ENERGY IN RUSSIA

ENERGY IN RUSSIA

Russia is the world's largest producer of crude oil and the second-largest producer of dry natural gas. Russia also produces significant amounts of coal. If you combine proven oil and gas reserves, Russia is the world's leading energy producer. , with about 15 percent more proven reserves than Saudi Arabia.

Russia was the world's largest producer of crude oil including lease condensate and the third-largest producer of petroleum and other liquids (after Saudi Arabia and the United States) in 2014, with average liquids production of 10.9 million barrels per day (barrels per day). Russia was the second-largest producer of dry natural gas in 2013 (second to the United States), producing 22.1 trillion cubic feet (Trillion cubic feet ). [Source: U.S. Energy Information Administration, July 2015 ~]

Russia consumed 31.52 quadrillion British thermal units (Btu) of energy in 2012, the majority of which was in the form of natural gas (51 percent). Petroleum and coal accounted for 22 percent and 18 percent, respectively. ~

Energy plays a central role in the Russian economy because it drives all the other elements of the system--the industrial, agricultural, commercial, and government sectors. In addition, energy, particularly petroleum and natural gas, is the most important export and source of foreign exchange for the Russian economy. Experts forecast that the energy sector will continue to occupy this central position until Russian manufacturing reaches a level competitive with the West. [Source: Library of Congress, July 1996 *]

Energy Industry in Russia

The coal industry, forced by depleted resources to more northerly and less economical sites, remains a key industry in some regions but requires large-scale restructuring. Russia still is second only to the United States in coal reserves, however. The oil and gas industries, among the largest in the world, provide key export commodities, although transport within the country and conflicts over the energy sector’s structure have provided obstacles. The oil industry underwent a major restructuring in 2003–4. The government has delayed restructuring the heavily subsidized coal sector. [Source: Library of Congress, October 2006 **]

In the 1990s and the early 2000s, the oil and gas industries relied largely on existing deposits and infrastructure. As of 2006, they had built no new refineries for 15 years, and geological exploration ceased entirely for several years. Extraction efficiency from existing deposits is extremely low. A 2003 law aimed to restructure the energy sector substantially, including extensive privatization of energy provision and elimination of the Unified Energy System. In 2006 plans called for encouraging foreign investment in generating infrastructure.[Source: Library of Congress, October 2006 **]

Russia is the third-largest generator of nuclear power in the world and fourth-largest in terms of installed nuclear capacity. With nine nuclear reactors currently under construction, Russia is the second country in the world, after China, in terms of number of reactors under construction as of March 2015. [Source: U.S. Energy Information Administration, July 2015]

Energy Use, Production and Waste in Russia

Russia is the second largest consumer of energy after the United States. Consumption dropped from 4 million barrels of oil per day in 1992 to 2 million barrels of oil per day in 2001.

As of 2005, Russians paid about 50 cents a gallon for gasoline Per capita annual gasoline consumption in the 1990s: 55 gallons, compared to 459 gallons in the United States and 10 gallons in China.

Through the 1990s and early 2000s gasoline sold at the artificially low price of around 60 cents a gallon. The low prices created a demand that had to be kept in check with artificial measures like coupon rationing in the Soviet era. Cheap fuel invited bribe-taking by officials and lead to waste. Families left stoves on all day to save matches and open windows when in the winter when it became too hot indoors.

Russia’s factories are 2½ times less energy efficient than their European counterparts. Entire cities are heated with steam released from nuclear power plants. Tomsk, for example, was a secret city in the Soviet era with a population of 500,000. The nuclear reactors used to create weapons-grade plutonium outside Tomsk are connected to the city by four steel pipes, each 4 feet in diameter, that carry steam from the reactor 19 miles away to heat apartments and homes in the Tomsk’s nine-month-long winter. The city depends on the reactors for about a forth of its heat.

Energy used to generate electricity (1996): 1) natural gas (40.1 percent); 2) hydro (20.5 percent); 3) coal (18.3 percent); 4) nuclear (11.6 percent); 5) oil (9.2 percent); 6) other (0.3 percent). [Source: OECD, Energy Balance of OECD countries]

Political and Economic Power of Russian Energy

Russia possesses abundant resources for energy production, making it a net exporter of electric power and the largest producer of energy in the world. Increasingly, Russia has used this position as a geopolitical lever to enhance its influence in the states of the former Soviet Union and to influence world energy prices. In 2006 the oil and gas industry contributed as much as 25 percent of gross domestic product, and oil accounted for 35 percent of Russia’s exports. [Source: Library of Congress, October 2006 **]

Russia's economy is highly dependent on its hydrocarbons. Russia is a major producer and exporter of oil and natural gas, and its economy largely depends on energy exports. Russia's economic growth is driven by energy exports, given its high oil and natural gas production. Oil and natural gas revenues accounted for 50 percent of Russia's federal budget revenues and 68 percent of total exports in 2013. [Source: U.S. Energy Information Administration, July 2015 ~]

Russia and Europe are interdependent in terms of energy. Europe is dependent on Russia as a source of supply for both oil and natural gas, with more than 30 percent of European crude and natural gas supplies coming from Russia in 2014. Russia is dependent on Europe as a market for its oil and natural gas and the revenues those exports generate. In 2014, more than 70 percent of Russia's crude exports and almost 90 percent of Russia's natural gas exports went to Europe. ~

The dominant player in the fuels sector is the Gazprom company, which controls natural gas production, owns the gas pipeline system, and has diversified into transport and gas processing as well as telecommunications. Gazprom, in which the state holds majority ownership, controls an estimated 30 percent of the world’s natural gas reserves. The extensive Shtokman natural gas field in the Barents Sea is expected to be productive for as much as 50 years, but Russia has delayed exploitation to coincide with increased world demand for liquefied natural gas. Yukos, until 2004 Russia’s largest oil company, lost most of its assets during the government’s campaign against its president, Mikhail Khodorkovskiy. At that point, an estimated 30 percent of oil output came from state companies. The largest such company, Lukoil, is responsible for 18 percent of production. **

Oil and Gas and the Russian Government

Oil and natural gas revenues account for more than 50 percent of Russia’s federal budget revenues. Before Putin came to power, Russia oil and gas accounted for 15 percent of the economy but paid only 4 percent of the taxes. In contrast, Indonesia's oil and gas sector accounted for 12 percent of the economy and 34 percent of its taxes.

The Kremlin keeps control over the energy industry by placing Kremlin loyalists in key positions in the main oil companies and selectively applying the complex and often arcane laws that affect the oil industry to project government interests.

In 2004, production taxes and export duties were raised for oil companies and loopholes that saved the oil companies millions were closed. Some that this wold, yes, bring n more revenues of the government but hurt the oil industry making it less transparent and scaring off foreign investors.

See YUKOS AFFAIR Under Economics

Dependence on Energy in Russia

Russia is one of the most energy-dependent countries. Many years of high energy prices bolstered Russia’s economy with an infusion of cash, but other industries were left underdeveloped, making the nation particularly vulnerable to declines in oil prices. The International Energy Agency of the Organisation for Economic Co-operation and Development (OECD) estimated that in 1993 it took 4.46 tons of oil equivalent (TOE) to produce US$1,000 of Russia's GDP, compared with an average of 0.23 TOE to produce US$1,000 of GDP for the OECD member countries. [Source: Library of Congress, July 1996 *]

Russia's excessive consumption of energy results from the Soviet system, which artificially priced energy far below the level of world market prices and thus subsidized it. Soviet energy-pricing policies disregarded resource utilization in the quest for higher output volumes and discouraged the adoption of conservation measures. Soviet planners also skewed resources toward the defense-related and heavy industries, which consume energy more intensively than other sectors of the economy. Until the 1980s, the national economy managed to survive under such policies because of the Soviet Union's rich endowment of natural resources. *

The problems that plagued the Russian energy sector in the last decades of the Soviet Union were exacerbated during the transition period. Since 1991 the output of all types of fuel and energy has declined, partly because of plummeting demand for energy during a time of general economic contraction. But the energy sectors also have suffered from the intrinsic structural defects of the central planning system: poor management of resources, underinvestment, and outdated technology and equipment. *

The structure of energy and fuel production began to change dramatically in the 1980s with the exploitation of large natural gas deposits. In the mid-1990s, natural gas accounted for more than half of Russia's energy consumption, a share that is expected to increase in the next decades. Oil accounts for another 20 percent, a proportion that is expected to remain approximately constant. Coal and other solid fuels, water power, and nuclear energy account for smaller shares that experts predict likely will decline after 2000. Despite the waste of fuel in the Russian economy, Russia manages to produce a surplus of energy for export. Exports, particularly of natural gas and oil, have accounted for 30 percent of Russian energy production, and this share is expected to hold steady. *

Russia's drive to become a market economy should help to alleviate some of the problems of the energy sector. Russian energy pricing policies have changed. Since January 1992, energy has been gradually deregulated, closing the gap between world market prices and domestic prices and forcing consumers to conserve. Russia is also adopting Western technology and more efficient management techniques that will improve productivity in the sector. *

Energy Shortages in Russia

Even though Russia is practically floating in oil and petroleum, gasoline shortages have occurred. Blackouts are common even in area rich in coal because the power utilities can't pay their bills because their customers haven't paid their bills. Much of Russia’s oil leaves the country and props up the government and the economy, leaving ordinary Russians to endure shortages and large price hikes. In the winter there are thousands of shivering people with no electricity or heat, other than what they produce themselves, mainly with wood stoves

In 1996, the monthly cost of electricity in Vladivostok was cheaper that a pack of chewing gum and a candle. The consequences on the artificially low prices were frequent blackouts. In the Russian Far East at that time the government paid hospitals, schools and military installations but they couldn’t pay their electric bills. The electric company couldn’t pay the coal company. The coal company ccouln't pay its bills. The Russian army radar surveillance network was temporally shut down over an unpaid electric bill.

A massive power blackout on May 25, 2005 struck Moscow and the surrounding area. It affected millions of people, closed down the Moscow stock exchange, stranded passengers in subways and crippled the transportation system. The outages began with an explosion at a 40-year-old substation. It then cascaded, affecting areas as far away as the Tula region, 200 kilometers south of Moscow. Electricity was not restored until the next day.

Chechen rebels said their commandos caused the outage, An investigation found that the blackout was the result of outdated equipment badly in need of fixing. Putin blamed the energy giant Unified Energy System, asking why company that made $2 billion in profits in 2004 but to spend $25,000 for badly needed repairs at four substations in Moscow.

The theft of copper wire, aluminum cables and other metals from power lines, communication cables, telephone poles, railroad power systems, military complexes and factories is a serious problem. The metal is mainly taken by desperately poor who have few other means to make money and sold as scarp through dealers with connections to organized crime. An estimated 15,000 miles of power lines were pulled down in the 1990s with the rate 10 to 20 times higher in the late 90s than in the early 90s. Millions of people lost their electricity. The problem was particularly bad in coal mining regions, where thousands of people have lost their jobs, and military facilities, full of underpaid soldiers.

Effects of Sanctions on the Russian Energy Sector

In response to the actions and policies of the government of Russia with respect to Ukraine, in 2014 the United States imposed a series of progressively tighter sanctions on Russia. Among other measures, the sanctions limited Russian firms' access to U.S. capital markets, specifically targeting four Russian energy companies: Novatek, Rosneft, Gazprom Neft, and Transneft. Additionally, sanctions prohibited the export to Russia of goods, services, or technology in support of deepwater, Arctic offshore, or shale projects. The European Union imposed sanctions, although they differ in some respects. [Source: U.S. Energy Information Administration, July 2015 ~]

Michael Birnbaum wrote in the Washington Post, “Western sanctions against Russia appear likely to remain in place for years. The United States and Europe imposed them after the Kremlin annexed Ukraine’s Crimean Peninsula in March 2014 and ramped them up in July after a civilian jetliner was shot down over territory held by pro-Russian rebels in eastern Ukraine. But the sanctions have done little to alter the core policies they were intended to target: Moscow shows no intention of giving up Crimea, and Western leaders say Russia actually upped its involvement in the conflict in eastern Ukraine after July’s round of sanctions. [Source: Michael Birnbaum, Washington Post December 2, 2014]

Sanctions and lower oil prices have reduced foreign investment in Russia's upstream, especially in Arctic offshore and shale projects, and have made financing projects more difficult. In recent years, the Russian government has offered special tax rates or tax holidays to encourage investment in difficult-to-develop resources, such as Arctic offshore and low-permeability reservoirs, including shale reservoirs. Attracted by the tax incentives and the potentially vast resources, many international companies have entered into partnerships with Russian firms to explore Arctic and shale resources. ExxonMobil, Eni, Statoil, and China National Petroleum Company (CNPC) all partnered with Rosneft to explore Arctic fields.6 Despite sanctions, in May 2014, Total agreed to explore shale resources in partnership with LUKoil, but then, because of sanctions, halted its involvement in September. ExxonMobil, Shell, BP, and Statoil also signed agreements with Russian companies to explore shale resources. Virtually all involvement in Artic offshore and shale projects by Western companies has ceased following the sanctions. ~

Arctic offshore and shale resources are unlikely to be developed without the help of Western oil companies. However, these sanctions will have little effect on Russian production in the short term as these resources were not expected to begin producing for 5 to 10 years at the earliest. The immediate effect of these sanctions has been to halt the large-scale investments that Western firms had planned to make in these resources. ~

At the same time as the United States and European Union were applying sanctions, oil prices fell by more than half, from an average Brent crude oil price of $108 a barrel in March 2014 to just $48 a barrel in January 2015. Both the sanctions and the fall in oil prices have put pressure on the Russian economy in general, and have made it more difficult for Russian energy firms to finance new projects, especially higher-cost projects such as deepwater, Arctic offshore, and shale projects. ~

Low Oil Prices Hit Russia Much Harder than Western Sanctions

Michael Birnbaum wrote in the Washington Post, “Plummeting oil prices are doing to the Kremlin what sanctions could not: forcing a grim rethinking of Russia’s economic future. The plunging price of oil is causing deeper and swifter pain than the Western sanctions that have targeted key areas of Russia’s economy. Russian leaders said that their economy will head into recession next year. In a nation where oil and gas exports largely determine the bottom line, lawmakers are slashing spending promises. And the ruble is hitting historic lows every day. [Source: Michael Birnbaum, Washington Post December 2, 2014 */*]

President Vladimir Putin has vowed that Russia will survive the current decline in energy prices — but he has also accused the West of waging pocketbook warfare over the cost of a barrel of oil. Putin’s approval ratings remain near record highs, but opinion polls also show new economic fears. “We simply need to implement our agenda calmly,” Putin said in an interview with the state-run Tass news agency. “Many say that oil prices are falling because a tie-up is possible among traditional producers, particularly between Saudi Arabia and the United States. They say this is being done especially to let the Russian economy down.” “Does this damage us? It does partially, but not fatally,” Putin said. */*

“Oil prices appear to be changing policy calculations far more quickly than sanctions, in part because Russian leaders believe they are significantly more threatening, given oil’s role as the lifeblood of the Russian economy. Finance Minister Anton Siluanov last week pegged the cost of lost oil revenue at $90 billion to $100 billion a year and the cost of sanctions at $40 billion. Russian worries accelerated after OPEC decided not to try to bolster oil prices by cutting production. That sent global oil prices to five-year lows. They have since recovered slightly, but Russia’s central bank has said that it is making plans for next year based on an oil price that it had until recently used only for the toughest stress tests of the economy. */*

Impact of Low Oil Prices and Sanctions in Russia

Michael Birnbaum wrote in the Washington Post, “The bleak prospects are setting in among the broader Russian population. In an October 2014 opinion poll conducted by the independent Levada Center, 61 percent of Russians said they expected a decline in living standards and an economic crisis “in the near future.” The upheaval is clearly making Russian lawmakers nervous. Several members of parliament asked the country’s top law enforcement official to investigate whether the central bank was breaking the law by refusing to intervene more forcefully to prop up the ruble, the Russian Interfax news agency reported. Economic officials have said they will have to revise the already-approved 2015 budget, although they have not detailed planned cuts. [Source: Michael Birnbaum, Washington Post December 2, 2014 */*]

“News of the expected economic contraction sent the ruble dropping yet again, pushing it down 5.5 percent against the dollar. The ruble has slumped 36 percent since the beginning of July, almost hand in hand with the falling price of oil. The decline means higher prices for imported goods, and the central bank said it expected a painful 10 percent inflation rate in 2015. Western brands such as Apple have already raised their prices in Russia; Ikea says it will follow suit, according to the Tass news agency. */*

“Putin scrapped an ambitious, $19 billion natural gas pipeline project to southeastern Europe. That decision came largely because of cold E.U.-Russia relations over Ukraine, but some analysts said the price tag was probably a factor. Some aspects of Russia’s finances still stand it in good stead. The state’s debts are low. Its international reserves were $429 billion at the end of October, down by a fifth since last year’s peak but still enough to hold off major economic calamity for about two years, analysts said. And the ruble’s slide has helped cushion the blow to state coffers, since oil transactions are in dollars: A barrel of oil at $71 on Tuesday actually bought more rubles than it did in July, when oil was $110. */*

“Any Russian company that has loans denominated in dollars but profits coming in rubles will find it far harder to pay back its debts. And U.S. and E.U. sanctions on Russia’s financial sector make it tough for companies to borrow more. For now, many here are pessimistic about the future. “I don’t see a good way out for them except for making friends with the West again,” said Vladimir Milov, an energy analyst and opposition politician. “But this won’t happen quickly, and time is against us.”“ */*

Foreign Investment in Oil and Gas in the 1990s

In the mid-1990s, many analysts consider the oil and gas industries to be the best targets for foreign investment in Russia. The record of foreign investment in that period illustrates both the potentials and the pitfalls of such ventures. Experts have concluded that the Russian oil and gas sector will require large amounts of foreign capital to improve output. According to some estimates, the oil sector will require US$30 to US$50 billion in new investment just to maintain the mid-1990s level of production. To return production to its peak levels will require an estimated US$70 to US$130 billion in new investments, which clearly would have to come from foreign sources. The Russian oil and gas sector also would benefit from infusions of Western technology and expertise. However, according to a 1995 report by Cambridge Energy Research Associates, key figures in the oil industry, most of whom were schooled in the isolated Soviet-era approach to commerce, have been indifferent or hostile to Western management methods. [Source: Library of Congress, July 1996 *]

By the end of 1994, the oil and gas sector accounted for about 38 percent of total foreign direct investment in Russia, but the total input was only about US$1.4 billion. Although Western companies are poised to commit large amounts of capital for exploration, as of 1996 most foreign investment had gone to repairing and maintaining current facilities. Some analysts have estimated that foreign investment in the oil and gas sector could reach US$70 billion by the year 2000. *

Among several United States oil companies active in Russia, Texaco heads a consortium in the largest project, the development of oil fields in the Timan-Pechora section of the Komi region north of the Arctic Circle. The project, under negotiation since 1989, has an estimated potential of US$45 billion in investment over the next fifty years. Conoco, a subsidiary of the DuPont de Nemours chemical firm, leads a consortium of United States and European firms and a Russian firm in the Polar Lights project to explore Siberian oil fields. Two United States companies, Marathon Oil and McDermott, along with the Japanese companies Mitsui and Mitsubishi and Britain's Royal Dutch Shell, are engaged in one of several projects to explore for oil off Sakhalin Island on the Pacific coast. The last two projects each could bring in as much as US$10 billion. *

Nevertheless, Russia's generally poor investment climate and other obstacles such as special taxes have discouraged additional investment in gas and oil. As of mid-1996, a tax of about US$5 per barrel was imposed on oil exports, and a tax of about US$2.60 was levied per 1,000 cubic meters of natural gas exported. Foreign and domestic firms were also subject to royalty payments to the Government for the privilege of drilling for oil. Foreign investors have argued that reduced profit margins are a substantial obstacle to the support of some projects. Some major oil investors have received tax exemptions, but delays in rebate payments have created additional deterrents. *

Image Sources:

Text Sources: New York Times, Washington Post, Los Angeles Times, Times of London, Lonely Planet Guides, Library of Congress, U.S. government, Compton’s Encyclopedia, The Guardian, National Geographic, Smithsonian magazine, The New Yorker, Time, Newsweek, Reuters, AP, AFP, Wall Street Journal, The Atlantic Monthly, The Economist, Foreign Policy, Wikipedia, BBC, CNN, and various books, websites and other publications.

Page Top

© 2008 Jeffrey Hays

Last updated May 2016

This site contains copyrighted material the use of which has not always been authorized by the copyright owner. Such material is made available in an effort to advance understanding of country or topic discussed in the article. This constitutes 'fair use' of any such copyrighted material as provided for in section 107 of the US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed without profit. If you wish to use copyrighted material from this site for purposes of your own that go beyond 'fair use', you must obtain permission from the copyright owner. If you are the copyright owner and would like this content removed from factsanddetails.com, please contact me.