Yuri Shafranik: «Russia and joint energy market in Europe» (The Times, Wednesday, March 3, 2004, p.8)

Today Russia shows high growth rate in oil production that has come as a surprise for many observers. However it worth mentioning that the Soviet Union produced just recently as much as 624 million tons of oil annually, that is 40 per cent more than Saudi Arabia in 2000. Of this volume, about 570 million tons were aquired within current Russia borders.
That is why the Russian progress in the recent years for the managers and specialists of the Russian oil and gas industry is only regaining the positions left earlier.
The Russian oil and gas industry have been traditionally an important part in the world economy and its energy industry, especially in Europe. Russian hydrocarbon deliveries play a con­siderable role in the energy supply of many countries neigh­bouring Russia and also those distant from Russia. Over decades by now those supplies ensure additional stability of those economies. It is reasonable therefore that achievements and problems of the Russian oil and gas industries have been for long time not only cared for by Russian authorities, petroleum com­panies but also observed attentively by the world community.
Alongside with the oil production growth its export was increasing as well. In 2003 this export topped the highest mark over the Russian history — 195.6 million tons, of which 37.3 million tons were exported to CIS countries.
Russia is also one of the largest world oil product exporters. In 2003 Russian oil product exports reached the record figure over 90 million tons.
Russian export potential of liquid fuel export considerably increased therefore over the recent years and now exceeds the Soviet times capacity. In 1990, for example, Soviet export of oil was 108.5 million tons. Russia is capable to further build up oil export. However, additional development is required of throughput capacity of the operating export terminals, and establishing new terminals — on the North and East of Russia.
Favorable international business trends combined with posi­tive internal factors of the Russian economy development make it possible for experts to present quite optimistic forecasts along­side with conservative ones. In the year of 2003 oil production in Russia reached 421 million tons (54.2 per cent of this was produced in Khanty-Mansi autonomous okrug). In 2005 it may top 450 million tons mark, and it may happen that by 2010 this figure will reach even 550-570 million tons per year. It should be mentioned though that optimistic scenario may realize only under the stable combination of favorable condi­tions, both in Russia and in the world power industry develop­ment and international economics in general.

Gas Production
As for gas industry development in Russia, it has been carry­ing quite different dynamic over the same years as compared with oil production.
In the beginning of 90-ties gas production retained for sev­eral years the high level achieved earlier then started to decrease and at the edge of new century practically stabilized at the level of 581-591 billion cubic meters. In 2002 Russian companies produced 595.3 billion cubic meters of gas of which Gasprom’s share was about 88 per cent. Another 34.8 billion cubic meters were produced by oil companies, and 36.7 billion cubic meters — by independent producers

Gas production in Russia
Specifics of this dynamics were dictated by various reasons but let’s mark the main point: no fluctuations affected the export commitments of Russia. Through all those years Russian gas was steadily supplied to European customers, and for the last sever­al years — in growing volumes.
Some decrease in gas supply to CIS countries took place but it was related to reduction of their purchasing power.
Two scenarios of possible development of gas industry are laid down in the Russia Energy Strategy for the period of up to year 2020. One is the favorable and the second is a stepped down scenario.
According to the favorable scenario gas production in Russia should reach at least 650 billion cubic meters in 2010, and not less than 700 billion cubic meters by 2020 of which the JSC Gazprom share will be 530 billion cubic meters. The favorable scenario may realize under certain conditions in Russia herself. They include:

• increase of domestic gas prices;
• provision of access to trunk gas lines and export lines for independent gas producers;
• further improvement of subsoil use system and taxation.
  

Apart from this, foreign investments may play a major role in implementation of that scenario. Since the bulk of exported gas as before will be directed to European countries it would be log­ical to expect participation of European investors in new large scale projects in gas production and transport. Aggregate value of prospect projects here is measured in tenths of billion of US dollars; and it may provide great choice for investors.

European market
The European market is regarded as the main interna­tional market for sale of Russian gas in the forthcoming decades. «We are interested in this market and are imple­menting, together with our European partners, quite a num­ber of measures to increase our positions there», said Yuri Shafranik, former Fuel and Energy Minister and the head of the Russian Oil and Gas Union. «These include successful completion of the unique Blue Stream gas pipeline project, establishment of the International Consortium for Management and Development of the Ukraine’s Gas Transportation System, preparation of construction of North European Gas Pipeline and many other projects.»
However, according to the opinion of the Russian expert, lib­eralization of the European gas market or, to be more correct, implementation of the principles and measures prescribed by the EU Gas Directive, as well as the pending issues of long term guarantees for gas producers concerning investment payback do not allow to forecast higher volumes of gas production for export to European countries than it is provided in the Energy Strategy of Russia.
«Our European partners are well aware of these problems,» said Yuri Shafranik. «We openly discuss them on the bilateral basis and within Russia-EU Energy Dialogue. We believe that implementation of the short-term financial profit principles is capable to undermine the balance between supply and demand. Our opinion is that there should be a compromise found between spot transactions and long-term contracts of the ‘take or pay’ type in favor of the latter.»
As Russian experts estimated, in 2003 oil and oil products export may exceed 300 million tons. Of this only 59 per cent will be sold as oil and, since today’s profit from oil sales is higher than from oil products sales, Russian oil companies are losing hundreds of millions of dollars due to lack of export oil facilities. Unless appropriate measures for oil export infrastructure development are taken those losses may grow further.
Throughput capacities of Transneft export oil pipelines are steadily increasing however the systems development does not follow the pace of increase of the Russian export poten­tial. That is why new major projects are required that may dramatically expand export abilities of Russia.
Several projects of that type had been proposed. The idea of one of them was developed and acquired strength within the last 4 years, and the project was already implemented. It was the first train of the Baltic pipeline system (BPS) with a throughput capacity of 12 million tons of oil per year. By the year of 2005 the second train of BPS will be commissioned and its through­put will increase up to 30 million tons per year.
Experts are sure that in case die oil prices at the world market remain higher than $22 per barrel over many forthcoming years, all these projects may be implemented. Then by 2015 Russia will be able to export up to 400 million tons per year. It will solve the problem of deficit of export facilities, but at the same time the question remains: will Russia by this time will be able to export such volumes of oil? As Mr. Shafranik believes, to provide the fur­ther growth in the hydrocarbon production it is necessary to invest in new oil fields development at least $30 to $35 billions annually.
Conclusion
Traditionally, Europe is the main export market for the Russian liquid fuel. We should also keep in mind that Russia is anchored to Europe not only with common history and l^lng partner relations, but also with major gas and oil pipelines. Supplies of oil, oil products and gas play considerable part in reliable power supply of many European countries.
However time is moving fast. Globalization and integration will require active moves and innovative solutions even within traditional types of business.
The world is on the verge of global energy changes. What kind of new energy order will come? Will it terminate the struggle for energy resources or, on the contrary, result in armed clashes?
Everybody would like to hope that globalization will enhance trends for international cooperation and partnership in develop­ment of energy-related projects. They will become tools in achievement economic and political objectives by both the EU countries and Russia. Provision of such cooperation and partner­ship is a common task for both companies and energy diplomacy: all contracts and contacts in this field require diplomatic and political support on the government and international levels.

The Times, Wednesday, March 3, 2004, p.8