11.02.2007
The Evolution of the Global Energy Market
№1 2007 January/March

The global energy
market is going through large-scale changes, some of which may
reach their final phase by 2017. There are increasing signs that
the traditional code of relations between energy producers and
consumers, established in the last quarter of the 20th century, is
becoming a thing of history. Mechanisms for regulating the global
energy market no longer work. Competition between consumers, fueled
by the emergence of new powerful players, like China and India, is
obviously increasing.

Oil fields that
are situated close to the developed countries, where oil
price-hikes in the 1970s-1980s prompted oil production, are now
near exhaustion. Today, large-scale investment is required in new
oil-bearing areas in West Africa, Central Asia, the Caspian region
and Russia in order to replace depleting oil fields. A new energy
reality is taking shape in the world.

GENERAL
SITUATION

The world’s key
energy players include:

The
United States
– the world’s largest oil consumer (24.6%).
It imports more than one half of the oil that it consumes. The
United States is also the world’s leading importer of natural gas
(16% of global imports);

The
Middle East
accounts for 61% of global oil and 40.1% of
natural gas reserves, which makes it a crucial regional factor in
the energy strategies of the world’s largest consumers;

The largest oil
producers in the Middle East are Saudi Arabia (22% of global proven
oil reserves, 13.5% of global oil output), Iran (14.9% of proven
natural gas reserves, 11.5 of proven oil reserves), Iraq (9.6% of
proven oil reserves), and Qatar (14.3% of proven natural gas
reserves);

Russia possesses 26.6% of global natural
gas reserves, 6.2% to 13% (according to different estimates) of
global proven oil reserves, and about 20% of known coal reserves.
The country is the world’s leading pipeline gas supplier and the
world’s No. 1 oil exporter (together with Saudi Arabia). More than
90% of Russian energy exports today go to European
countries;

China, the world’s fastest growing energy
consumer, accounts for 31% of global oil consumption growth in
2004. In the past 40 years, oil consumption in China has grown more
than 25 times over and is now at 8.55% of global
consumption;

The
EU
, which accounts for only 3.5% of global proven gas and
less than 2% of proven oil reserves (mostly in Norway and the UK).
At the same time, oil and gas deposits in Europe are exploited far
more intensively than in other parts of the world, which leads to
the rapid depletion of reserves. Western Europe consumes 22% of the
world’s oil supplies, while Germany is the world’s second largest
gas importer (14%). The main problem for the EU is its growing
dependence on energy imports: by 2030, oil imports to the EU will
grow from 76% to 90%, gas imports from 40% to 70%, and coal imports
from 50% to over 70%.

Today, the
situation on the global energy market is characterized by the
following factors:

  • oil is a global
    source of energy, and natural gas is primarily a regional source,
    while coal is a local source of energy;
  • while
    consumption of hydrocarbons is growing rapidly, there will not be
    alternative energy sources in the foreseeable future;
  • a rapidly rising
    need for energy resources in the emerging Asian economies amidst
    their ongoing economic development, rapid population growth, and
    the extremely high energy usage of national economies;
  • the widening gap
    between the volume of hydrocarbon consumption (growth) and
    production (decline) in developed countries;
  • limited
    production growth opportunities increase market destabilization
    risks;
  • the global
    economy is experiencing a shortage of oil and natural
    gas;
  • a shortage
    (temporary) of oil refining and transport facilities, together with
    a lack of additional oil production capacities;
  • large industrial
    consumers are showing a marked interest in alternative energy
    sources;
  • the growing
    importance of liquefied natural gas production and delivery
    projects;
  • interest in
    nuclear energy is reviving in some countries;
  • in the past few
    years mergers have been occurring exclusively within the limits of
    one country or a common geopolitical space as assets available for
    mergers and acquisitions are decreasing; and growing political
    risks in hydrocarbons-rich regions.[1]

The global energy
situation is marked by a deepening of contradictions that will
remain throughout the period under review.

[1] The growth of prices for hydrocarbons has shown
consistency since 2000,  when a new Arab-Israeli conflict
broke out. Since then, periods of high oil prices have always
echoed increases in tensions in this region: the U.S. intervention
of Iraq, th worsening of the situation involving Iran’s nuclear
program, th thirty day war in Lebanon, etc.

The conflict
potential inherent in the distribution of oil resources in the
world is the primary cause of geopolitical tensions. While the main
consumers of oil are highly developed countries or emerging giants,
the bulk of global hydrocarbon reserves is concentrated in a
relatively small group of developing countries or transitional
economies. This contradiction is a basic factor in the behavior of
key market players. Such large consumers as the U.S., the EU and
China are concentrating both economic and political resources on
expanding on the same market, which leads to competition between
them. The fact that the majority of resource-rich countries are
politically unstable sets the stage for future upheavals on the
world energy market, while opening some opportunities for Russian
expansion.

The world’s main
hydrocarbon resources are controlled by national state companies.
Meanwhile, downstream capacities, logistic and transport schemes,
as well as distribution of hydrocarbons, are under the control of
multinational corporations. This accounts for the differences in
market players’ behavior. Large multinationals are striving to
strengthen their resource base while state controlled companies,
which have the main resources, are striving to expand downstream
operations and obtain an equity share in transport and sales
structures. This contradiction is a growing trend that will likely
continue in the next decade.

There are fewer
regions today where hydrocarbon production can be raised sharply
without the use of modern technology or production methods that
demand many billions of dollars in infrastructure investment. As a
result, there are fewer opportunities for maneuver by key consumers
on the market, especially after 2013-17. Geostrategic confrontation
is developing mainly between China and the United States, and by
2030, China will be importing as much oil as the U.S. At the same
time the Chinese leadership is very well aware that further
economic growth will be impossible without securing reliable energy
sources. This is why energy security and the search for new markets
is becoming a matter of survival for one of the world economic
leaders. For its part, the U.S. is not interested in China
strengthening its positions on the hydrocarbons market and is ready
to use political and economic leverage to keep Chinese oil and gas
companies off these markets. 

MAIN VECTORS OF
DEVELOPMENT IN 2007-2017

The main trends
in the global energy sphere will generally continue in the next
decade. The share of fossil energy resources (oil, natural gas and
coal) will remain at the 2003-05 level, i.e., about 80% of the
aggregate consumption of primary energy sources. Until 2017, oil
will be by far the most important source of energy in the world
(interest in oil may only be expected to decline starting in
2030).

Within the next
decade, oil will remain the leading source of energy, accounting
for approximately 40% of energy consumption, followed by natural
gas (28%), coal (20%), renewable sources of energy (7%), and
nuclear energy (5%). The share of natural gas and oil will continue
to increase whereas the share of coal and nuclear energy will
decline. Possibly, by the end of the decade, the share of nuclear
energy will stabilize and alternative energy sources will start to
increase, but their growth will not affect global trends for at
least the next 15-25 years.

In the longer
term (by 2067), the world energy balance structure may change
according to two basic scenarios. The first one sees a gradual
shift from oil to natural gas, similar to the way coal was earlier
replaced by oil. This will be followed by a shift toward renewable
sources of energy and possibly to nuclear energy. At the same time,
oil will retain its positions as an important energy source at
least until the mid-21st century. In the second scenario, if
considerable progress is made in hydrogen technology within the
next decade and hydrogen fuel cells start replacing
gasoline-powered engines, oil production will begin to decline much
earlier, perhaps some time around 2025, but thus far this scenario
seems unlikely.

While the huge
energy demand of the global economy will gradually decline (mostly
in developed countries), the dependence between GDP growth and
energy consumption will remain. The continuing growth of the global
economy will drive energy demand for some time yet, but energy
consumption growth is slowing, and falling increasingly behind GDP
growth. This means that world economies are beginning to adapt to
the use of alternative and renewable energy sources. The share of
energy in the GDP of Western powers will continue to fall. This
makes it impossible to rely on energy sources as the foundation of
national economic development even in the medium term (particularly
for Russia).

In the next
decade, energy consumption will grow the most rapidly in 2006-12,
on average 1.6-2% a year, after which growth will begin to slow,
but the main trends in the energy sector will generally remain. On
the regional level, energy consumption growth will be the largest
in the Asia-Pacific region. Attempts by China and India to solve
their energy security problems with internal resources will most
likely prove unsuccessful. Oil, natural gas, and coal consumption
in the developing countries will exceed that in the industrialized
nations.

Global oil
consumption growth will be driven mainly by increasing consumption
in the Asia-Pacific region (on average 2.8% a year), primarily in
China (4.5%) and India (3.5%), as well as in North America (1.4%),
Latin America (2.6%) and the Middle East (2.1%).

In the next
decade, natural gas consumption will increase the most rapidly
around the Pacific Rim (on average 3.6% a year), Central and South
America (3.2%), the Middle East (3.1%) and in Africa (4.1%).
Natural gas consumption will grow as natural gas (including LNG)
transportation and utilization technology systems become cheaper
and more advanced. Gas supplies will increase as a number of major
production projects are implemented in a number of countries,
including Russia (Yamal Peninsula, East Siberia, the Far East, the
Kara Sea shelf), Iran, Qatar (North and South Pars), Saudi Arabia,
the United Arab Emirates, Kuwait, Algeria, Libya, Azerbaijan,
Kazakhstan, Turkmenistan (Caspian Sea shelf), and other
countries.

Due to an
expected drop in oil production, industrialized states may
substantially increase the volume of their oil imports, primarily
from politicaly and economically unstable countries in the Persian
Gulf. In general, this scenario makes diversification of oil supply
a pressing problem. Hence the interest that major energy consumer
nations and international corporations take in the energy resources
of non-OPEC countries, including Russia and other post-Soviet
countries.

Growing
hydrocarbon consumption in the world will further aggravate the
basic contradictions within the global fuel and energy system. In
the future, energy markets will be affected by coordinated
terrorist attacks against elements of the oil infrastructure, most
likely in Iraq, Iran, Saudi Arabia, Latin America, and African
countries, with resulting disruptions in deliveries. Growing
hydrocarbon consumption in the world will substantially increase
political risks and could cause new regional conflicts. At the same
time, oil crises, like those in the 1970s-80s, are unlikely to
appear in the next decade.

China will likely
do its utmost to strengthen its influence and economic presence in
the Middle East, Africa, Latin America and Central Asia. The United
States will remain China’s main competitor with respect to
geographic expansion. It cannot be ruled out that China will form
temporary alliances with India and possibly with Russia in order to
expand its presence in the global energy system.

The main source
of production growth in Latin America will be around Brazil’s
deep-water shelf. U.S. corporations will apparently develop this
region in order to lessen U.S. dependence on suppliers from the
Middle East with Brazilian hydrocarbons. At the same time, the
formation of the Chavez-supported Venezuela-Cuba-Bolivia union
could attract other Latin American countries. Thus, high oil prices
may cause substantial amounts of South American oil to be re-routed
from North America to Asia Pacific. Chavez will most likely retain
his position or transfer power to a successor. At the same time,
faced with the danger of the complete termination of oil supplies
or the formation of a political opposition in Latin America, the
United States could take more decisive measures with a view to
changing the political regime in Venezuela.

The share of
energy sources in the Black Continent in the global energy system
is expected to grow considerably. Energy production in the region
should be expected to peak by 2020, and then gradually decline.
Apart from the existing production projects in North and West
Africa (Nigeria, Algeria, Egypt, and Libya), international energy
companies will begin to actively invest in geological prospecting
and production in East and Southeast Africa (Sudan, Tanzania, and
Angola). Oil production should also grow in Chad, Congo, and
Equatorial Guinea. Priority will be given to shelf projects.
Angola, where deep-water deposits discovered in recent years will
reach full capacity, will become the growth leader in Africa. The
main competitors in African oil and natural gas projects are the
United States and China. The U.S. was the first country to start
working in this area, but China is now rapidly expanding its
presence in Africa. From every indication, the U.S. will strive to
use its political leverage in the majority of African countries to
impede Chinese entry into the African fuel and energy
complex.

In the Caspian
region, oil production will continue to steadily rise. Until 2015,
the regional leader will be Azerbaijan, where oil will be produced
at the Azeri-Chirag-Gyuneshli fields, while natural gas will be
produced at the Shakh-Deniz field. After 2015, the main oil field
will be the Kashagan deposits in Kazakhstan. As for natural gas, by
2017 the main suppliers will still be Turkmenistan and Kazakhstan,
while Azerbaijan’s shares will fall.

The geopolitical
lineup in the Caspian region is generally developing in favor of
the West. The Baku-Tbilisi-Ceyhan (BTC) oil pipeline bypasses
Russia and Turkish straits; the Baku-Tbilisi-Erzurum (BTE) natural
gas pipeline will be put into operation in 2007. Before 2015, a gas
pipeline will likely be built from Turkey (subsequently
transporting Iranian, Kazakh and Turkmen gas) to Europe (Nabucco
project). In this context, the U.S. and the EU will intensify their
pressure on Turkmenistan to re-route the gas flow to this pipeline
project. At the same time, Kazakhstan and Turkmenistan will
implement pipeline projects to carry oil and natural gas to China.
Russia’s influence in the Caspian region will be minimized.
Russia’s positions will most likely remain at their present level –
as a transit country for small volumes of Caspian oil along the
Caspian Pipeline Project (CPC). Oil shipments along the
Baku-Novorossiisk pipeline will likely stop flowing once the
Baku-Tbilisi-Ceyhan oil pipeline reaches full
capacity. 

The Broader
Middle East will generally remain under U.S. strategic control. In
terms of energy security, Saudi Arabia will remain the main energy
source until 2017. By 2010, it will put new production capacities
into operation. As a result, Saudi Arabia’s share of the world oil
market will remain unchanged, despite the fact that substantial
U.S., Chinese, EU, and Japanese resources will be spent to reduce
dependence on Middle East oil. The majority of countries in the
region will largely continue the policy of maneuvering between the
principal consumers – the U.S. and China.

With continuing
military-political instability in the Broader Middle East, no
breakthroughs should be expected with regard to Iraqi oil and
Iranian gas supplies to the world market before 2015. One likely
scenario in the next decade is that the U.S. will attempt to
establish control over strategically important oil and gas regions
at minimum financial and political cost. With respect to Iraq, it
is the “controlled breakup” of the country into three parts, as a
result of which the oil rich north will, as the U.S. hopes, pass
under the control of a U.S.-Kurdish administration. Then the
Kirkuk-Ceyhan oil export system would expand
accordingly.

With respect to
Iran, the U.S. will apparently continue to work toward the
“democratization” of the country’s political life amid “mild”
economic sanctions. One possible U.S.-Iran scenario could be
separate agreements and the relinquishment of a number of claims in
exchange for long-term fuel and energy projects. Given the
long-term nature of these measures, as well as the growing
political instability in the region throughout the period under
consideration, neither Iran nor Iraq will be able to fully realize
their energy production potential before 2017. For the U.S., the
Broader Middle East will remain a “reserve” source of hydrocarbons
for the long term. Meanwhile, in the next decade the U.S. will be
actively developing oil production programs in Latin America,
Africa, Canada and the Caspian.

Iran’s role in
the world – both in its political and energy dimensions – will
continue to grow as Tehran continues with its efforts to expand the
geographic base of its energy exports. There are three directions
in Iran’s regional gas strategy – western (Turkey, Europe),
northern (Transcaucasia and Central Asia) and eastern (Pakistan,
India, China, and Southeast Asian countries). The western vector of
Iran’s gas policy (the Iran-Turkey gas pipeline with the prospect
of moving into European markets) is in the zone of high political
risks. Nevertheless, Iran’s reserves are a key to the EU’s
independence from Russia. From this perspective, the United States
is interested in resolving the “Iranian problem” as soon as
possible. Thus, it will be able to use Iran’s energy potential to
deal with its own geopolitical problems, specifically, as already
mentioned, reducing the EU’s dependence on Russian energy. Even so,
projects that may bring Iranian hydrocarbons to the European market
can only materialize after Iran’s nuclear problem has been resolved
“in a peaceful way.” As long as this ominous problem exists, Tehran
will continue to target primarily the markets of the Pacific
Rim.

In the next
decade, developed consumer countries will give high priority to
alternative and renewable sources of energy. Today, this is one of
the most dynamic segments of the energy sector. These include wind
and hydroelectric power, as well as ethanol, Brazil being its
largest producer. Large-scale bio-fuel projects will begin to
surface. Investment in alternative types of energy is expected to
come mainly from the United States, China and Japan, as well as
from the world’s oil and gas majors – BP, ExxonMobil, Royal
Dutch/Shell, and others.

New technology
will help make energy consumption more effective, but alternative
energy sources will hardly be able to meet the world’s growing
energy needs: their share in the energy balance will only increase
modestly. For renewable sources of energy to meet at least one-half
of the required energy growth, their capacity would have to
increase 63 times. Such growth is impossible to achieve within a
space of 10 years. During this period (until 2017) it will also be
virtually impossible to mobilize production of “alternative” oil
(super-heavy oil, tar sand, blacks, etc.) or to develop fields and
deposits in hard-to-access areas.

The liquefied
natural gas (LNG) market is becoming a global market. The main
growth in demand for LNG is expected to derive from the United
States and the Pacific Rim countries. The U.S., which is already a
major LNG importer, will continue to increase its LNG imports
(there are 55 new projects for LNG terminals, including LNG
re-gasification plants). Japan is likely to remain the LNG market
leader until 2020, after which the U.S. will become the No. 1
consumer. Nevertheless, the main volume of natural gas by 2017 will
still be delivered to consumers through pipelines. Implementation
of LNG projects will be unable to reverse the trend in the next
decade.

The share of
nuclear energy will fall to 5.3% as developed countries pursue a
policy to enhance the technological security and environmental
safety of their energy systems. The use of nuclear energy in the
world will decrease amid its reduction in Europe (-1.1% a year) and
stabilization in North America. The steady reduction in the number
of nuclear power plants in Europe (except France) will be offset by
the construction of new facilities in Pacific Rim (China, India,
Pakistan, South Korea, etc.), as well as in Russia, Iran, and
Brazil. Consumption of nuclear energy in North America, Japan, and
France will increase to some degree in the next few years, after
which it will stabilize. Russia has a unique chance of increasing
its share on the global nuclear energy market. But that rare window
of opportunity will remain open for a brief period – about 10 to 20
years.

The risk of a
major drop of world prices in the medium term is very high.
Contributing factors here include sufficient supplies of oil and
natural gas, declining interest of developed countries in
traditional [fossil] fuels, and the construction of new energy
capacities in the Caspian, Africa, and other parts of the world, as
well as the policy of consumer countries (above all the U.S.)
toward steadily increasing their interest rates. As a result, a
considerable number of investors are moving away from the raw
materials market, which narrows opportunities for speculative
growth in hydrocarbon prices.

In the
foreseeable future, Iran will play a major role concerning prices
on the hydrocarbon market. The course of events in and around Iran
is likely to follow one of three possible scenarios.

Scenario
1
(the more likely): further confrontation between
Washington and Tehran, which, however, will not lead to an armed
conflict. In this case, the world energy market will see a downward
trend with oil prices falling to $40-50 per barrel and fluctuations
within the range of $5-10.

Scenario
2
: reaching agreement and resolving the conflict by
peaceful means, which will lead to a sharp fall in oil prices
within a year. But the chances for the realization of this scenario
are rather slim.

Scenario
3:
an armed conflict. In this scenario, oil prices will
exceed $100 per barrel. Subsequently, if the armed conflict becomes
protracted, the price could rise to $130-150 per barrel, which
would force the U.S. to exert unprecedented pressure on the OPEC to
increase production. As a result, competition in non-OPEC
production areas will grow considerably. But if the military
confrontation in Iran follows the “Iraqi model,” the market will
gradually adjust itself and stabilize by 2015-17.

OUTLOOK FOR THE
RUSSIAN OIL AND GAS SECTOR

Russia has a
large potential on the world energy market. By now, more than 3,000
hydrocarbon deposits have been discovered and prospected in Russia.
About one-half of them are being developed. Over 50% of Russian oil
production and more than 90% of natural gas production is
concentrated in the Urals and West Siberia. Most of the deposits in
this region are marked by a high rate of depletion, so while it
remains the country’s main hydrocarbons base, it is also necessary
to develop alternative energy production areas.

According to
Russia’s Energy Strategy for the Period Until 2020, by 2015, oil
production in Russia could hit 530 million metric tons with oil
exports at 310 million metric tons. The West-Siberian oil and gas
province will remain the country’s main oil base. New oil
production centers will emerge in East Siberia and the Republic of
Sakha (Yakutia) – up to 50 mln metric tons by 2015; on the Sakhalin
shelf (25-26 mln metric tons), in the Barents Sea and the Russian
sector of the Caspian Sea. Oil production will also increase in the
Timano-Pechora Province.

The capacity of
main oil pipelines and sea terminals for the export and transit of
oil from Russia beyond the CIS could increase 50% by 2015. This
will enable Russia by 2015 to export to non-CIS countries about 70
mln metric tons along the western and northwestern lines, about 130
mln metric tons along the Black Sea-Caspian line, about 80 mln
metric tons along the eastern line, and up to 25 mln metric tons
along the northern line.

By 2015, natural
gas production in Russia could reach 740 billion cubic meters, with
gas export hitting 290 bln cu m. Gas production in West Siberia
during this period will stabilize, therefore, most of the increase
will be ensured by putting into operation new fields in East
Siberia and Russia’s Far East, as well as the northern and Far East
sea shelf. Substantial natural gas reserves in East Siberia and
Russia’s Far East make it possible to form new gas production
centers in this region.

At the same time,
the existing trends in the development of the Russian fuel and
energy sector suggest that in the next decade Russia will not be
able to strengthen its positions on the world energy market,
converting its energy potential into political
dividends.

The main
impediments to oil production growth in Russia are:

  • the critical
    condition of the existing oil export infrastructure;
  • mineral and raw
    materials reproduction problems;
  • political
    restrictions with respect to construction of private pipelines and
    access for foreign companies to the Russian market;
  • the low
    investment activity of oil companies; and
  • the shrinking
    resource base of Russian oil companies (production has been
    exceeding reserve growth potential for many years).

The main factor
in Russia’s weakening positions on the oil refining market is the
obsolescence and general poor condition of most of Russia’s oil
refineries. Thus, although some companies have modernized their
refineries in the past few years, the general quality of Russia’s
oil refining infrastructure is considerably below international
standards.

The main
impediments to natural gas production growth in Russia
are:

  • the policy of
    Gazprom, which finds it unprofitable to develop the domestic market
    with the current domestic gas tariffs;
  • the gap between
    the growth of gas production and consumption;
  • the need to
    invest substantial resources in development of new
    deposits;
  • the preference
    that is given to the purchase of Central Asian gas over investment
    in production projects;
  • the state policy
    of barring foreign companies from developing the most promising
    fields (Yamal, Shtokman) as project operators;
  • the critical
    condition of the existing gas export infrastructure,
    and
  • the monopolistic
    nature of Russia’s natural gas sector.

The upshot of all
this is that the existing oil production growth potential will only
last for a few more years. Because of a confusing, poorly regulated
tax system, and a lack of investment incentives for prospecting
work, raw materials companies will be unable to prospect and
develop new large deposits. The rate of oil production growth that
Russia showed in 2000-04 is unlikely to be maintained in the
future. By 2017, Russia will reach the maximum production level of
10-11 million barrels a day (530-550 million metric tons a year) by
the end of the second decade, and that level will eventually
stabilize. By 2010, Russia will account for about 15% of the world
oil market, and this share will fall to around 10% by 2030.
Therefore, factoring in global consumption growth, Russia’s share
on the world oil market will tend to decline.

By 2010, natural
gas production in Russia will stabilize, and by 2010, given
domestic demand and export levels, Russia could have a natural gas
shortage of 75-150 billion cubic meters.

To maintain or
increase energy production and exports, Russia needs to start
developing new areas – above all in Siberia and the Northern shelf.
This requires a political decision to attract investment (including
foreign investment). No drastic changes in this sector are expected
before 2010 – or even by 2017.

Despite its
leading positions in the production and shipment of hydrocarbons,
Russia lags noticeably behind in the implementation of advanced
technologies. The country’s leadership puts the main emphasis on
oil, natural gas and coal as the principal instruments that allow
Russia to attain and retain the status of a great energy power.
Meanwhile, the world’s changing energy structure will by 2030-50
substantially reduce Russia’s competitiveness.

Russia’s
technological lag, especially in the medium term, also concerns the
production and transportation of liquefied natural gas (LNG). By
now, about one-quarter of global gas exports come in liquefied
form, with the LNG market expanding rapidly. It is not ruled out
that by 2017 LNG will become a viable competitor to gas supplies
that are transported via pipeline.

Concerning the
implementation of large-scale LNG projects in Russia, the outlook
is rather pessimistic. Virtually the entire LNG volume within the
Sakhalin-2 project (the only Russian LNG project that could be
completed within the next five years) has been contracted. As to
the situation around other LNG plants, their future is uncertain.
For example, it was decided to re-route natural gas from the
Shtokman field (the most promising deposit for LNG deliveries to
the U.S.) to Europe, to be shipped by pipeline. The LNG project in
Ust-Lug, even if it is carried out before 2017, will not be enough
to turn Russia into a great gas supplier due to its low
capacity. 

While Europe will
in the next decade remain the main market for Russian hydrocarbons,
Russia’s capacity for oil shipments to Europe is rather limited.
The main pipeline, Druzhba, is in need of renovation; the Baltic
Pipeline System has already reached full capacity, while in the
south all of Russia’s oil export routes flow via Turkish straits
with no viable alternatives in the foreseeable future. The
throughput capacity of the Bosporus Strait is the most vulnerable
part of Russia’s transport policy as Turkey is expected to continue
restricting its straits to the passage of foreign oil tankers. Such
a scenario will, on the one hand, reduce Russia’s export capacity
and, on the other, compel Moscow to use the BTC as a reserve route
in the southern direction (should the Turkish straits be closed off
completely).

Russia will be
able to partially compensate for losses with the
Burgas-Alexandropoulos oil pipeline bypassing Turkish straits. But
given that the costs involved in Russian oil production and exports
exceed analogous costs on the Caspian, it is quite likely that
Russian oil will be partially crowded out of the European
market.

The second most
important market, whose influence will be growing in the period
under review, is the Pacific Rim market. Meanwhile, here too Russia
has only a limited capacity to ensure the declared increase in
energy supply (from 3% to 30%). To meet this target, at least 60
mln metric tons of oil and 65 billion cu m of natural gas a year
will have to be “re-routed” to the east. This task is technically
unfeasible and financially dubious in the next 10 years.

The Russia-U.S.
energy dialog is in its early stages. From every indication, the
resources of the Shtokman field will be sent to Europe, while the
construction of the Northern Oil Pipeline to Murmansk will be
frozen until 2015 – the deadline for putting the Eastern Pipeline
into operation (Transneft will simply not have enough money to
handle both projects). By 2017, the share of Russian oil and
petroleum products on the U.S. market will not exceed 5%. In the
most likely scenario, these restrictions will not allow Russia to
emerge as a major player on the North American market in the next
decade.

Russia will be
confronted with growing competition on the gas markets in Europe
and the Pacific Rim. European consumers are pinning hopes for
energy diversification on the increasing share of North Africa
(Algeria, Libya and Egypt), as well as states in the Caspian
region, Central Asia and the Middle East. A number of pipeline
projects, due to be completed in the next five years (the BTC, the
BTE, which is to be linked with Nabucco, and others), are designed
to limit Russia’s influence. For its part, China will implement a
number of projects, also reducing its dependence on Russian
hydrocarbons – oil and gas pipelines from Kazakhstan and a gas
pipeline from Turkmenistan. Furthermore, oil deliveries to China
from South America and LNG from Iran will increase.

Nevertheless, in
Europe, Russia will retain its status as a regional energy leader.
The EU will remain the largest market for Russian energy resources
in the foreseeable future. It is rather unlikely that an
all-European energy market will be created any time soon that would
crowd out Russia.

The major
contributing factors here are:

  • outstanding
    problems within the EU framework, and the lack of consensus on ways
    of ensuring energy security;
  • specific
    projects on alternative sources of energy in Europe are implemented
    mainly on the national level;
  • the explosive
    military-political situation in the Middle East (especially around
    Iran, which is being closely watched by virtually all Russian gas
    consumers in Europe and in post-Soviet states as an alternative to
    Russia in oil and gas supplies) creates a number of political and
    military risks, impeding the implementation of Western plans to
    build new energy corridors.

Therefore, the
main task facing Russia in the next decade will be to provide
conditions to minimize expected losses, first, from its declining
presence on world oil and gas markets, and second, from falling
world energy prices. In this context, the main priorities for
Russia are:

  • a greater
    emphasis on the domestic oil and gas production sector – both on
    the state level and on the part of oil and gas majors;
  • incentives to
    stimulate investment in the reproduction of the mineral and raw
    materials base and the development of new deposits;
  • temporary
    deviation from the concept of global energy expansion in favor of
    investment in national production projects in East Siberia and
    Russia’s Far East, the Sakhalin, the northern shelf,
    etc.;
  • at the same
    time, considering that the Middle East is going to remain the
    world’s main energy powerhouse, Russia should concentrate on
    preserving and expanding the presence of Russian energy companies
    in Iran, Iraq, and other states of the region;
  • reviewing
    production sharing agreements (PSA) and developing new mechanisms
    for participation of foreign companies in LNG projects in Russia,
    taking into account the interests of both sides;
  • special
    attention needs to be given to LNG production projects as by far
    the most promising on the global energy market;
  • enhancing
    technological security and effectiveness of energy transport
    networks;
  • expanding
    hydrocarbon deliveries to European markets by building additional
    energy transport facilities (to northern and southern Europe and
    the Balkans) and consolidating positions on the Pacific Rim
    market;

Russian oil and
gas companies should take advantage of the favorable external
environment to modernize their production capacities, use advanced
technology, and develop their sales network, which will help them
cut production costs and offer more competitive products on foreign
markets.