Study: Russia stabilises Europe

  • Oil and gas supplies from Russia are becoming more important to Europe against the background of tensions in the Middle East.
  • Russia's share of energy deliveries to Europe could double to 20 %.

As the current tensions in the Middle East (Iraq, Saudi Arabia) continue, Russia could play a more important role as an energy supplier to Europe. At present, Russia accounts for more than 10 per cent of Europe's imports of crude oil. With substantial investment in oil and gas production and infrastructure, this share could double by 2020. "If fundamental reforms are made in Russia's energy sector, it can be the engine of growth for the Russian economy as a whole while also reducing Europe's dependence on deliveries from the Middle East," says Marianne Kager, Chief Economist of Bank Austria Creditanstalt.

A central aspect of the reforms will be the separation of production and transport, with only the transport and distribution systems remaining in state hands. "Whether new (private) owners will be prepared to invest in the energy sector, will depend to a great extent on the success of efforts to bring domestic market prices closer to world market levels," say the bank's economists. At present, domestic gas prices are still three-quarters lower than world market prices. This is the result of a study conducted by the Vienna Institute for International Economic Studies (WIIW) and commissioned by Bank Austria Creditanstalt.

"The energy dialogue between the EU and Russia, which has been institutionalised since October 2000, has so far produced hardly any concrete results. But as reforms of the Russian energy sector get under way, this dialogue will gain in importance“, Marianne Kager adds. In this dialogue, specific new transport infrastructure is referred to as being in the "common interest". This includes, for example, the Yamal-Europe gas pipeline across Belarus and Poland, the North European gas pipeline, the development of the Shtokmanovskoe field or the linking of the Adria network with the Druzhba pipeline running across Belarus and Ukraine. Since December 2002 Russia's Gazprom has intensified its activities to attract interest from European energy companies and banks in the construction of a 3,000 km pipeline, at an estimated cost of EUR 5.7 billion, from Russia to Germany on the seabed of the Baltic Sea.

Second-largest net exporter of crude oil
Russia is the world's second-largest net exporter of crude oil (see table), behind Saudi Arabia. In terms of proven oil reserves, Russia is in eighth place and it has almost one-third of worldwide reserves of natural gas. Most of Russia's oil is currently produced in the oilfields of West Siberia. There has so far been little exploration activity in many remote areas. This means that Russia's share of world energy reserves could be much higher than its share of proven reserves.

Following the collapse of the Soviet Union, Russia's oil industry, which accounted for 90% of Soviet production, experienced a temporary decline. In the mid-1990s, large parts of Russia's oil industry were privatised. Between 1992 and 1998, as a result of a decline in demand from Russian industry and a lack of investment, production fell by almost one-quarter, from 7.9 million barrels per day to 6.1 million barrels. Relatively high world market prices for oil and the rouble devaluation after the 1998 crisis helped the Russian oil industry to recover. In 2002, production again reached about 7.6 million barrels.

The objective of the Russian government is to maintain oil production at 7.8 million barrels per day over the next few years. "Achieving this objective and making up for depletion of fields in West Siberia will require annual investments of EUR 1 billion or more," says Marianne Kager. Equipment is becoming obsolete and there is also an urgent need to renew and expand the transport infrastructure.

A rapid increase in Russia's energy exports is prevented mainly by a lack of capacity in the area of export pipelines. The most important is the Druzhba pipeline, which is operating close to full capacity. Transneft, the state monopoly for oil transport, is planning to expand Novorossijsk, the major oil exporting port on the Black Sea, to build a Baltic pipeline and to link the Druzhba and Adria pipeline systems. There are also plans to build a pipeline to China as well as improving transit from Azerbaijan, Kazakhstan and Turkmenistan. International cooperation is playing an increasingly important role in developing new fields and building new pipelines. Companies involved in these efforts include Shell, ExxonMobil, Texaco, Wintershall, Conoco, ENI-Agip, BP.

"The deterioration of the situation in the Middle East and high oil prices could accelerate some of these projects. In view of the geographical conditions, Europe can thereby make its energy supply less dependent on the Middle East with Russia's help," says Marianne Kager, Bank Austria Creditanstalt's CEE expert.

 Study: The Russian Oil and Gas Sector

 Background information

The WIIW study on "The Russian Oil and Gas Sector: Facing the New Challenges" can be ordered by calling +43 (0) 50505 56148 (answering machinge) or by e-mail to pub@ba-ca.com.

Enquiries: Bank Austria Creditanstalt Group Public Relations
Peter N. Thier, tel. +43 (0)5 05 05 41100 ; e-mail: peter.thier@ba-ca.com