Sample Article: Russia's Energy Sector Evolves

Russia's Energy Sector Evolves

September 27, 2013 | 1049 GMT

Summary

(DMITRY ASTAKHOV/AFP/Getty Images)

Russian President Vladimir Putin signs a natural gas pipeline in Vladivostok. Russia is making several changes to its energy strategy and technical capabilities as it tries to keep up with developments in global energy. Russia holds the world's second-largest proven conventional natural gas reserves and alternates with Saudi Arabia as the world's top oil producer. But recently, Russia's ability to wield energy as a potent political weapon has started to wane. Now, Moscow is moving to embrace liquefied natural gas, offshore drilling and hydraulic fracturing technology to ensure the energy sector's future. Analysis Russia supplies just under one-third of Europe's oil and natural gas, and energy revenue makes up approximately 50 percent of the Russian government's budget. Consequently, the energy sector is the primary pillar of not only Russia's current stability but also its foreign policy toward the West. However, recent years have produced ominous signs for the future of Russia's energy industry. Russia's primary oil-producing region -- the Western Oil Basin -is in decline, and new fields in other regions such as the Yamal Peninsula and East Siberia will likely have much higher production costs and will require new

infrastructure to transport the energy to consumers. New producers that also are coming online, such as Azerbaijan and Algeria, can supply the European market, primarily via liquefied natural gas, which is transported by ship instead of pipeline.

To counteract these trends, Russia is changing how it operates internally and in the global energy markets. For example, Russia has already adjusted its approach to energy contracts with Europe, with Moscow giving price discounts to key customers such as Germany in exchange for longer-term deals. Russia has also tried to expand its customer base away from just Europe, supplementing its exports there with exports to East Asia. Oil exports to East Asia already constitute 17 percent of all exports, up from 4 percent in 2006, and Russia plans to follow with natural gas exports to Asia. Embracing New Technologies Russia also has other initiatives in the works. On Sept. 25, Russian Deputy Energy Minister Kirill Molodtsov said the Russian government would aim for the country's natural gas exports to account for 20 percent of the world's liquefied natural gas by 2030. Currently, Russia has only one liquefied natural gas facility at Sakhalin-2, but there are plans for half a dozen more new liquefied natural gas facilities across Russia's coasts. Russia has taken note of the many import facilities being built across Europe and East Asia, and it wants to keep up with the shift away from traditionally piped natural gas to seaborne imports. This would be a major change for the country, but it would enable Russia to continue its drive to diversify its customer base, since liquefied natural gas exports are able to go anywhere that has a liquefied natural gas import terminal. Another recent development for the Russian energy sector has been technical advancements made by the country's energy giant Gazprom. Like most Russian energy firms, Gazprom has a reputation for being a rather outdated company in terms of its technical capabilities. This is why Russian energy firms have repeatedly tried to bring in foreign energy majors for their expertise on the more

difficult or newer projects -- which the Kremlin loathes since it does not want to rely on foreign assistance (particularly from Western firms) in its most strategically important sector. However, it now appears Russia has been able to develop some important capabilities domestically. Gazprom announced Sept. 17 that its oil subsidiary, GazpromNeft, became the first Russian company to drill a horizontal well as part of a hydraulic fracturing operation (commonly known as fracking). Even though Russia has had components of fracking technology for decades, it is now using the technologies in a coordinated manner -- though it should be noted that Russia is still far behind other countries; the United States, for example, is already consistently fracturing wells five times deeper than the Russian wells. In the past, Russia has opposed fracking. It reportedly even funded many of the anti-fracking movements around the world. Moscow's opposition to fracking stems from a fear that if more countries can tap unconventional sources for oil and natural gas, the need for Russian oil or natural gas could start to decline. However, the global trend of countries and energy firms becoming more interested in turning to fracking has forced Russia to adopt the trend as well.

Moreover, many of Russia's oil fields are in rapid decline, particularly in the Western Oil Basin, which has been producing two-thirds of Russia's overall oil production for decades. If Russia can shift oil production within the Western Oil Basin to take advantage of the tight oil reserves -- the type that requires fracking -it could slow or perhaps halt the production declines, since Russia is estimated to have more recoverable tight oil reserves than any other country. Moscow also had the choice of focusing on developing the more difficult and costly reserves in the country -- such as East Siberia or the Yamal Peninsula -- but instead opted to embrace new technologies in order to continue using its current infrastructure for oil transport.

Another major development involves Gazprom's Sakhalin-3 natural gas project. Sakhalin-3, which will start commercial operation in October, will be the first subsea production by a Russian firm. Russia's Sakhalin-1 and Sakhalin-2 each have relied major foreign energy firms (ExxonMobil and Royal Dutch/Shell, respectively) to provide the technical expertise for subsea production. Gazprom has been attempting the Sakhalin-3 project on its own, and limited production is already underway. Commercial production may begin in October. Sakhalin-3 is not expected to produce a large amount of natural gas, but the fact that Gazprom has been able successfully undertake such a technically difficult project on its own is a milestone for the natural gas giant. Though Gazprom has had components of each of these technologies before, it is now able to use several production methods in tandem. It is unclear how Gazprom acquired the expertise to do this, but rumors have persisted that the energy firm has been secretly hiring engineers and technicians out of the Western energy majors over the past few years. This is traditionally how Russia makes drastic technological advances, rather than developing the expertise domestically. The Russian Empire snatched oil production technology from the U.S. and European oil firms operating in the Caucasus and Volga regions. The Soviet Union stole the technology on how to make its atomic bomb from the German and American nuclear programs. The Soviets attempted to steal the blueprints from the French to make their version of the Concorde supersonic aircraft, the Tupolev Tu-144. This strategy of pilfering new technology has worked repeatedly for the Russians in the past, particularly when Moscow has found itself behind and has needed to keep up with a rapidly changing world. With the energy sector so critical to Russia's stability and ability to project its influence abroad, Moscow will need to take advantage of all its available options, including embracing new technologies, to ensure the sector's continued health.