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Case study V: External Effects II: Russia NE Asia Relations

Case study V: External Effects II: Russia NE Asia Relations. David Dusseault Eurasia Energy Group Aleksanteri Institute. Introduction. Russia’s EC in the NE Asian Context; Regional Dynamics: N. Korea What is Russia’s Role? Sakhalin Specifics Conclusions.

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Case study V: External Effects II: Russia NE Asia Relations

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  1. Case study V: External Effects II: Russia NE Asia Relations David Dusseault Eurasia Energy Group Aleksanteri Institute

  2. Introduction • Russia’s EC in the NE Asian Context; • Regional Dynamics: N. Korea • What is Russia’s Role? • Sakhalin Specifics • Conclusions

  3. Russia’s Economic Development and the Energy Sector • Fuel & Energy Complex (FEC) is a heterogeneous political, social and economic environment; • FEC is crucial in RF’s social-economic development (national champion) & a solution for increasing external energy demand; • Two discernable, irreconcilable resource dependent strategies: NREM & HTIM; • A third way: Putin links natural resources to value added high tech economic development; and • Price dependency, nature of institutions, with actor strategic preferences & resulting agency are major vulnerabilities in all models.

  4. NE Asian Context

  5. Regional Assessment

  6. Energy Imbalance

  7. Conditions: North and South Korea

  8. The Nuclear Issue in the Present Energy Context • Nuclear stand-off on the peninsula is tied to regime survival; • NK’s regime survival strategy has been directly linked to external aid (food and energy (KEDO)); • Energy can still form the basis for a flexible long term strategy to incorporate NK back into the international community.

  9. Priorities & Strategies • US Priorities: Regime Change • Economic Sanctions (Uni - & Multi-lateral) • Military “Axis of Evil” (Sum zero) • NK Priorities: Regime Survival • Nuclear Threat (Sum zero) • FDI, financial credits, WB loans; (Bi & Multi-lateral) • KEDO energy package, UNDP development aid. (Bi-& Multi-lateral) ? • Regional Priorities: Catastrophic Regional Conflict Avoidance • FDI, financial credits, ROK Japan loans; (Bi & Multi-lateral) • Regional Development aid (Bi & Multi-lateral)

  10. Sakhalin: Is Russia the Answer? • Begun in the 1970’s; • Division of Sakhalin’s shelf between Japan & USSR; • Project shelved in the 1980’s but tenders offered in 1991; • Two Licenses offered: Sakhalin II (1994) Shell, Mitsui, Mitsubishi; and • Sakhalin I (1995), Exxon-Mobil, SODECO, ONGC, Rosneft, & SMNG. Data and materials for slides 11-18 obtained from RAD 08/ 06: M. Bradshaw, “Sakhalin II in the Firing Line”

  11. Sakhalin Oblast

  12. The IOCs are Coming! • Production Sharing Agreements (PSA) set the standard for FDI in the energy sector; • Set legal responsibilities, ensured long term risks, guaranteed profitable returns; • Internationally binding; and • Customised to the demands of each project.

  13. How Important is Sakhalin? • July 1999 Sakhalin II produces Russia’s first offshore oil; • 2005 produces 11M tonnes of Crude; • 6 month extraction season; • 2003 Shell commits 10B USD for LNG & year round oil export; • Largest integrated oil and gas project in the world today.

  14. Importance continued… • Both Sakhalin I & II will produce 7% of Asia-Pacific demand; • LNG is already sold out: Japan, S. Korea, US & Mexico; • Sakhalin II 8 % of Japan’s LNG; • Plans for a third LNG plant 16M tonnes per year; and • Russia’s planned increase in exports to Asia: 3-30%

  15. Bumps in the Road • Plagued by delays and cost overruns; • Phase 2 costs increased from 10 – 20B USD; • LNG pushed back from mid 2007 to late 2008; • Total costs: 12.8 to 17B USD (Exxon) • External influences include labour, materials, exchange rates.

  16. And what about the environment? • Genuine concerns; • Sakhalin II Phase 2 “unfit for purpose” (EBRD); • Final decision pending and funding on hold; • Pacific grey whales, salmon stocks, Aniva bay ecology, indigenous population; and • PSA is not a good deal for Russia.

  17. A Failure to Plan? • Re-routing of pipelines; • Environmental impact studies after the fact; • Work standards in difficult terrain; • Sharing the benefits with the locals?

  18. The Kremlin’s Volte-face • Increased costs cause delays in production; • PSAs no longer embody Russian interests; • Renegotiation? • Asset swaps Shell Sakhalin II 25% share for 50% stake in Zapolyarny gas field; and • Gazprom benefits: reserves & LNG.

  19. Causes for Concern Products of Actor Agency : • Monopolistic economic logic intertwined with a traditional geopolitical approach in both up & downstream projects; • Unresolved legal issues regarding the control over resources between federal authorities & IOCs; • IOCs and state backed energy companies share a partial, but not common ideological basis for energy sector development projects; and • Regional energy relations are institution-free.

  20. Conclusions: Implications for the NE Asia & Russia • Expectations: Is it in Russian interests to exploit E. Siberian energy resources for export? • Anticipation: Will Russian energy majors be able to deliver and on what terms? Will NE Asia remain a “golden opportunity” for Russia’s FEC? • Contingency: What strategies can NE Asian states & Russia develop under prevailing conditions to ensure stable energy relations?

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