Studies Eastern European Markets
Eastern European Markets
Kari Liuhto
- A Source of Integration
Research report N:o 131, 2002
. Lappeenranta University of Technology. Department of Industrial Engineering and Management.


    Russia possesses the world´s 7th largest oil reserves: only Saudi Arabia, Iraq, United Arab Emirates, Kuwait, Iran and Venezuela have bigger oil reserves than Russia. Russia´s natural gas reserves are clearly the largest in the world. One claryfying example of the extent of these reserves is the fact that Russia´s natural gas resources are some 15 times bigger than those of the entire EU. Despite such a giant difference in the reserve bases, the EU consumes as much gas as Russia.

    At the production level of 2000, Russia´s proven oil reserves will last some 20-60 years and natural gas 90 years. Russia produces 1/10 of the globe´s oil i.e. over 300 million tonnes and some 550-580 billion cubic meters of gas, 1/4 of the world total.

    The Russian oil and gas business is concentrated in hands of a dozen oil majors and practically one gas company. The three biggest oil companies produce almost 50 % of the nations´s entire oil production and one single company, Gazprom, produce almost 90 % of Russia´s gas.

    In order to lift the current production and export level, the Russian energy companies have to invest heavily in their production and pipeline systems. I has been estimated that Russia´s whole energy sector requires, by 2020, some USD 500 billion of new capital. The share of oil and gas industry is roughly half (EU, 2001). Russian energy companies cannot carry this financial burden alone, and hence, they must create strategic alliances with the main energy companies of the world to finance these gargantuan energy infrastructure projects.

    Russia is one of the largest energy exporters in the world. She exports over 200 million tonnes of oil, including crude oil and oil products, which is some 40-60 % of Russia´s production. Similarly, Russia exports over 200 bcm of gas annually, i.e. over 35 % of the country´s natural gas is exported. The main reason behind such a high export-production ratio is the fact that energy prices are substantially higher abroad than in Russia. Oil price inside Russia is just approximately half of the world market price and the domestic price of gas is approximately 1/10 of European price (EIA, 2000;2001).

    The lion´s share of Russian gas and oil is sold to Western customers. The main export destination is the EU. In 2000, Russia exported 80 bcm of gas to the current EU. Russian gas forms some 35 % of the EU`s total gas imports. The respective share for oil is 15 %. With these shares Russia is the EU`s biggest gas supplier and the second biggest oil provider after Norway.

    Russian oil and gas companies are significant economic and political actors, not only in their home market but also abroad. In recent years, the Russian energy corporations have accelerated their internationalisation. The main driving forces of the internationalisation are evidently to support their exports and to improve their position in the global market. Russia´s two most international companies are Lukoil and Gazprom. The value of Lukoil´s assets abroad exceeds USD 3 billion. Similarly, Gazprom has equity investments in at least 20 foreign countries. Most probably, other Russian oil and gas majors will follow the internationalisation steps of these energy giants. All in all, the recorded outward FDI stock of the Russian companies, at the beginning of 2001, was almost USD 12 billion.

    Whereas USD 12 billion of the Russian FDI has floated to the West, some USD 20 billion has floated into Russia. The FDI inward stock is extremely small, when adjusted to the federation´s large natural resources and large population. So far, Western oil and gas majors have been relatively reluctant to invest in Russia, mainly due to the bureaucratic, corrupt and less law-abiding business environment. In order to attract foreign investment, Russia has lowered the taxation burden of companies. In fact, the current taxation scheme in Russia is more appealing for companies than that presently employed under production-sharing agreements (PSAs), hence the slowdown PSA implementation.

    Even if mergers in the Russian oil sector have already taken place by now, the on-going consolidation of the Russian oil business is likely in the forthcoming years. Also changes in the natural gas sector are ahead, as a result of which Gazprom may be broken up into independent production, transmission and distribution entities.

    The intensification of the energy collaboration between Russia and the EU started with the meeting of Putin and Prodi in October 2000. The energy co-operation has good basis because the EU`s dependency of imported energy is high (and it is expected to grow substantially in the near future) and Russia has considerable energy reserves. Moreover, such an EU-Russian energy partnership is absolutely necessity since the energy business demands mutual long-term commitment and substantial new investments. EU-Russian energy collaboration may result in strategic alliances between Russian and European companies and increasing investments from the EU to Russia, and in turn, investments from Russia to the current and future EU member states.

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