exploitation which are already being displayed by the monetary position of Russia either directly or in a more subtle form. (Patin)
Challenges Faced By Russian Oil Industry and Future Prospects
The Cold War era might have ended in the year 1991 following the vulcanization of USSR, but the war between the two giant countries is still out in the middle. This time they are not intimidating each other with their giant reserves of nuclear weapons, this time both of them have streamlined their intentions to a greater extent and the clash between these two titans is now on an economic and diplomatic scale.
It is as all of us have conjectured correctly, the greatest challenge being faced by Russia and its energy sector is from the United States and the kind of policies it wants to draft in order to confront the escalating hegemony of Russian energy sector in the entire global arena.
While Russia keeps moving its planned objectives, its progress especially in the case of oil and natural gas provider to the world is taking an increasingly serious stand to bring this battle out in the middle again. Initial confrontations and clashes between the two started during the time when Vladmir Putin was the President of Russia and Russian forces were combating so called insurgents in Chechnya. It was during this time that the United States took its stance against Russia and its nationalist media began to disseminate messages and articles sparking resentment against Russia.
A closer understanding of the eco-political melodrama that was being orchestrated could be obtained by looking at the location of three countries and the vested interest of United States and Russia that lied with these places.
These three countries included Chechnya, Georgia and Azerbaijan. Chechnya connects Georgia and Georgia like Azerbaijan was at that time exhibiting signs of joining NATO forces, but their major objectives were to ensure the safety and security of Baku-Tbilisi and Ceyhan pipeline and its second and more important objective was to prevent any sort of Russian intervention in the developmental process of the pipeline as it has troops in both these countries.
American establishment felt that if Russia is resisted and forced to retreat from Chechen occupied areas, this would facilitate a sustainable disintegration of the Russian State as it was already predicted by the Central Intelligence Agency in its Global Trends report for 2015 that with the passage of time Russian State would lose its writ in the ice-capped and oil rich region of Siberia. This entire propaganda started to gain tremendous impetus as the acquisition of American objectives from Iraq began to fail and the condition there began to deteriorate.
The true aims of America in Iraq were first brought into limelight by the imprisoned Russian oil mogul Mikail Khodorkovsky who said that if America would have succeeded in taking control of Iraqi oil fields, it would have triumphed in bringing the prices of oil to $12 a barrel. This would have been of severe disadvantage to Russian economy and energy sector as the revenues being generated would have slashed substantially as a result of the bottoming prices.
It was the failure of plan A that coerced United States to switch over to the strategy that was formulated under Plan B and that was to assert its hegemony in Eastern European states that are close neighbors and bitter enemies of the Russian State. The former communist States like Ukraine, Georgia and Slovenia have transformed into US colonies and allies with the passage of time. In order to expand their plan and extract the related benefits, America wanted a pro-US ruler installed in Ukraine and therefore financial support and money for the victory of such a ruler known as Victor Yushchenko began to pump in.
All the efforts that the US has made to gain control or at least keep an eye on Russian oil and energy sector have gone in vain. The major reason behind all such conspiracies is that cheap oil and its acquisition is a matter of life and death for the growth of the US economy. At one hand where it is important for the corporate sector sustainability of the country, on the other hand it is of immense importance to the United States to gain control of major oil resources either directly or indirectly to maintain its economic and political hegemony and assertiveness in the uni-polar world that it has created.
On the flip side of the issue, it is important to mention that the future of Russian energy sector looks extremely optimistic on intra as well as intercontinental basis. Statistics show that Russian oil market and companies have succeeded in cementing their foundations in many Asian markets especially developed and booming Asian economies like that of Japan and South Korea. South Korea recorded an all time high import of Russian oil mounting to over 173,000 barrel per day during the month of May.
Similar phenomenal figures were also displayed by the Trade Department of Japan by recording a record inflow of 241,000 barrel a day from Russia. With Russia rising as a giant contender in the oil field, the hegemonic foundations of Middle Eastern countries are manifesting a state of erosion from major Asian markets.
In tandem to this the competition between the two has also reached a cutthroat point with Russian owned ESPO and Dubai Crude both battling each other to gain for the acquisition of maximum benefits. North Asian markets have easy and prompt accessibility to ESPO which provides them oil at $1 a barrel less than that provide by Dubai crude rate along with time saving facility as the oil takes only two to three days to reach their required destination as compared to monthly duration when purchased from middle eastern markets.
In order to counter the competition on an equivalent scale Middle East oil companies especially that of Saudi Arabia have lowered their prices by slashing premiums to bring it on an equal footing to that being provided by Russian oil companies.
It can be said beyond doubt that the performance of Russian energy sector is charging the entire Middle East market. According to Bloomberg data total Middle East production was 19.9 million barrel whereas Russia alone was producing 10.3 million barrel. Furthermore another advantage that has been voiced by countries purchasing oil from Russia or ESPO said that the oil contain very minor traces of sulfur as a result of which the probability of oil causing environmental damage and atmospheric pollution is minimal.
Chemical analysis reveals that the percentage of sulfur in Russian oil is about 0.535% as compared to Saudi oil which contains approximately 1.8% of this impurity. It is worth mentioning here that greater the presence of sulfur in oil, the greater is the expense and time required for its purity and on repeated refining oil may lose some of its properties that make it multi functional for myriad functions and purposes.
Apart from all these characteristics of Russian oil another major threat that is being faced by Gulf States and to their petro relied hegemony as far as exporting it to Asian states is concerned is that the transportation costs and charges when these countries import oil from Russia are severely reduced as compared to the transportation expenditure involved in importing it from Gulf countries.
According to the statistics showed by a Singapore based company Allied Tankers that the cost involved in freight costs from importing oil from Russia comes to around 70 cents a barrel whereas around $2.16 per barrel when importing the same blend from Middle East.
Another leverage provided to Russian oil in terms of emerging as the major country to monopolize the export of oil and natural gas resources to other major Asian countries is that the time duration required and spent in the arrival of the consignment. From Saudi Arabia it takes up to twenty days to arrive whereas from Russia the time required is only three days. (Schmollinger, 2010)
Russian Oil and its Implications on the US
It is truly said by scholars and experts that the rifts created by ideological clashes are so deep rooted that they cannot be filled easily. Similar is the case with United States and Russia and their economic relationships that they have with each other. When it comes to energy relationships and the respective exchange of goods and services between the two countries, it is worth mentioning that the relationships and ties between the two countries experienced a healthy rejuvenation following the disintegration of USSR, but as said earlier that the difference in the ideologies that ultimately influence the formation and functioning of different institutions in both countries is still at loggerheads with each other.
As a result of these differences the financial ties between the two countries could foster in the way which could have proved beneficial for both countries. But this does not manifest that the relations when it between the two are strained in any way.
At the end of the year 2003, US was Russia’s second largest source of foreign direct investment and the capital pumped in the country was mainly concentrated in the sector of energy, communications, engineering and transportation.
Likewise in the year 2005, 9% of US exports of oil machinery and equipment were sent to Russia, which is a comprehensible demonstration of the mushrooming process of the amiable relations between the two countries.
But as said by economic experts and analysts, economic relations between the two countries are still in very embryonic stages and United States has two major concerns regarding the development of Russia as a key energy player and stakeholder in the global financial arena.
Firstly, the emergence of Russia as a prime energy kingpin has rattled the monetary foundations of many Gulf States who have always been overwhelmingly dependent on the export of oil and petrochemical for their economic survival.
United States has always been dependant on these countries for obtaining oil as most of the countries like Jordan, Egypt, UAE and Saudi Arabia have always been close American allies and economic partners.
Russia on the other hand is confronting the long sustained hegemony of the Gulf States and the percentage of benefits that the US was extracting through petroleum from these countries and with countries like China and India opting Russia for their oil imports the gravity of the entire situation provoked considerably for Gulf States.
Second major problem that has prevented the entrance of United States investors to proliferate their capitalist and free market mandate in Russian energy industry can be attributed to the economic system that prevails and is still exercised by Russia.
Even though the State claims that it owns all major energy corporations and organizations that operate in the country, it is no concealed fact that these corporations are highly autonomous and the government is bound to formulate policies that conform the interest of these organizations, hence the practice of a communist or public market economic model in Russia is highly hypothetical.
But, despite these efforts, Russian government has framed regulations and procedures which do not provide a very auspicious working and investment environment to American businessmen or energy corporations.
Some of the major concerns that is felt by investors is the instability that has invaded the entire Russian system in the form of lack of effective intellectual rights of property protection and safeguarding, high percentage of taxes that are imposed on investments, judicial clashes and conflicts that exist between the state and the different hierarchical arrangements of local and federal governments, unchecked and unaccounted corruption that prevails on institutionalized basis in the country and most importantly the lack of investor friendly incentives and facilities that encourage the influx of greater foreign direct investment in the country.
In a nutshell, it can be said without doubt that the rise of Russia as an energy titan in the financial mainstream will be equivalent to the brewing of some serious implications on United States and its future prospects as a major energy consumer of the world.
Furthermore, it is important for the United States at an economic level to conduct some serious diplomacy with Russian officials regarding this matter to escalate the seriousness of the situation and the subsequent repercussions that it is likely to impose on the energy standing of the United States. (Gerb, 2006)
Russian Reserves and the Non-Renewable nature of Oil
It is so well said by experts that all that glitters is not gold and it seems as if a very similar situation suits the so called booming economy of Russia on the basis of its highly resourceful and efficient energy market but all of it seemed to have gone astray and in vain after Russian finance minister, Alex Kudrin, in May 2010, announced that the accumulated oil reserves of the country are depleting at a rampant pace and will reach the brink of exhaustion by the year 2011.
The news and the statement of Russian finance minister does not come only as a shock to the Russian economy which had used its oil and natural gas resources as the most vital tool for weathering and countering the economic crunch in the most crucial financial times, but also shocks the monetary pillars of many European Union countries due to the Russia’s vital role in exporting oil to these countries.
Economic critics say that no effort or concentration has been invested in the implementation or the formulation of a proper and sustainable regulatory program which could have played a pivotal role in alleviating the overwhelming dependency of the economy on oil and energy resources. It is also important to mention here that over 70% of Russian exports are contributed by the exports of oil, gas and mineral resources as a result of which the entire economy is victimized to the steep and sporadic nature of prices that dominates the commodity markets of these products.
One of the prominent challenges faced by Russian economic policymakers is to devise an effective strategy which can help in balancing the country’s budget and for that to take place Russia will have to consider the option of ascending oil prices in the international market. Government experts cast their vote in the favor that the global prices of oil must top $100 a barrel if Russia wants to seek sanctuary from landing in the same boat as Greece, but the probability of this taking place is negligible.
Hence in a nutshell, it is important for Russia at the moment to carefully assess its resource network and chalk out effective policies for regulation in order to pull itself along with other countries from another economic turmoil. (Roznhov, 2010)
In conclusion it is appropriate to say that the economy of Russia has reached to unprecedented levels of development and innovation after economic revenues skyrocketed on the foundation of black gold financing.
Recent statistics revealed by Chinese prominent news agency Xinhua show that due to surging oil prices in global market in the year 2010, revenues obtained from oil export have increased from $20.96 billion to over $41.05 billion.
In the year 2009, Russia’s oil output and production was estimated to be totaling 494 million tons out of which 226 million was exported mainly to Asian countries like Japan, Korea, India and China.
According to the data disclosed by Russian Federal Statistics Service the output of oil climbed by over 2.9% to surpass 165 million tons of oil production.