Economic growth and new energy strategies

In 2003, the Russian parliament adopted a new Energy Strategy, drafted by the government and experts from the industry and academia. Taking into account the new context of economic growth and the rising oil prices, this legal document set out the main guidelines for the development of the sector until 2020. Two alternative scenarios for different rates of economic development and world crude oil prices were provided with forecasts for production, consumption and exports of raw materials and electricity for each branch of the industry. The fuel and energy complex is regarded as the basis of economic development and the instrument for both internal and external policies. The formation of a ‘civilised energy market' has been recognised as essential to accomplish the competitive energy sector with the state serving as a regulator: ‘Energy strategy is firstly an ideology, and secondly - numbers.' The strategy underlines the central role the state should play to ensure the most effective exploitation of Russia's mineral wealth, through price regulation, taxation and investment policies, and the legal framework. The state should promote national companies that serve the national interests first: ‘Ongoing global competition to gain control over hydrocarbon reserves has shown that state-owned and backed companies have considerable advantages in obtaining dominating positions on international markets.'

One striking feature of the Russian fuel and energy sector at the beginning of the twenty-first century is undoubtedly the emergence of oil and gas operators with an international dimension in which the state has a majority control (Gazprom, Rosneft). In addition to the growing presence of the state in some of the leading energy companies, the government has imposed stricter conditions for accessing the country's resources: the Subsoil legislation was modified several times to grant the federal government the sole authority to issue mining permits. Moreover, the adoption of a list of ‘strategic fields' in 2007 now grants state control over important oil and gas fields, such as the Chtokman in the Barents Sea. Gazprom and Rosneft, two Kremlin-controlled companies, are often privileged in winning the licence permits. In the West, the recent developments such as in Sakhalin are generally interpreted as new cases of ‘resource nationalism'. This term designates in fact the restricted access for multinationals in developing countries to natural resources. It is generally accompanied by the growing weight and influence of national, often state-controlled companies that control the majority of oil and gas reserves. However, the use of such a term in the Russian context requires closer examination.

Historically, the fuel industry has always been considered as a key national economic sector that enjoys special attention from the government. In this sense, the anarchic period of Yeltsin appears to be an aberration. It is worth recalling that during the Yeltsin presidency state institutions became weak and corrupted while the real power was concentrated in the hands of the president. It is interesting to learn what Russians think about it: according to polls conducted in 2005-8 by VTsIOM, the leading public opinion research centre, 51 per cent of respondents would like the results of the privatisation to be revised, 56 per cent support the further reinforcement of the state, 45 per cent agree to the idea of nationalising the entire oil and gas industry and 66 per cent believe that foreign capital should not be invested in the energy sector. The crucial questions for Russia today are to know how long it can sustain current production levels from mature fields in decline and where the new sources will come from in the future. The new extractive regions are located further north (Yamal peninsula, Arctic Ocean) and further east (Eastern Siberia). These areas are even more hostile and remote than Western Siberia, where the cost of extraction and transportation is already considerably higher than in most other producing countries. It is essential to note that overall geographic and geological conditions for the extraction of hydrocarbons in Russia are worsening: future production will increasingly come from harder-to-reach reserves.

Thus, the development costs will increase significantly in the next two decades. In the gas sector, over two-thirds of the production come from three giant fields (Yamburg, Urengoï and Medvezhie) and have entered into a declining phase. One of the greatest challenges is to develop fields in new gas provinces of the Yamal peninsula and the Arctic shelf. The Chtokman field, for instance, is one of the world's largest natural gas deposits. It is particularly challenging: not only is it 300 metres deep but the nearest seaport of Murmansk is 600 km away. Icebergs are frequent in these northern latitudes and pose a serious threat to offshore platforms. Certainly, this project will be the world's most challenging and costly development. Its successful realisation is not possible without broad international cooperation. In the petroleum sector, the oil production in Western Siberia has reached a plateau. The upsurge in oil production between 2000 and 2006 originated from deposits exploited at the end of the Soviet era or from idle fields. It is clear that such growth is not sustainable. To maintain current extraction levels, new capacity and new fields must be developed in the very near future. According to the Russian Energy Strategy, East Siberia and the Far East will largely contribute to the increase in output in the next decade. Yet, the development of new fields in those regions will require a radical expansion in prospecting activities and in the development of a transport infrastructure in the Siberian desert. Moreover, these new fields are generally smaller and more dispersed, thus requiring colossal investments. ‘To explore and to develop the rich deposits of Siberia are as difficult as to explore the space. Here everything is unique and tremendous,' stated Mikhail Lavrentiev, founder of the Siberian branch of the Russian Academy of Sciences in the 1960s. Great uncertainty surrounds the estimation of oil reserves.

For example, the Oil and Gas Journal 2007 estimates the proven reserves at 60 billion barrels (8.2 billion tons), while the International Energy Agency (2002) forecasts 146 billion barrels (19.9 billion tons). In fact, only a small fraction of the huge Russian territory, spanning over 17 million square metres, has been explored. According to Andrei Trofimuk, only a quarter of the country's subsoil has been explored. Little is known about Eastern Siberia, or the Arctic shelf, where exploration has just started. Exploration activities were almost abandoned and drilling considerably reduced during the 1990s, after the state ceased to finance them in 1992. Moreover, oil reserves are now considered as strategic assets and have thus been classified as a ‘state secret' since 2003. The Russian Ministry of Energy has estimated that $90 billion of investments will be necessary for exploration by 2015. Yet, the amount invested by oil and gas companies remains far below this number. Flexible tax policies that would encourage the development of exploration and development of difficult fields should provide incentives for companies. The stakes are high as Eastern Siberia may have enormous hidden wealth in its depths.

Economic growth and new energy strategies

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