Russia in Global Affairs

THE SITUATION ON THE INTERNATIONAL OIL AND GAS MARKETS

Despite some very pessimistic forecasts concerning the prospects
of the oil industry, the role of hydrocarbons in the development of
the world economy will continue to be decisive for another several
decades.

The energy security of the highly developed countries will
depend on the availability of reliable hydrocarbon sources. These
countries are the main oil consumers, whereas a small group of
developing and transitional states are largely responsible for the
export-oriented oil production. The United States, for example,
accounts for 25.4 percent of the world’s oil consumption and a mere
9.9 percent of the world’s oil output. The developed countries of
Northeast Asia (Japan, South Korea and Taiwan) do not produce oil,
but they consume 11 percent of the global oil supply. After 1993,
fast-developing China joined the group of net importers and now
consumes 7.4 percent of the world’s oil (together with Hong Kong),
while extracting 4.8 percent of the world’s total oil output.

The Middle East, the world’s leading oil exporter, extracts 28.5
percent of global oil supplies, but consumes only 5.9 percent.
Russia follows right behind with 10.7 percent of the world’s oil
output, but it consumes even less oil than the Middle East with 3.5
percent.

Not that long ago, oil replaced coal as the world’s main source
of energy. Now we are witnessing the beginning of a new era when
natural gas will replace oil. Energy production from oil pollutes
the environment two times less than peat or coal, but natural gas
is three times environmentally cleaner than oil. However, natural
gas will overtake oil as the world’s primary energy source only
after the process of turning gas into a global commodity gains
momentum.

Although natural gas is a relatively new commodity on the local
and international markets, it is already obvious that it is
characterized by the same geographical disproportion between
production and consumption, as is characteristic of oil. The United
States, for example, is one of the world’s two top leaders in gas
production (21.7 percent of the world’s output), but it consumes
more than it produces (26.3 percent); the consumption and,
consequently, the import of gas by the U.S., keeps steadily
increasing (actually all newly built electric power plants in the
country use natural gas). The 15 older members of the European
Union depend on natural gas imports even more – they consume 15.2
percent of the world’s gas output, although they produce only 8.3
percent of the world’s total amount. Considering the depletion of
Europe’s own gas resources, its reorientation toward natural gas,
and the increasing convergence of its gas and power-engineering
sectors, Europe’s dependence on gas imports will continue to grow
at a slow but steady pace.
The developed countries in Northeast Asia fully depend on the
import of liquefied natural gas in the same way they depend on oil
imports. For example, Japan, South Korea and Taiwan consume 4.4
percent of the world’s output. China in 2002 produced and consumed
equal amounts of natural gas (1.3 percent together with Hong Kong).
However, fast economic growth, together with the conclusion of
long-term contracts for gas supplies, are turning China into a net
importer.

World energy balance (%)

Russia far outpaces other countries in the production and export
of natural gas; it accounts for 22 percent of the world’s gas
production. And although its domestic gas consumption stands at
15.3 percent of the world’s figure (ranking second after the U.S.),
its export potential (the difference between extraction and
consumption) exceeds the aggregate export potential of three
regions in the world – the Middle East, Africa and Latin America.
In 2002, the Middle East produced 9.3 percent of the world’s gas
and consumed 8.1 percent. The main producer – Saudi Arabia –
consumes all the natural gas that it extracts, while Iran consumes
slightly more gas than it produces. Until recently, only Qatar and
the United Arab Emirates enjoyed a natural gas surplus, which they
sold to neighboring countries. The export potential of Africa is
somewhat higher, but only due to Algeria. In the Asia-Pacific
Region, three countries boast the largest export potential –
Indonesia, Malaysia and Australia (6.2 percent against 3.4
percent).

Now let us examine how export hydrocarbon resources are
distributed among their major consumers.
In 2002, Western Europe as a whole was the main importer of oil and
related products. The bulk of these imports came from three
regions: Russia and the Commonwealth of Independent States (214.6
million tons), the Middle East (161.1 million tons), and North
Africa (122.5 million tons). Europe is demonstrating an increased
interest in the African continent, which seems to be part of a
strategy for diversifying its oil import sources there. In the last
few years – especially during the presidency of George W. Bush –
Europe has faced bitter, even aggressive, competition in the region
from U.S. corporations.

The U.S. accounts for 26 percent of all imports of oil and
related products (561 million tons), but the Americans eventually
formed a diversified structure for their imports. The greatest
amount of oil and related products (171.7 million tons) are
imported from Canada and Mexico – Washington’s partners in the
North American Free Trade Agreement (NAFTA). South and Central
America account for 119.2 million tons of oil shipments to the
U.S., while Africa accounts for 69.1 million tons. Europe provides
57.0 million tons; Russia and the CIS, 9.8 million tons;
Asian-Pacific Region, 12.8 million tons; the Middle East, 114.7
million tons. Through such a strategy, the U.S. has protected
itself against catastrophic developments, for example, in the
Middle East. Furthermore, unlike Europe, the U.S. has ‘alternative’
oil and gas reserve fields in Alaska, although development in this
sensitive region remains blocked by U.S. legislators. However, the
U.S. government could easily overcome this resistance should an
emergency situation arise with regard to the global energy
supply.

Of the total amount of oil and related products exported from
the Middle East countries, 62.3 percent goes to the Asia-Pacific
Region. For example, Japan released figures for the year 2003
demonstrating that its import of crude oil supplies from the Middle
East was 87 percent.

The global situation with regard to natural gas supplies is
somewhat different. Presently, natural gas is transported largely
by pipelines, which reduces the distribution of this commodity to
the regional level. The amount of liquefied natural gas being
transferred by sea has not been very substantial: in 2002, the
figure stood at 150 billion cubic meters, compared with 431.35
billion cubic meters of gas transported to the global markets via
pipelines.

Table 1. Oil

Source:   BP Statistical Review of World Energy.
June 2003. BP p.l.c., L., 2003.

The bulk of liquefied natural gas is consumed by countries in
Northeast Asia (Japan, South Korea, and Taiwan) – 103.8 billion
cubic meters. Western Europe consumes slightly more than 39 billion
cubic meters, while the U.S. (including Puerto Rico) consumes more
than 7.1 billion cubic meters. The dependence of global consumers
of liquefied natural gas on supplies from the Middle East is much
less. Although there have been signed contracts for gas exports in
the region, it will be several years before the development of gas
production begins there. Presently, the export of liquefied natural
gas from the Middle East slightly exceeds 33 billion cubic meters.
The largest suppliers of liquefied natural gas are the
Asian-Pacific countries (Indonesia, Malaysia, Australia and Brunei)
which provide over 74 billion cubic meters; African countries, such
as Algeria, Nigeria and Libya provide 35.35 billion cubic
meters.
The largest consumer of natural gas is Western Europe; it imports
240 billion cubic meters. The main suppliers of natural gas to
Europe (including Central and Eastern Europe) are Russia (128.2
billion cubic meters) and Algeria (29.38 billion cubic meters);
Algeria also supplies 26.13 billion cubic meters of liquefied
natural gas. The second largest importer of natural gas is the
United States which imports 109 billion cubic meters of gas from
Canada.

Table 2. Natural gas

Proven oil reserver (% of world reserves)

Source:   BP Statistical Review of World Energy.
June 2003. BP p.l.c., L., 2003.

To assess the prospects for the development of the global oil
and gas markets, one must take into consideration one more factor:
the amount of resources that the hydrocarbon-producing countries
possess, together with their ability to maintain the current
consumption levels, as well as its predicted growth. The Middle
East now boasts the largest proven oil reserves: in 2002, they were
estimated at 685.6 billion barrels, or 65.4 percent of the world’s
oil reserves. Provided that oil extraction is maintained at its
present level, the oil reserves will last for another 92 years.
Saudi Arabia alone can exploit its oil reserves, which comprises 25
percent of all oil in the world, for the next 86 years.

For the short and even medium term, however, the Middle East
will remain the most unstable region in the world – a large
‘medieval island’ in an ocean of fast-developing industrial and
post-industrial economies. The problem for the Middle East is not
only the nature of its political regimes, but the socio-economic
nature of the society. The problem cannot be solved by sending
U.S., NATO or UN armed forces into the region. This is the reason
why, perhaps, a majority of developed countries have begun
searching for alternative sources of hydrocarbon resources.

South and Central America can alleviate the situation for a
short period of time, and only for the U.S. Africa has even less
proven reserves, and these will last for only 27.3 years if
extraction is maintained at the present rate. The situation is
worse in the Asia-Pacific Region where hydrocarbon reserves will be
depleted within 10 to 14 years. In Europe and the CIS, the largest
proven oil reserves are in Russia; these will last for less than 22
years. Norway, ranked second in Europe for oil reserves, is far
behind Russia with one percent of the world’s proven reserves. All
of the other countries in Europe and the CIS, some of which are
often cited in the press and even in scientific studies as
potential alternatives (e.g. Kazakhstan and Azerbaijan), each
possess less than one percent of the world’s reserves. These
factors make it obvious that all of the talk about the West’s
desire (especially in the U.S.) to establish democracy in the
Middle East is just a smoke screen, and a rather transparent one,
which cannot conceal the true motive – their interest in the Middle
East’s oil reserves. (The Americans, for example, did not hesitate
to establish close relations with the harsh dictatorship in
Equatorial Guinea as soon as large oil reserves were discovered
there.)

Russia is an indisputable leader in proven natural gas reserves
with over 30 percent of the world’s total amount. If Russia
continues extracting gas at the present rate, its reserves will
last for more than 80 years. By comparison, the other countries in
Europe and the CIS, taken together as a whole, account for only 8.7
percent of the world’s reserves. Norway’s reserves may last for
33.5 years, while gas fields in Britain may be depleted in less
than seven years. Kazakhstan, Turkmenistan and Uzbekistan together
possess 3.7 percent of the world’s natural gas reserves, but only
Kazakhstan can exploit its gas fields for another 100 years or
longer. In any case, all the above countries can only meet Europe’s
short-term natural gas requirements. In the long term, Russia has
no serious rivals when it comes to natural gas reserves.

Russia is far ahead of second-place Iran, which possesses 14.8
percent of the world’s gas reserves. Iran’s natural gas supplies
will last for at least 100 years. However, political considerations
have caused Western corporations to set their sights on Qatar with
its 9.2 percent of the world’s gas reserves; these are expected to
last as long as Iran’s reserves. Another Middle East country
attractive to foreign consumers is the United Arab Emirates (3.9
percent of the world’s gas reserves), whereas Saudi Arabia (4.1
percent) consumes all of its natural gas reserves itself.

In Africa, only Algeria, Nigeria and Egypt have large, proven
gas reserves. In Asia, Indonesia and Malaysia – major exporters of
liquefied natural gas to Japan, South Korea and Taiwan – have only
1.7 and 1.4 percent of the world’s gas reserves, respectively,
which will last for 37 and 42 years, respectively.
In North America, the situation with its proven reserves of natural
gas is similar to that with its oil reserves. The three NAFTA
member countries account for 4.6 percent of the world’s reserves,
which will be enough for 9.4 years. Neighboring countries in
Central and South America (4.5 percent of the world’s reserves)
will hardly be of much help to them. Gas reserves in Central and
South America may last for 68 years, but this gas will more than
likely be used to meet the growing regional demand. The small
country of Trinidad and Tobago may be the only exception. Although
it has only 0.4 percent of the world’s gas reserves, this amount
far exceeds the country’s domestic needs. The U.S. has already
concluded several contracts with it for supplies of liquefied
natural gas.

So, America, together with the large corporations representing
its ‘gas interests,’ will offer bitter competition to the West
European and Northeast Asian countries within the international gas
markets. This factor, in addition to the fast-growing demand for
hydrocarbons in China, suggests that Russia will play an ever
growing role in ensuring a normal balance between supply and demand
on the world’s natural gas market.

MERGERS AND TAKEOVERS

Changes on the world energy markets, and the toughening of
environmental requirements in the Western countries, forced the
international oil and gas companies to take appropriate measures.
These factors also prompted the EU leadership to draw up specific
electricity and gas directives.

The problem of dwindling oil reserves, together with dropping
oil prices in the mid-1980s, and again in 1997-1999, provoked
several waves of mergers and takeovers within the oil and gas
industries. During the first wave, Texaco took over Getty Oil,
while Chevron took over Gulf Oil. The second wave was characterized
by a series of strategic mergers and takeovers: British Petroleum
took over Amoco, and then eventually ARCO. This was followed by
Exxon taking over Mobil Oil to become the world’s largest oil and
gas corporation. These heavyweights were joined by France’s Total
SA after it took over Elf Aquitaine and Belgium’s Petrofina SA.
Finally, Chevron and Texaco completed the process for their merger.
The strategic goal of these mergers and takeovers was to
consolidate efforts and funds in order to find and develop new oil
and gas reserves in remote regions. These are usually in areas with
harsh natural conditions, or in deep-water fields that are more
difficult to develop.

The new strategy was further prompted by natural gas gradually
becoming a global commodity. This tendency helped to initiate the
‘gasification’ of the heavyweight players, that is, their evolution
from oil corporations into oil-and-gas and, finally, gas-and-oil
corporations. Royal Dutch/Shell Group offers the most glaring
example of this transition. It has the largest share of gas (48
percent) in the overall ratio of its oil and gas resources, and in
the next three to four years the company may finally shift toward
gas. This move would naturally correspond with the contracts the
company has recently concluded, as well as with its officially
proclaimed reorientation toward natural gas (John Barry, named
chairman of Royal Dutch/Shell in Russia, made a statement to this
effect last summer at an annual conference organized by the
Renaissance-Capital Investment Group). Shell is followed by Exxon
Mobil, whose gas reserves are actually equivalent to Shell’s.
However, Exxon Mobil’s gas/oil ratio is slightly different at 45/55
percent. Nevertheless, Exxon Mobil is confidently leading the other
majors in gas production. BP is placed third among the world’s oil
corporations in gas extraction (its oil/gas ratio is 52/48
percent). Also, BP now accounts for 30 percent of the world trade
in liquefied natural gas. Other majors are also beginning to move
in the same direction (for example, Chevron Texaco and
ConocoPhillips).

However, the tectonic shifts on the world energy markets have
been marked by an important new trend in the last few years. The
EU’s adoption of electricity and gas directives in 1996-1998, and
more importantly, the actual start of their implementation, was a
major factor for the new wave of mergers and takeovers in the
world’s energy sector. In 2001-2003, a fundamentally new energy
policy began to take shape in Europe. The EU’s strategic
orientation toward the most environmentally safest fuel – natural
gas – has resulted in the ever-increasing use of gas turbines at
newly built electric power plants. Consequently, this has led to an
increasing convergence in the production and marketing of gas and
electricity.

Recently, the national gas and electricity companies were
confronted with fundamentally new challenges, such as the
liberalization of the energy markets, their greater openness to
third parties and the privatization or commercialization of
state-owned energy corporations. In order not to go bankrupt, or
become easy prey for a takeover by other companies, the national
corporations had to adapt to the new situation and meet those
challenges. The national European corporations had to be
consolidated and made more competitive before they entered the
world energy markets. As it turned out, the antimonopoly
requirements set by the Brussels officials often motivated the
national energy companies to restructure and extend their
businesses by exceeding the national frameworks. This was
accomplished through diversification, or the convergence of the gas
and electricity sectors.

At the same time, and irrespective of these European tendencies,
the United States experienced a negative situation that was
provoked by the unsuccessful deregulation of its gas industry. What
evolved was an energy crisis in California, and the collapse of
several energy corporations, among them the huge Enron company.
These events prevented American businesses from taking an active
part in the third wave of mergers and takeovers which had already
begun in Europe. As a result, the assets of Enron, El Paso and
other energy companies continue to be sold, and are being purchased
by independent U.S. oil companies. In other words, the energy
business in the U.S. is being restructured, but there is a
‘European’ nature to the third wave of mergers and takeovers.

This wave has resulted in the rapid rise of some national energy
companies in Europe to the majors’ level. Germany’s
super-corporation E.ON AG, which emerged in 2000, provides a prime
example. In the course of the third wave it took over Britain’s
Powergen (only a year before this company had taken over the U.S.
company LG&E Energy), Sweden’s Sydkraft, Britain’s TXU Europe
Group, and U.S.-owned Midlands Electricity in Britain. However,
E.ON AG’s main transaction in 2002-2003 was its merger with
Germany’s Ruhrgas, which took a year and a half to finalize. It was
necessary for E.ON AG to overcome strong resistance from the local
authorities, Brussels regulatory bodies, as well as its German and
European rivals. Finally, under the slogan of Germany’s “national
energy security,” E.ON AG established a full-fledged, vertically
integrated corporation that is capable of successfully competing on
the European and global markets. This was a blow to Brussels
bureaucracy which had fought for many years to divide the functions
and businesses of the national energy companies.

Another blow to the EU’s energy liberalization strategy hit the
very heart of the liberalization process, and in the most exemplary
country in this respect – Great Britain. The previous policy of
splitting businesses, as well as destroying the monopoly of the
vertically integrated British Gas Corporation, only weakened the
British positions. This is why, in the course of the third wave,
British companies were consistently the victims of takeovers. The
only exception among the major transactions between 2001 and 2003
was the merger of the gas distributor Lattice Group and the
electricity transmission company National Grid Group. But this
intra-British transaction only emphasized the failure of all
previous efforts to demonopolize the energy sector in the
country.

Throughout this period, companies merged and took each other
over en masse. This process involved the national oil, gas and
electricity companies from various countries (German, French,
Spanish, Italian and so on). This gigantic restructuring of the
European energy sector is not yet over. However, many experts now
conclude that this wave of mergers and takeovers will result in an
increase in regional monopolization, together with the formation of
an oligopolistic structure of the global energy market. Its main
actors will comprise several traditional majors, plus three to five
newly established European super actors with global ambitions.

WHAT THE WEST WANTS FROM RUSSIA

The energy majors’ strong interest in Russia is easily
explainable. Today, these companies own a total of almost six
percent of the world’s oil reserves that are concentrated in the
more developed and ‘ripe’ oil fields. According to the Oil and Gas
Journal, the largest five majors now control only 15 percent of the
oil and gas markets, and all of them must address the problem of
decreased production, as well as geopolitical and geo-economic
risks from OPEC. At first, the majors tried to apply the mechanism
of production-sharing agreements (PSA) in Russia. In the 1960s,
Indonesia concluded production-sharing agreements with relatively
small independent oil companies from the West (above all, the
U.S.); this practice was followed by several other countries. These
agreements served as ‘rams’ for destroying the world monopoly of
the ‘Seven Sisters’ – the past companies which made up the majors.
Later it was the majors who sought the rights to PSA for gaining
access to Russia’s oil and gas wealth.

However, the imperfection of Russian laws impeded PSA
implementation. It was only after the government of Yevgeny
Primakov got through the State Duma 22 amendments to the law (in a
one-week period of time) that the first (Sakhalin) agreements were
put into effect. Later, however, some Russian oligarchs (above all,
those who had no roots in the oil business and who viewed it as
another field for speculative financial operations) launched
another massive PR campaign against PSA in the press and inside of
the State Duma under pseudo-patriotic slogans, accusing the
government of ‘selling out the Homeland.’ However, the majors soon
realized that the true reason for the fierce resistance to PSA in
Russia was not the rejection of foreign capital per se, but the
fact that there was no room for speculative oligarchs in the
state-majors link of the PSA mechanism.

The oligarchs began to bargain with the majors, and offer
themselves as partners in future joint ventures. This was possible
since they had successfully blocked PSA. Furthermore, they had
successfully acquired numerous licenses to develop oil and gas
fields, but were unable to do this on their own. As a result, the
majors were offered a Russian variant of a merger, which was
different from those described above. It was proposed that a
foreign company would not fully merge with a Russian company in
order to create a new joint venture, but would only merge its
Russian assets into it. For the same reason, unlike PSA, such
transactions cannot be described as direct investment. For example,
the funds that the majors put up are simply pocketed by the Russian
owners. Unfortunately, no one knows where this money will be later
invested.

Brussels also has a strong tendency to view Russia as a source
of cheap hydrocarbons, but here the emphasis was placed on natural
gas. The EU’s gas directive was prepared and adopted without the
participation of the main natural gas suppliers, nor without taking
their interests into consideration. This was done in order to
introduce the spot market mechanism around the world, as well as
destroy the system of long-term contracts which has been the only
reliable basis for energy cooperation between Russia and the EU. It
has also been a solid guarantee of the energy security of the EU
member states themselves. Later, however, realism prevailed;
furthermore, the energy crisis in California, together with
Britain’s failed deregulated system, apparently served as good
lessons.

Russia and the EU have now reached a more or less acceptable
compromise on long-term contracts. Yet, the two parties are still
far away from a comprehensive solution to the gas problem. The
European Union fully ignores the obvious fact that gas is Russia’s
natural competitive edge. It demands that Russia raise its domestic
gas prices, thus interfering in its internal affairs. The EU hopes
that this move will reduce the price of exported gas; it does not
care that an increase in domestic gas prices would bring the
Russian economy to its knees. Furthermore, such a move would hurt
the Russian population, a majority of which already lives on the
verge of poverty. Furthermore, the West has repeatedly given Russia
rather dubious recommendations that it should liberalize its gas
sector and break up Gazprom. Interestingly, this pressure is being
made amidst the aforementioned process of takeovers and mergers
that are occurring throughout Europe, together with the formation
of large, vertically integrated corporations.

WHAT RUSSIA WANTS FROM THE WEST

Representatives of the developed countries have repeatedly
stated that the West is interested in a strong Russia. However,
these declarations are at variance with the practices of many
leading states. When in the last few years Russia began to
establish order in its economy, and work out a strategy for its
economic development that corresponded with its national interests,
the U.S. and the EU immediately grew cold toward it. The same thing
occurred when Russia attempted to implement this strategy in order
to prevent the uncontrolled embezzlement of its natural
resources.

The Expert magazine, in a February issue, made the following
fair remark: “The present coolness in relations between Brussels
and Moscow was caused by the failure of Europe’s strategy which the
EU had hoped would have created a weak Russia.” Apparently, the
West cannot tolerate the idea that the epoch of Boris Yeltsin’s
flabby and pliant authoritarianism (which for some reason is still
persistently described as ‘democracy’) has become a thing of the
past and that from now on Russia will keep upholding its national
interests in a polite yet rigid way. In February 2004, Russia’s
foreign minister pointed out that someone “deliberately or not, is
leading us away from the strategic long-term tasks, the
accomplishment of which we must focus our main efforts on” (quoted
from Germany’s Frankfurter Allgemeine Zeitung).

It is true that the Russian economy is not operating at its full
potential, and the country is faced with a major dual task:
optimizing and modernizing the industrial sector and,
simultaneously, laying the foundation for a new IT or
post-industrial environment. This is why Moscow is very interested
in developing its energy cooperation with the West. However, this
cooperation should not result in Russia becoming a raw-materials
appendage of the West, as it was in the 1990s. (Norway avoided this
fate by pursuing a prudent economic strategy.) This cooperation
must be built on a mutually advantageous and equitable basis. The
parties must take into consideration each other’s interests,
although they may not fully coincide: the West’s interest in
reliable and stable supplies to ensure its energy security, and
Russia’s interest in developing its economy and improving the
well-being of its population.

Russia has been making active efforts to fulfill its
contribution to this cooperation. In the last few years, it has
been stepping up the production and export of oil and natural gas.
In 2003, oil output increased to 421 million tons, compared to 379
million tons in 2002. According to expert estimates from the UBS
Investment Bank and Brunswick UBS, oil output will reach 457
million tons in 2004, and 568 million tons by 2008. And although
Russia will hardly repeat its 2003 record-high growth rate (11
percent) in oil production in the near future, even the 4.8 percent
increase in the absolute physical volume, planned for 2008, will
still be a high figure, especially as the expected increase in oil
exports will be 50 to 100 percent higher than the production growth
rate. In 2003, Russia exported 4,259,000 barrels a day. According
to the Oil and Gas Journal, in 2008 this figure may reach
6,648,000.

Russia has been consistently removing the bottlenecks in the oil
transportation system. The Transneft Corporation, for example, is
successfully completing the construction of the Baltic Pipeline
System with a terminal in Primorsk. According to the 2002 plan, its
throughput capacity was expected to reach 18 million tons of oil.
Last year, the oil output was increased to 30 million tons, and in
2004, the system’s capacity will be further increased to 42 million
tons. By 2005, this figure will reach 50 million tons. Other
Russian companies, such as LUKoil, Surgutneftegaz and Rosneft, are
also building oil terminals along the Baltic coast. An application
for the construction of another oil terminal was submitted by
TNK-BP and approved in February 2004.

The production of natural gas in Russia has been growing as
well: in 2003, it  amounted to 2,053 billion cubic meters.
Russia has markedly increased gas exports to Western and Central
Europe: in 2002, this figure stood at 128.6 billion cubic meters,
while in 2003, the figure increased to 132.9 billion cubic meters.
However, problems continue to hinder further progress. For example,
there has been the reoccurrence of illegal gas siphoning from
Russian pipelines that travel through neighboring CIS countries.
This has forced Russia to take measures in order to ensure the
uninterrupted flow of gas supplies to Europe. Gazprom and Finland’s
Fortum, for example, will conduct a feasibility study for the
construction of a 5.7-billion-dollar North European gas pipeline
that will bypass all intermediate countries on the way to Europe.
The proposed pipeline will be built on the seabed to the German
coast, and there are plans for it to extend to Britain as well. The
first phase of the project is planned to be completed in 2007.

By the end of 2004, Gazprom will complete the construction of a
gas pipeline from Yamal to Europe; the pipeline travels via Belarus
and will be the sole property of the Russian company. Finally,
within the framework of a Russian-Ukrainian consortium that was
established in October 2002, Gazprom has prepared two variants of a
feasibility study for the construction of another gas pipeline.
This one is planned to transport gas from Russia and Central Asia
into Western and Central Europe.

Russia’s efforts in the realm of energy production do not rule
out the participation of foreign capital in large-scale energy
projects. On the other hand, Russia is now taking another look at
its position concerning the activities of foreign companies in the
country. As a result, it is likely that Russia will discourage
speculation on the energy market, together with the unauthorized
large-scale strategic (the word ‘strategic’ seems unnecessary here)
transactions which are damaging Russia’s national interests.
However, direct foreign investment that is used for locating and
developing new oil and gas fields, together with outside
participation in the construction of new pipelines, will only be
welcome.