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 Russias Dependency on Europes 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 (contd) 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 8 th in world for known reserves (60 bbl, + 67 unproven) 2 nd for production, 9.5 M bbl/d (Only Saudi Arabia is more) –NATURAL GAS 1 ST in world for known reserves 27.5% of worlds known supply (Iran is second, at only 15%) Norway, Algeria, Netherland = only 5% 1 st in Production –21.8% of world production (U.S. 19%, domestic)

OIL PRODUCTION AND CONSUMPTION

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

DOMESTIC CONSUMPTION

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.

QUESTIONS?

III.EUROPEAN DEPENDENCE A.EUROPEAN DEMAND –Limited natural resources –Large industrial and domestic needs B. IMPORT AND CONSUMPTION –17% of world energy consumption –80% provided by fossil fuels –40% oil, 24% natural gas –30% oil, 50% natural gas from Russia

III.EUROPEAN DEPENDENCE C.LONG-TERM CONTRACTS –Ensures gas for consumers and revenue for supplier –Pricing is key, tied to fixed, variable, or current market rates –Individual vs. collective contracts Germany, Italy, France, Turkey… Vs. EU consolidated energy strategy Russian Duma will not ratify EU energy strategy –Ends monopolistic protectionism –Pipeline diversification = leverage as well Individual countries have less power Russia is overly dependent on Europe as a whole

III.EUROPEAN DEPENDENCE D.EUROPES STRATEGY TO REDUCE ENERGY NEEDS –Alternative import sources –Alternative energy sources HydropowerWind Nuclear Energy –Increase Efficiency All take investment and time Russian oil and natural gas pipelines fast and cheap