For more than forty years, Russia has been steadily stepping up its oil and gas sales to the EU countries. Today, the enlarged EU-27 relies on Russia for a quarter of its gas needs and one-third of its crude oil imports. While the EU has become increasingly dependent on Russian deliveries, Russia has also become very dependent on European markets: the EU currently takes about 70 per cent of gas and 80 per cent of oil exports from Russia.39 The trade, however, is asymmetrical: Russia imports equipment, consumer goods and high value-added products, while it exports raw materials. Following the break-up of the Soviet Union, Russia became dependent on its western neighbours, notably Ukraine, Belarus or the Baltic States for oil and gas transit. In the 1990s over 90 per cent of Russian gas exports to the EU transited through Ukraine, which became a key energy transit country. Major Soviet oil terminals such as Ventspils (Lithuania) or Odessa (Ukraine) and refineries are located in the newly independent states.
As a grave economic crisis hit all of the ex-USSR republics, the demand for energy fell and the resource-poor transit states were not able to pay for Russian oil and gas. Note that during the first post-Soviet decade, Russia provided hydrocarbons to former Soviet states at a much lower price than that paid by Western or Central European countries. Recurrent non-payment for oil and gas deliveries, the poor state of the transport network, plus high transit fees and disputes over fuel prices prompted Russia to diversify its export routes. Political issues such as the pending entrance to NATO of the Baltic States and the discrimination against the Russian-speaking population have influenced the decision to develop transport hubs on Russian territory as well. Crude oil, which was traditionally transported through the Baltic States, has been re-routed through the new Baltic Pipeline System (BPS). The BPS is linked with the new giant oil terminal of Primorsk (about 1.5 million b/d in 2007), near St Petersburg, thus giving a direct outlet to the northern European markets by the Baltic Sea. Shipment of oil through the northern seaport of Murmansk, located above the polar circle, has been growing as well. New gas pipeline projects such as Nord Stream (under the Baltic Sea), Blue Stream or South Stream (under the Black Sea) bypass any third transit country.
The realisation of these costly and complex infrastructure projects would not be possible without the participation of energy giants such as German E.ON, BASF or Italian ENI. Joint mega-projects such as Nord Stream only reinforce the existing mutual dependency between the EU and Russia. Nevertheless, the traditional European markets will not remain the only destination for Russian exports in the long term. Russia is increasingly looking to diversify its exports eastwards, notably towards the booming Asia-Pacific region (APR). The first reason is purely geological: vast untapped reserves are to be found in the east, such as on Sakhalin Island, close to Japan or to South Korea. The giant gas field of Kovykta located in the Irkutsk region is much closer to China than to Germany. Second, the most dynamic and energy hungry economies such as China are in the east. Moreover, sparsely populated Eastern Siberia and the Far East remain the most economically backward parts of the country and new oil and gas projects would boost their development. Finally, some top Russian oil managers have increasingly criticised the predominance of the EU market. Semyon Vainshtok, the chairman of Transneft, remarked: ‘Our entire export potential is geared towards Europe, which is overdone with Russian oil . . . Today Russia has a chance to open the Asian-Pacific market.' In fact, the Energy Strategy (2003) forecasts that by 2020 the share of APR markets in Russian oil exports should increase from 3 per cent (2003) to 30 per cent (11223991-105 Mt) and gas exports should rise to 15 per cent (40-2 Bcm).
The most important transport project now underway is the East Siberia-Pacific Ocean (ESPO) pipeline. It is designed to carry up to 80 million tons of crude oil annually to the Pacific coast, as well as to China. The construction of a gas pipeline through the Altai region to China has been planned as well. Yet, the ambitious plans to diversify export markets raise the question of the industry's ability to increase production capacity in Eastern Siberia fast enough. More generally, it is not clear if Russia can meet its growing domestic demand as well as its export commitments and targets. At the same time, Russia's southern neighbors in the Caspian region are increasing their production at a rapid pace to become important suppliers of oil and gas to Western markets. Kazakhstan, Turkmenistan and Azerbaijan are the newly independent Turkic states around the Caspian Sea. Together they hold about 4 per cent of world proven reserves of natural gas and 4 per cent of oil (less than neighbouring Iran). These new states are awash in oil and gas and have recently emerged from obscurity to find themselves at the centre of new rivalries between major world consumers. Having similar political systems (all three are governed by autocratic rulers), these states are very different in terms of size, population and economy. Among them is Turkmenistan, the biggest exporter of natural gas. Its gas production is rapidly increasing but it has not yet reached the peak achieved in Soviet times. Azerbaijan is the world's oldest oil-producing region. Its Baku fields that once provided half of the world's oil output have witnessed a long period of decline. Now Azerbaijan is back on the energy scene thanks to oil from the offshore fields, developed by a consortium of British and American companies. Kazakhstan has the largest proven reserves of hydrocarbons. Its gas production has increased threefold since 1991, and its oil production is forecasted to double over the next decade. Yet, Kazakh oil is not easy to extract. Take the example of Kashagan, a super-giant offshore oil field discovered in 2000.
The field is so complex both technically and geologically that the overall production cost, estimated at $136 billion, makes it the world's most expensive oil project. Besides, the crude oil from Kashagan is sour, with a high content of toxic pollutants and the development of the field may have a very negative impact on the environment of the Caspian region. Locked in the heartland of Eurasia, the newly independent states face a similar dilemma: how and where to export their oil and gas wealth with maximum profits. The United States, China and Russia apparently share similar concerns, and have become increasingly active in courting these republics. The US government vigorously supports pipeline projects that bypass Russia and Iran. It backed the Baku-Tbilisi-Ceyhan (BTC) pipeline that now brings Caspian crude oil to the Mediterranean port of Ceyhan in Turkey. The US equally seeks to develop a strategic partnership with Kazakhstan where American companies participate in several mega-projects. The decision of the Kazakh government to join BTC was indeed warmly welcomed by the United States. Likewise, China is actively seeking to secure direct energy supplies from the region. In 2005, the Kazakhstan-China oil pipeline became operational. Two years later, the Chinese oil corporation CNPC started building a pipeline that would transport Turkmen natural gas to China. Contrary to the 1990s, Russia's current strategy aims at securing and consolidating its position as a transit state for oil and gas from this landlocked region. Recently, Russia seems to be regaining its influence, and has concluded several long-term strategic gas cooperation agreements with Kazakhstan, Turkmenistan and Uzbekistan.
In fact, Gazprom counts on imports of large volumes of gas from Central Asia as its own production stagnates. Without it, the Russian giant may not be able to honour its export contracts and meet the growing domestic demand. Turkmen's gas fields are relatively easy to exploit, but the transport remains expensive and its obsolete infrastructures need upgrading. However, the Central Asian governments keep raising the price of gas, which may have an impact on future export projects. Given the ultimate pragmatism of the leaders of those states, it is rather difficult to foresee future alliances between the Caspian producers and the major consuming countries.
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