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Overview
Today Russia holds the world’s eight largest oil reserves. Russia is also the world’s second largest exporter of oil. In 2007, Russia produced 470 mt of oil. This accounted for 12 percent of the world’s total. Only Saudi Arabia produces more oil. Russia’s economic growth over the last few years has been fueled by energy exports. In this time, Russian oil production has increased and oil prices have gone upwards. Russia’s economy is heavily dependent on oil and natural gas exports. This makes the country vulnerable to changes in world oil prices. According the International Monetary fund and the world bank, in 2005 Russia’s oil and gas sector accounted fro around 20 percent of the GDP. Oil and Gas also represented 60 percent of the country’s export revenues. These numbers jumped to 67 percent in [[2007[[. Oil and gas also accounted for 30% of all foreign direct investment in the Russia..

Industry today
Russia’s oil Industry today developed from the collapse of state ministry that had been created from the USSR’s command economy. Since the fall of the Soviet Union, a major private oil companies have emerged to dominate the nation’s oil supply. The largest economic change from these companies is that oil production in Russia is no longer funded by the state, but rather by selling oil on the domestic and export markets. Despite the fact that Russia’s oil industries are today private, they still have vivid memories of their Soviet past. Many of these companies have adopted Western technology and even corporate management from abroad. However, throughout the industry there is a blend of fundamental changes in reaction to a sudden entrance into a largely market environment. These companies still have strong elements within them inherited from a state controlled upbringing. All of Russia’s oil Companies today started as divisions of the Soviet Ministry of Oil. Each of these divisions was responsible for developing a compact geographical region </ref.

Companies
Russian oil producers operate under rules today than those that were enforced in the last 15 years. Over this time, Russia’s role in the world oil market has also changed. The industry for the most part survived the first several years after the fall of the USSR and has emerged with a very strong recovery. This recovery has already lasted over 12 years. For companies producing oil in Russia today, the situation remains dynamic, but it is much more stable and the industry has much better prospects than even a short time ago.

At the root of most of these changes was the decision to privatize oil. This decision was made by the Putin administration and remains controversial. Today the Russian oil Industry is dominated by a very small number of firms. The reasons for this oligarchy go beyond political reasons. The distribution of oil fields within Russia favors only a small number of firms and the benefits of economies of scale. In addition, there were seven decades of Soviet ideals that thought bigger is better. The result of these factors was that by 2003, over 80 percent of Russian supply came from five major private companies. These companies are Lukoil, Gazprom Neft, TNK-BP, Surgutneftegaz, and Rosneft. These major producers were complimented by major regional producers Tatneft and Bahneft.

Problems in the Industry Today

However, a problem in the industry today is that there is no important companies below the majors. There are many independent oil companies which produce about 10 percent of the national oil output. However, these independents are important to the supply of oil in market economies. Despite this fact, these independent producers receive no support form the government or the industry. The environment for smaller independent companies in Russia can be described as anything but encouraging. Some see the failure to support these independent oil and gas firms as a threat to long term Russian oil supply.

Barriers to entry for independent oil companies are a huge reason why a vast number of discovered but undeveloped fields exist in Russia today. Most of Russia’s major companies have so much oil assets that they do not have the capital or management to exploit them. They possess far more fields and physical oil than they have the resources to develop. Some argue that a lower tier or companies beneath the majors is necessary in order to exploit these fields. In addition, because they cannot even develop their own fields, major companies are economically discouraged to launch explorations for new reserves. The discovery of more oil in Russia is a definite possibility.

Rosneft
Another important trend in the Russian oil industry is the recent and dramatic role that the government has assumed in the direct management of oil production. The first phase of this process began quietly in the early part of President Putin’s administration. This process became very visible after 2002, after the empowerment of the state oil company known as Rosneft. Using state power, Rosneft found its way into several strategic high profile projects. These included projects with major western Oil companies. Using Rosneft as a tool, Moscow has gained direct influence into the management of exploration and major new oil field developments. The use of substantial financial resources has greatly aided Moscow in achieving this goal. The second phase began in 2003 with the move against Yukos. This action is more complex than its oil industry effects. With the government takeover of Yukos, the government effectively renationalized one of Russia’s foremost oil assets privatized in the 1990s. Its management structure is now in very close contact with the Putin administration and its vision of the economy and the role of Russia’s natural resources and private companies in it.

Recent Developments
The latest step in reasserting that state’s role in the economy into the industry is the absorption of Rosneft by Gazprom. With this is it easy to see that another goal of the Russian government is to nationalize the gas industry. Another goal is to provide Gazprom, already a powerful entity of state power, a larger role in the production of the nation’s oil. Finally, a unified state oil and gas company will also move forward Moscow’s external relationships with the world oil market and with leading foreign actors. With its distinct policies, it is easy to see the goal of the Putin administration is to raise and sustain Russia’s economic growth. However, a growing share of the national product is coming from state organizations. It is also true that there is no data to support the notion that with state-led corporations there will be greater production. If Moscow’s intent is to progressively shift assets back to direct state management, it may well have to trade production to achieve this. This is most certainly a growing limitation on supply.

Clasifications of Reserves
Before discussing how much oil is left in Russia, it is important to discuss how Reserves are classified. Reserve estimates are even further aggravated by the fact that Russia uses a different classification system that is different than most of the world’s. Most of the world uses the standard set forth by the Society of Petroleum Engineers (SPE) to measure reserves.

SPE System of Classification
Below is a simplified version of the SPE reserve classification: Proved Reserves: These refer to the amount of oil existing in known fields that is commercially recoverable at a reasonable price. Unproved Reserves: These are based on geologic and/or engineering data similar to that unused in estimates of proved reserves, but can’t be classified as proved due to technical problems, contract issues, economic problems, or regulatory uncertainties. Unproved reserves are further divided into probable and possible reserves. Probable reserves are unproved reserves that are more likely than not to be recovered. Possible reserves are unproved reserves that are less likely to be recoverable than probable reserves.

Russian System of Classification
Russia’s system is quite different. Oil reserve estimates are expressed by the letters A,B,C1,C2,D1, and D2. Their classification is described below:

Proved Reserves A-	Geologically examined reserves currently in production

B-	Geologically examined reserves, which are the unused production capacity

C1- Geologically evaluated reserves, which according to engineering data show practical recoverability. Probable reserves.

C2-Reserves that are presumed to exist, based on geological and geophysical data

D1- Speculative reserves, presumed to exist on the basis of geological analogy to reference areas

D2- The same as level D1, but less closely evaluated.

Differences in the Systems
The Russian definition of proved reserves is not the same as the SPE’s proved reserves. The main difference is that the Russian definition looks at what is geologically possible to extract but does not take into consideration economic factors. The basic result of these two systems is that the Russian system usually places estimate to be 20-30% larger than the SPE system estimates.

Problems
Estimation the remaining recoverable reserves is not an easy task. In addition to the different systems of reserve measurement, this is made even more difficult when dealing with a country such which reliable data is hard to come across (A).

Future Reserves
As of the end of 2003, the total proved Reserves for Russia were estimated at 68.2 billion barrels. This estimate was also very close to that of the BP Statistical Review of World Energy. Proved reserves of 68 billion barrels places Russia seventh in the world. It also possesses the largest proved reserves outside of OPEC. With this number, Russia’s reserve to production ratio (R/P), meaning the number of years its proved reserves would last at current production levels would be 22. This is far less than some of the richest OPEC producers (some have R/Ps of greater than 100). However, Russia’s reserves are two times larger than those of the United States and four times larger than the Biggest European producers. (a)However, as of 2006 there were many different estimates of how much oil is left in Russia. In an Oil drum article from 2006, many oil companies, consultants, and experts were asked to estimate how much Russian oil was left. There were three different sets of estimates. The “low” camp suggested that there was less than 70 billion barrels left. These guesses were on par with the 2003 estimate. There was a “middle” camp which suggested there was 120 billion barrels left. However, these estimated are considered to be optimistic. The “high” camp suggested that there were 170 billion barrels of oil left. This is of course considered to be high optimistic. These estimates assume that any yet to be found oil through 2050 will be economically feasible to produce. Clearly, estimating how much oil is left in Russia draws a wide range of estimates with no clear consensus (A). Future oil Production

Through 2010, all but a small amount of oil will be produced from fields that were online in 2003. By 2020, a very large percent, maybe even 50%, will still come from these current fields. These are the fields that contributed almost all of Russia’s 68 billion barrels of proved reserves. They are at the center of national supply. Current producing fields can be classified into two groups. The first is fields that have already reached their engineer maximums. The second class is fields that are increasing their productions, and have not yet hit their peak capacity rates.

Fields in decline are the main producers of Russian oil today. Most of these fields reached their peaks many years ago. Most of Russia’s largest fields are already in decline. However, this does not mean that these fields can still in time increase their production over short periods. (A) In fact, Dr. Iskander Diyashew, chief engineer of the former company Sibneft, expects Russia to be capable of incrasing its oil production to 12 million barrels a day over the next 7 to 10 years (A). However, it does mean that they are not expected ever to exceed their highest historical annual production. This means that the fields that represented 80% of the countries output will go into decline. The rate of decline for these fields is dependent on economic, technical, and political conditions. At low-end decline rate predictions, fields will decline at 1% annually. This level could be obtained if net income to producers from the sale of oil is very high. High predictions place annual decline at 5% or higher. Higher declines were seen in Russia before. This would occur if producers were losing money on oil production. World prices could also fall from their current record levels. If oil prices were to drop to $18 a barrel, it would wipe out most or all of the Russian oil industries present net income. At this price, post-peak fields would decline at an annual rate of 3-5% annually. Fields with increasing production will contribute the most to production growth through 2010. In 2004, these fields contributed about 20%, or 1.4 million barrels a day of supply in 2003. This is responsible for an overwhelming fraction of the growth in national output. The amount produced by these fields will be critical to growth. There production will be enough to fill the annual gap created by the decline of post-peak fields and leave on average 1 million barrels ad ay for new net national production. There are many fields that have not hit their engineering maximums and will increase for years to come. However, by 2010, most of these fields will peak. The rate at which they decline after 2010 will be set by the net income and business environment of the industry in the next decade. With the current growth in oil production, the export capacity might becoming a limiting factor in the near future. Currently, Russia has at least two major piplein projects that are planned or in construction. One is the Eastern Siberian Pacific Ocean pipeline or EPSO. This pipeline is supposed to transport oil to China. It will be built in two stages. The first will extend the existing pipeline from Kimeltey near the Baikal Sea to Skovorodino close to the Chinese border. When finished, this will carry 30 million tons of oil per year. This is equivalent to 600,000 barrels a day. Another pipeline is planned to run from Bulgaria to Greece. It will start in Burgas, Bulgaria to Alexandroupolis in Greece. It has been approved and it set to be completed in 2010. It is designed to transfer between 35 and 50 million tons a year. This is the equivalent to about 700,000 barrels a day. Added together, these two new pipeline can transfer 1.3-1.6 million barrels a day. (A)

Arctic Oil
The United States Geological Survey has claimed that the Arctic would hold 25% of the world’s remaining oil resources. A large part of the arctic belongs to Russia, and this would mean that Russia is possible sitting on huge deposits of oil. These resources could add even further to the possible 170 billion barrel estimates discussed above. However, there are differing opinions on exactly how much oil is left in the arctic. Some estimates even claim that only 1/4th of previous estimates is probable. Some reports also claim that 85% of the already discovered resources and 75% of the future exploration potential is believed to be natural gas. Most agree that there is still 90 billion barrels in the South Kara Yamal basin that has yet to be found. However, Arctic oil is more expensive, more difficult and slower to produce than land-based fields. Some estimates claim that arctic reserves could possibly add up 3 million barrels a day to Russian production.

Pipelines
With the currrent growth in oil production, the export capacity might become the limiting factor for Russian production in the near future. Therefore, there are a number of proposals to build new or extend exisiting Russian oil pipelines and related facilities. Russia currently has at least two major pipline projects that are planned or in construction.

New Pipelines
The new Eastern Siberia Pacific Ocean pipeline is supopsed to transport oil to China. It is to be built in two stages. The first section will extent the existing pipeline from Kimeltey near the Baikal Sea to Skovorodino, close to the Chinese border. This This should be operational very soo, and has the capability to transport 30 million tons of oil per year. This is the equivalent of about 600,000 barrels ad day.

A 280 kilometer pipeline from Burgas in Bulgaria to Alexandroupolis in Greece has been approved and is to be reading in 2010. It is designed to transfer between 35 and 50 million tons a year. This is the equivalent of 700,000 to 1,000,000 barrels a day. Added togther, these two new pipelines have the capability to transfer 1.3-1.6 million barrels a day.

There are also other major pipleines that have only been proposed. One such line would carry oil from Russia's West Siberia and Tyumen-Pechora basins west and north to a deepwater terminal at Murmansk or perhaps Indiga on the Barents Sea. This would allow 1.6-2.4 million bbl/day of Russian oil to reach the U.S. through tanker ships. This process would only take nine days, much faster than it takes from the Middle East or Africa. However, some argue that this project is not economically feasible.

Other routes have been proposed to open up the market to Japan. The plans suggest building a pipeline from the Russian city of Taishet to Nakhodka, which is close to the Sea of Japan. This route would provide a new Pacific port from which Russian oil could be shippped by tanker to Japan and other Asian markets. This could also possibly create another route through which Russian oil could be delivered to the U.S. As of 2006, Japan had offered $5 billion to finance the contrustion and $2 billion for oil field development.

Major Companies and the Future
Roseneft Roseneft believes that if the current favorable economic conditions continue, it can significantly increase its oil and gas production. In the short term, its growth will come from its already developed fields. Roseneft owns 20% of the international stake in the Sakhalin-1 project. Commericial production of oil began at Skahalin-1 at the end of 2005 and it is expected to incrase significantly over the next several years. Rosneft plans to strengthen its position in the energy markets of the Asia-Pacific region. Sakhalin-1 will play a major role in the company's future goals of diversifying exports.

Other projects are also being developed by Rosneft to develop Sakhalin Island. These projects will provide some of the most promise for the company's long-term increases in oil production. Exploration work at Sakhalin-3, Sakhalin-4, and Sakhalin-5 is continuing. It has become quite clear that these projects have considerable potential to make Rosneft the major player in the Far Eastern energy market. Exploration work is also being carried out on the Kamchatka shelf. This is a joint venture with the Korean National Oil Company (KNOC). The west Kamchatka shelf is a major part in Rosneft's long-term developement strategy. The regions potential reservers could be comparable with total resources of the Sakhalin shelf.

TNK-BP