Russia – Energy

2009/06/01

Natural Gas

Russia is also one of the world’s largest natural gas producers. Its proven reserves have been estimated at 49 billion cubic meters, or roughly 35 percent of the world’s total. Natural gas has also been one of the most successful parts of the Russian economy. In the early 1980s, it replaced oil as the Soviet “growth fuel,” offering cheaper extraction and transportation. Although output has dropped in the 1990s, the decline has not been as severe as that for other energy sources or the rest of the economy. Natural gas production peaked in 1991 at 727 million cubic meters, then dropped throughout the early 1990s. But 1995 production, 596 million cubic meters, was an increase from the previous year.

After European gas fields in the Volga-Ural region dominated the industry through the 1970s, production shifted to giant fields in Siberia. The Urengoy and Yamburg fields in the West Siberia region are among the most productive; the former is the largest field in the world. Soviet plans called for rapid development of new reserves in the Yamal Peninsula in the Arctic Ocean north of Urengoy, but environmental problems and infrastructure costs slowed development. Hasty construction and poor maintenance have caused chronic breakdowns and accidents in the long pipelines of Russia’s natural gas delivery system (see Transportation, this ch.).

The State Natural Gas Company (Gazprom) has a virtual monopoly over Russia’s gas production and transmission. A vertically organized enterprise, the company has been reorganized into a joint-stock company, in which 40 percent of the shares remain under state control. Company employees hold another 15 percent, managers of the company hold 10 percent, and the remaining 35 percent were sold at public auction. Gazprom controls a network of regional production associations. Its management, which once was headed by Prime Minister Viktor Chernomyrdin, has been accused of corruption and tax evasion.

Foreign Investment in Oil and Gas

In the mid-1990s, many analysts consider the oil and gas industries to be the best targets for foreign investment in Russia. The record of foreign investment in that period illustrates both the potentials and the pitfalls of such ventures. Experts have concluded that the Russian oil and gas sector will require large amounts of foreign capital to improve output. According to some estimates, the oil sector will require US$30 to US$50 billion in new investment just to maintain the mid-1990s level of production. To return production to its peak levels will require an estimated US$70 to US$130 billion in new investments, which clearly would have to come from foreign sources. The Russian oil and gas sector also would benefit from infusions of Western technology and expertise. However, according to a 1995 report by Cambridge Energy Research Associates, key figures in the oil industry, most of whom were schooled in the isolated Soviet-era approach to commerce, have been indifferent or hostile to Western management methods.

By the end of 1994, the oil and gas sector accounted for about 38 percent of total foreign direct investment in Russia, but the total input was only about US$1.4 billion. Although Western companies are poised to commit large amounts of capital for exploration, as of 1996 most foreign investment had gone to repairing and maintaining current facilities. Some analysts have estimated that foreign investment in the oil and gas sector could reach US$70 billion by the year 2000.

Among several United States oil companies active in Russia, Texaco heads a consortium in the largest project, the development of oil fields in the Timan-Pechora section of the Komi region north of the Arctic Circle. The project, under negotiation since 1989, has an estimated potential of US$45 billion in investment over the next fifty years. Conoco, a subsidiary of the DuPont de Nemours chemical firm, leads a consortium of United States and European firms and a Russian firm in the Polar Lights project to explore Siberian oil fields. Two United States companies, Marathon Oil and McDermott, along with the Japanese companies Mitsui and Mitsubishi and Britain’s Royal Dutch Shell, are engaged in one of several projects to explore for oil off Sakhalin Island on the Pacific coast. The last two projects each could bring in as much as US$10 billion.

Nevertheless, Russia’s generally poor investment climate and other obstacles such as special taxes have discouraged additional investment in gas and oil. As of mid-1996, a tax of about US$5 per barrel was imposed on oil exports, and a tax of about US$2.60 was levied per 1,000 cubic meters of natural gas exported. Foreign and domestic firms were also subject to royalty payments to the Government for the privilege of drilling for oil. Foreign investors have argued that reduced profit margins are a substantial obstacle to the support of some projects. Some major oil investors have received tax exemptions, but delays in rebate payments have created additional deterrents.

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