User:Slupa2/Oil and natural gas in Russia

Russia is one of the largest energy producers in the world. In 2009, Russia surpassed Saudi Arabia and became the largest oil producer in the world at 9.93 million barrels per day. Russia is also the world’s largest natural gas producer, producing over 21% of the world’s supply. In spite of its immense dependence on energy, the large amounts of oil and natural gas that Russia produces allow it to be mostly self-sufficient.

Oil and natural gas play an essential role in the Russian economy by driving all other elements of the system – industry, agriculture, commerce, and government. This is largely the result of the old Soviet system which drastically lowered the price of energy below the world market, essentially subsidizing it. In the mid-1990s, just after the fall of the Soviet Union, natural gas accounted for just over half of Russia’s energy consumption, while oil accounted for another 20%. In spite of all the waste, Russia continues to produce a surplus, exporting roughly 30% of its energy production. Russia exports its oil and natural gas by several means, including rail, tanker, and pipeline. Russia has an expansive network of pipelines, through which Europe receives the majority of its Russian energy imports. Natural gas and oil will likely continue to be a significant source of foreign exchange for Russia, at least until Russian industry becomes competitive with that of the West. Additionally, until the world makes more significant developments in terms of renewable energy sources, Russia will be able to use its resource endowment as a means of coercing submissive nations into complying with its demands.

Development
Although the existence of oil was known centuries before, the earliest accounts of its production in Russia begin in 1821. At this point in time, oil production was dominated by the Baku oil fields, located on the eastern edge of the Caucasus Mountains. By 1825, the oil industry was thriving with more than 125 wells in the Caucasus with an aggregate output of 25,000 bbl/yr. The prominence of oil increased over the next several decades, reaching total shipments of 19 million barrels in 1889. Volume in 1890s continued to grow at an average rate of 30 percent. With help from major foreign investment, production reached a peak of 85 million barrels in 1901. Due to strikes in 1906 and the aftermath of World War I, Russia’s oil industry was hit hard by decreased production. It was not until 1940 that the industry recovered, reaching 225 million bbl/yr. After World War II, production again swiftly spiked due to increased exploration, reaching levels greater than 12.5 million bbl/day. Shortly after, Russian oil production went into a steep decline which lingered around until the fall of the Soviet Union. No substantial new developments were made until 1992, after the injection of Western technology and extraction methods. Today, the industry is experiencing unprecedented growth by expanding redevelopment of old oil fields and increased exploration, mainly in western Siberia and the northeastern shelf.

Statistics
Although Russia has not always been the world’s dominant oil producer, it has been perpetually ranked near the top. Prior to 1973, it was ranked second when it surpassed the United States to become the leader. It remained the leader until the collapse of the Soviet Union when it fell behind the US and Saudi Arabia. In 1999, however, it surpassed the US for a second time, and in 2009, overtook Saudi Arabia to become the world’s current primary oil producer.

Russian oil production peaked in 1987 at 12.5 million barrels per day. After this, its production declined until 1995, when it reached a low of 7.4 million barrels per day. This was due to inefficient Soviet extraction techniques which led to waste. It has been on the rise ever since, with Russia now producing 9.93 million barrels per day. Experts predict that Russia’s oil production will peak again in 2010 or shortly after. There are six major oil producing areas in Russia, which including the Northern Caucasus, Timan-Pechora, Volga-Ural, Northwestern Siberia, Eastern Siberia, and Sakhalin. Two-thirds of Russian oil comes from the large fields in northwestern Siberia.

Domestic policy
Up until the fall of the Soviet Union, and as aforementioned, the oil industry had always been heavily-regulated. Until January 1995, there were quotas on all oil exports. There were also tariffs, which expired on July 1996. The purpose of these barriers was to ensure that there was a sufficient amount of oil for domestic use. They were lifted in the mid-1990s as the gap closed between domestic and world prices. By 1998, the major changes in the transformation of the Russian economy from state ownership and administrative control to private ownership and market relations had been completed.

A few large companies dominate the oil industry in Russia. The largest is Rosneft, which is ranked second in the world to ExxonMobil. The second largest in Russia is Lukoil. Oil companies in Russia are vertically-integrated, which means that they dominate every phase of the production process, from exploration to drilling to extraction to transmission.

Foreign policy
Russia is actively eyeing expansion in its oil production. It is currently looking for new oil deposits in its southern states. It has already claimed the Caspian oil fields, which were previously being surveyed by Western companies. Russia insists that the Caspian oil flows travel northward through Russia. Antagonistically, the West, Iran, and Turkey have all expressed desire for them to travel westward through Georgia and Turkey.

Russia views the prospect of oil extraction in the Arctic Ocean as increasingly lucrative. In 2001, Russia claimed before the United Nations that it was expanding its borders to the Russian continental shelf beyond the previous 200 mile zone of the Russian Arctic sector. After carrying out additional research in 2007, Russia believes the area contains 100 billion tons of gas and oil deposits.

Russia has recently been involved in energy disputes with many different nations. Russia is viewed by the West as using its energy superpower status as a way of pushing smaller, independent nations into submission. One example occurred in January 2007 when Russia stopped pumping oil through the Druzhba pipeline to Belarus. This was a hot-button issue, because Russia provides the majority of Belarus’ oil through this pipeline. Its decision to stop the flow was due to Belarus’ refusal to pay for an increase in the price of natural gas and subsequently imposing a tariff. Three days later, the oil flow was resumed, but only after Belarus agreed to stop the tariff that caused the shutdown.

Additionally, Russia shut down its oil exports to a refinery in Lithuania after an oil spill in the aforementioned Druzhba pipeline before it branched off to Belarus. Russia cited technical reasons for shutting off the flow, but Lithuania believes the oil supply was cut off because it had sold some of its refineries to the Polish company PKN Orlen. Since then, oil flow has been resumed to Lithuania, but only through alternate pipelines.

Finally, in July 2008, Russia limited its flow of oil to the Czech Republic after it signed a treaty with the United States to host an antiballistic missile tracking radar. Russia claimed correlation over causation, stating that the two had nothing to do with each other. Russian Prime Minister Vladimir Putin ordered a restored oil flow to Russia, but in the end, total supply was halved.

Historical context
Natural gas does not have nearly as expansive of a history as oil. Initially, natural gas production was not very significant to the Russian economy. In the 1970s, Russian production was dominated by the Volga-Ural fields in Europe. Its dominance abruptly ended, after which production shifted to the giant fields in Siberia. The major natural gas fields in Siberia include Urengoy (the largest in the world) and Yamburg. In the 1980s, natural gas replaced oil in terms of forecasted growth. This was due to its cheaper extraction and transportation costs. Production peaked in 1991 at 727 million cubic meters. Output then dropped in the 1990s, but has since been rising steadily.

Russia is currently the world’s largest natural gas producer. It is one of the most successful parts of its economy. It currently has 43 trillion cubic meters in reserve, which amounts to almost 24% of the world’s total. It is also the world’s largest exporter. It provides Europe with the majority of its natural gas through an expansive network of pipelines. In 2007, primary importers from Russia included Ukraine (26.7%), Germany (16.4%), and Turkey (9.86%). Still, Russia has not lived up to its full potential in terms of natural gas production. Environmental problems and infrastructure costs have slowed development, and hasty construction and poor maintenance have led to breakdowns and accidents.

Political context
The Russian natural gas industry is dominated by the state-owned Gazprom. Gazprom has the exclusive right to export natural gas as well as control over all gas pipelines leading out of Central Asia. As a result, it has been effectively nationalized, although the Russian government disputes these claims. This company is vertically organized, which means that it controls every phase of the production process. It is a joint-stock company, with 40% owned by the state, 15% by employees, 10% by managers, and 35% by the public. Gazprom also owns a network of regional production associations.

Similar to its use for oil, Russia has used its natural gas production capabilities to demand submission of weaker neighboring states. For example, in November 2006, Gazprom announced its intent to construct a gas pipeline to South Ossetia, which had earlier declared its independence from Georgia. Georgia spoke out in defiance. As a result, Gazprom increased the price of its natural gas shipped by pipeline to Georgia in January 2007. This was done as an attempt to thwart Georgia’s disobedience of Moscow. This led to a military conflict in August 2008 during which the flows of natural gas were completely shut off. Ultimately, Moscow got what it wanted.

Russia is able to use its energy superpower status to demand higher prices. In 2006, Russia increased the price of natural gas in Ukraine. Ukraine refused to pay, and Russia cut its gas exports to the nation until an agreement could be reached. Negotiations failed and an agreement was not reached. As a result, Russia was able to charge the prices it wanted. In 2007, Gazprom announced a 100% price increase for the nation of Azerbaijan. Azerbaijan declined, which resulted in a shutoff of its gas pipeline. The issue was resolved, but not in Azerbaijan’s favor.