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RUSSIAN OIL AND NATURAL GAS : DEPENDENCY ON EUROPE

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

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RUSSIAN OIL AND NATURAL GAS : DEPENDENCY ON EUROPE

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  1. RUSSIAN OIL AND NATURAL GAS:DEPENDENCY ON EUROPE By William M.C. Phillips 30 August, 2007 NS 3041, Professor Robert Looney

  2. RESEARCH QUESTION • What is Russia’s Dependency on Europe’s energy consumption?

  3. 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

  4. Overview (cont’d) • III. RUSSIAN OIL AND NATURAL GAS ASSESSMENT A. STRENGHTS B. WEAKNESSES C. OPPORTUNITIES D. THREATS • IV. CONCLUSIONS

  5. 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)

  6. OIL PRODUCTION AND CONSUMPTION

  7. 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

  8. 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

  9. 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

  10. 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

  11. 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

  12. DOMESTIC CONSUMPTION

  13. 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

  14. 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

  15. 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)

  16. 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

  17. 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.

  18. QUESTIONS?

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