Oil and Gas reserves in Russia
Currently, 90% of the Russian production is provided by the gas field in West Siberia which will represent the largest part of the Russian production in the medium to long term [1]. The Russian monopolist Gazprom controls 94% of the Russian gas production, which has been maintained basically at the same level since 1999 [2]. In 2004 gas production was equal to 545 Bcm. Gazprom plans to increase this production at the level of 530 Bcm by 2010 [3].
However, Russian gas production already peaked at a level of 599.8 Bcm in 1991 [4] and according to some experts it will find it increasingly difficult to achieve the planned level by 2010, let alone the level indicated by the “Russian Energy Strategy” [5]. Despite promising estimates envisaged by the Russian government, Stern demonstrates that there is no room for such an increase in production. On the basis of an analysis conducted on the current production at the major Russian fields, Stern concludes that gas production will most likely peak in 2010 at a level of 510Bcm and that it will decrease in the next decade to a level of 329 Bcm in 2020 [6]. Besides, there are geological and economic uncertainties regarding the development of new fields [7]. Some experts even stated that the Russian gas industry is already experiencing a “gas deficit” and that Gazprom production alone cannot cope with both domestic and foreign demand [8]. Gazprom’s production will be put under further stress in the medium term as both domestic and foreign demand are expected to increase. It will be therefore extremely difficult for the Russian government (and Gazprom) to meet the required demand and achieve an equilibrated domestic energy balance.
In conclusion, Russian gas production could be severely reduced by 2010. Gas reserves are certainly available in Russia but there is an urgent need to open new fields [9]. This represents the first and most important problem for the gas sector in Russia [10]. At the same time, both the need to develop new fields and to maintain and upgrade the current pipeline grid, which is ageing rapidly, require more investments in this sector [11]. In addition, oil reserves are far less important than gas ones for a number of reasons, which is why the Russian government focused its energy strategy primarily on gas export and production [12].
The Russian Energy Policy
As Vladimir Putin was elected to the presidency of the Russian Federation in 2000, he had already defined a policy regarding Russian energy resources. In fact, Putin wrote a doctoral dissertation while attending the Mining Institute in S.Petersburg in January 1999. He stated that energy resources must represent a guarantee for the future economic development of Russia and at the same time be the mean to strengthen its geopolitical stature in the world [13]. As a consequence, the Russian government has the right to control and define priorities in every part of the gas and oil industries (including pipelines). The export and production of these resources are identified both as the basis for a strong and lasting economic development and as a mean to allow Russia to come back as a great power in world politics. State support and planning in the energy sector are seen as crucial elements of this process [14].
Putin shares this view with a group of men and colleagues. Those belonging to this group are generally called “siloviki”. They have a similar background, generally as military or security services personnel (ex-KGB), and share the same ideology. They are nationalists and determined to strengthen state’s authority against all potential enemies, both foreign and domestic, as they reject pluralism in civil society. Energy resources must represent the source of state power and the mean to expand the Russian political and economic influence abroad. Putin and the new administration controlled by the siloviki could then easily extend state control to the entire energy sector [15].
State control on the gas sector was already secured through the Gazprom’s monopoly. The siloviki infiltrated the Russian monopolist and took control of it since the first years of Putin’s office. This move alone allowed them to take control of the entire Russian economy and the entire pipeline grid. Both households and industries are in fact dependent on cheap gas (regulated price often below the marginal cost of production), which the government continues to provide. Consequently, the government can control inflation and allow poor people in cold region to survive the winter. Besides, Gazprom’s control gives the government the ability to shape the whole Russian economy. In fact, gas exports accounts for 7% of the GDP and 14% of government revenues [16].
As above stated however, Gazprom production is not able to cope with both foreign and domestic demand. As a consequence, the Russian government has to find additional sources to support its foreign and domestic commitments other than Gazprom’s production. In fact, there are companies other than Gazprom which are actually involved in gas production in Russia. These are called “independent producers” and they are generally more efficient than Gazprom itself. The Kremlin therefore counts on their production to feed the domestic demand. By controlling the pipeline grid and domestic prices (as a monopolist in this instance), the government is able to determine the share of the domestic market for these producers, which are not allowed to access the export market. Profits are however limited for them as domestic prices are regulated. At the same time, Gazprom exports its own gas to the European market where prices are higher. This mechanism has allowed Gazprom so far to obtain high revenues from its exports and at the same time cope with its fading production, while satisfying domestic demand and maintaining its export monopoly [17].
However, independent producers have enough reserves to cover the “gas deficit” which Gazprom is already experiencing only until 2010. They can sustain the domestic gas balance only in the short term. It is therefore inevitable for Gazprom to seek for alternative routes to satisfy its domestic and export needs (remember the role gas revenues have in the state’s budget). These routes have been already developed even before the collapse of the USSR. The ex-soviet republics have in fact their pipeline grids connected to the Russian ones, which at the same time are the only ones directed to exports markets in the European Union. As central Asian states depend on hydrocarbon exports as much as Russia, their economic development is entirely dependent on the Kremlin’s will, which is capable of stopping their exports and revenues.
The Kremlin has therefore easily placed Russia as an obliged transit for central Asian gas directed to Europe. Gazprom buys central Asian gas at low prices and it is able to re-sell it on European markets at higher prices, making a considerable profit for the state’s budget. Besides, this mechanism allows Russia to save its own gas for future exports. Russia has signed many agreements with central Asian states for the development of their hydrocarbon reserves. Independent producers and central Asian states are consequently a key part of Gazprom’s monopolistic strategy and make it possible for the Kremlin to plan both political and economic expansion abroad. The Kremlin has achieved full control of exports and production, as stated in Putin’s dissertation. However, the problem of developing new giant fields capable of sustaining Russian production for decades and of maintaining the pipeline grid still has to be solved [18].
The oil sector was also re-shaped to conform to the new ideology at the Kremlin [19]. By 2007 the Kremlin had then secured its full control on the oil and gas sector as was in the government’s plans and it could dispose of its exports to achieve maximum revenues for the state’s budget and expand Russia’s influence abroad. State control was also reasserted on foreign investments and properties in Russia’s hydrocarbon sector [20].
Gas exports and pipelines
Gas exports are a crucial part of the Russian energy policy as they provide a very large share of export revenues for the state’s budget [21]. In fact, gas can be sold profitably only on foreign (European) markets because prices in Russia are regulated and are too low to allow Gazprom to have a profit in the domestic market. Secondly, gas exports must be used to expand Russian influence abroad according to the new Kremlin’s ideology. It’s easy to understand then why Moscow aims for control of the pipelines through which gas is exported. The siloviki gradually allowed the state and themselves with it to take control of every economic or political activity that may influence strategic resources like oil and gas. Pipeline’s control is one of the most important aspects of this process.
Traditional transit routes for Russian gas are Ukraine and Belarus. Ukraine represents the first and most important among “transit countries”. Almost 85% of gas directed to Europe is transported through the Ukrainian territory [22]. Recent problems in the relations between Russia and Ukraine and between Russia and Belarus, plus the need to have complete control on exports, convinced the Kremlin to seek for alternative routes to export gas without transit on foreign territories to reach the European market. There are two alternative routes for Russia and both find supporters and opponents in Europe. The first route is the so-called North European Pipeline (NEP).
This goes from the Russian Baltic coast to the German coast in the Greifswald region, running under the Baltic sea for 1200km for a total planned capacity of 27,5 Bcm [23]. The NEP is supported by Russia and its largest European consumer, Germany. However, the pipeline, whose construction is politically motivated (avoid transit through Ukraine and having a direct import of gas for Germany), is opposed on “environmental” grounds by the Baltic states and Sweden. Besides, the NEP would allow Russia to completely cut out gas to the Baltic states as their role as transit countries or storage sites would be ruled out. Sweden is actually the only country which could block the construction on environmental grounds, along with Finland and Denmark. Besides, costs are mounting as the project has been repeatedly delayed due to technical and political problems [24]. The construction of the pipeline also divides European interests as Germany is in favor, while the Baltic states and Sweden oppose the project. Its construction is then far from certain and it may be delayed beyond 2010 [25].
The second pipeline project financed by Gazprom is the so-called South European Gas Pipeline (SEGP) which is still under study, without an exact route established. Parallel to the NEP, the SEGP should be connected to the Blue Stream (already carrying Russian gas under the Black Sea to Turkey) at one point in order to carry gas directly to Romania, Bulgaria and then in the rest of Eastern Europe. Hungary should become the final hub for Russian gas in central Europe replacing the Czech republic [26]. Both the NEP and SEGP are supported by Gazprom to diversify from Ukrainian and Belarusian routes and to allow Gazprom to expand more rapidly in the European market maintaining the ownership of infrastructures. Gazprom will then be able to gain political influence on countries totally dependent from its gas (Hungary, Bulgaria in primes) while expanding its influence (economic and political) in West European markets. Gazprom has achieved this objective in most of Eastern Europe. Contrary to the NEP, the SEGP has gained support from European governments in the region, and especially from Hungary [27].
Moreover, the SEGP combined with the Blue Stream has a peculiar strategic relevance in Russia’s expansion westward. In fact, it is aimed at blocking the competing Nabucco pipeline. This has been proposed in 2002 and supported by the European Commission as an alternative source of gas other than Russia [28]. By promoting and building the SEGP, which is cheaper and faster to build than the Nabucco (which crosses various countries), Gazprom aims at making the rival project unprofitable since both projects will target the same market. Investors would be then discouraged to promote a project with uncertain market gains and high costs. The SEGP has a crucial advantage in this sense because it involves a smaller group of states and it is financed directly by Gazprom.
At the same time, Gazprom is pressing the participant states to the Nabucco project (Hungary mainly) to delay or discourage the project itself. If one of them exit the project its actual development would be in real danger as the Nabucco is expected to cross their territory and will need local support and finance to be built [29]. Gazprom has been trying to stop the Nabucco since its first proposal and this project may be severely endangered by Hungarian decision to support the SEGP in march 2007. Russian political influence and a short-sighted government are the first reasons for this Hungarian decision but the construction of the SEGP and the collapse of the Nabucco are still far from certain [30].
Both Romania and Bulgaria must give their final approval to the SEGP and the fluid political situation in South-Eastern Europe may stop Gazprom’s plans to extend its complete influence to the region. Besides, a pipeline grid aging rapidly in Russia and the need to develop new gas fields in order to simply maintain a constant production (see above) may put Gazprom’s plans for a pipeline (and political) expansion at risk. Both in the case of pipelines and production as shown above, reality is against the Kremlin’s wishes for a gas and oil industry really capable of sustaining a steady economic growth, let alone political influence abroad.
