Geopolitics & Energy Policy

« Older Entries

Global Politics Likely Will Trigger Congressional Action on Energy

Despite predictions late last year that energy policy would be a back-burner issue for the 112th Congress, the perfect storm of global politics, Middle East unrest and growing U.S. demand may force lawmakers to move energy legislation this year, albeit more targeted than 2010’s sweeping carbon trading or renewable energy standards measures.

At a Washington energy forum sponsored by The Abraham Group and Bloomberg Government, energy industry officials predicted that GOP leaders would have little choice but to act if gas prices climbed above $4 and $5 a gallon during this summer’s peak driving season.

U.S. Rep. Fred Upton, the Michigan Republican who chairs the House Energy and Commerce Committee, told the forum that “with the unrest in the Middle East, we are seeing increasing prices, which are really threatening our economy in the months and years ahead.”

Congress needs to take action to avert a crisis. “I think the emphasis will be on supply—what can we do to increase the supply to have a downward pressure on prices,” Upton noted. The pressure would likely take the form of legislation to encourage the extraction of additional oil resources in the United States, both in the Gulf of Mexico and Alaska.

In its short-term energy outlook released in February, the Energy Information Administration (EIA) forecast that the average WTI price of crude oil would be $93 in 2011. As of March 11, the price was hovering at $100. The EIA also projected that regular-grade gasoline retail prices would rise from an average of $2.78 per gallon in 2010 to $3.15 per gallon in 2011. According to AAA, the average price of unleaded gasoline in the United States this week is $3.54 per gallon.

“The price of oil passing $100 per barrel represents a serious challenge to the U.S. economy,” said Spencer Abraham, Chairman and CEO of The Abraham Group and former U.S. Secretary of Energy. “We need to continue to look for adequate and affordable energy supplies within the United States to lessen our dependence on foreign oil, offset growing demand from American consumers and continue to stimulate the economy.”

A recent Heritage Foundation analysis projected that a $10-per-barrel increase in the price of imported crude oil in the first quarter of 2011 and $20 in the second quarter would reduce the United States’ gross domestic product (GDP) by $20 billion, trim employment by nearly 100,000 jobs, and boost gasoline prices 18 cents per gallon in 2011 alone.

“Major energy and environmental laws are passed on a bipartisan basis, and many of them happen as a result of a crisis,” said Thomas R. Kuhn, President of the Edison Electric Institute, at the forum. “I think we may be in the middle of a new crisis here.”

It was a sentiment echoed by the other speakers at the forum, which included Dave McCurdy, President and CEO of the American Gas Association, Denise Bode, CEO of the American Wind Energy Association, Daniel J. Weiss, Senior Fellow and Director of Climate Strategy at the Center for American Progress, and Bob Simon, Democratic Staff Director for the Senate Energy and Natural Resources Committee.

Simon suggested that even with the threat of substantial increases in gasoline prices, comprehensive energy measures, including a clean energy standard highlighted by President Obama in his State of the Union address, aren’t likely to get any traction in this Congress. “This is going to be a challenging Congress to operate in because there are going to be lots of other crosswinds of other policy areas that threaten to knock us off course,” Simon said at the forum.

Simon predicted that “discrete” efforts would likely come on legislation that has had bipartisan support in the past. Along with an effort to increase U.S. oil production, those measures include improving energy efficiency standards for appliances and equipment and establishing a federal financing program to stimulate technology deployment. Sen. Jeff Bingaman, D-N.M., the committee chairman, and the committee’s ranking member, Lisa Murkowski, R-Alaska, have introduced an energy efficiency bill that follows the measure that nearly passed the Senate last year.

“The energy system in the United States is much more complex, much more interconnected … than most anyone in the American public realizes,” Simon said. “It is a difficult enterprise to turn around in any one piece of legislation. The realistic thing to hope for is we can have a good, long-term comprehensive policy vision and then we can take that vision and look for ways of implementing it in whatever environment we find ourselves in. There are some environments that lend themselves to large pieces of legislation. If you can get things done, then you do it that way. At other times, you can get things done in a more discrete fashion, then you do it that way.”

Simon said the Senate might also act on legislation addressing access to and availability of rare-earth elements. Despite immense domestic resources, the United States imports most of these rare earths from China. Sen. Mark Udall, D-Colo., has sponsored legislation that would address the issue.

Upton also supports increasing imports of Canadian crude oil from oilsands, and urged the approval of a U.S. permit for construction of TransCanada’s 1,661-mile Keystone XL pipeline, which would transport about 500,000 barrels of oilsands crude per day from northern Alberta to Gulf Coast refineries.

In Washington, a Renewed Interest in Diversifying Energy Sources

Diversification remains the nation’s best hope for guaranteeing a reliable and plentiful supply of energy far into the future—and the time may have finally arrived where the economics, politics and technology have aligned to compel Washington to forcefully champion a diversified energy strategy.

U.S. Rep. Fred Upton, chairman of the U.S. House Energy and Commerce Committee, told a Washington energy forum—sponsored by The Abraham Group and Bloomberg Government—that Congress needs to actively seek a more varied energy mix to meet the increasing need for electricity—both for economic growth and to service the growing number of electric and hybrid vehicles.

Electric vehicles are “where we need to go, but, of course, you have to have the energy on the other side of that cord to propel the vehicle,” said Upton, R-Mich. “That’s one of the reasons why we have to increase domestic production of electricity by 30 to 40 percent by the end of the next decade, not only because our economy is going to improve but also because we have these new vehicles that are going to tap into it.”

“We’re a country with great resources that we ought to be able to utilize,” Upton added. “We shouldn’t turn our back on what is here. …That’s the agenda we’re going to try to pursue in our committee.”

Thomas Kuhn, president of the Edison Electric Institute, agreed, noting that it is essential that the United States move beyond talk to action—it must build an energy infrastructure that can support the mounting demand sparked by electric vehicles. “There is a changing dynamic on what the priorities are on energy issues, and they are changing because of the transportation sector and our dependence on foreign oil. …Republicans and Democrats are saying we need all the options. We can’t foreclose on any of the options.”

Accenture, the global management consulting company, forecasts there will be 1.5 million electric vehicles in the United States by 2015, and more than 10 million are feasible by 2020. Automobile manufacturers here and around the globe are introducing new electric and hybrid vehicles with increasing frequency to respond to the public’s interest. In 2011 the market for plug-in vehicles in the United States will be flooded with entries from the top automobile manufacturers as well as new hybrid manufacturing companies. The market leaders are expected to be the Toyota Prius, Chevrolet Volt, Nissan LEAF, Ford Focus Electric, Tesla Roadster, Fisher Karma, Honda Fit EV, Mitsubishi I and Daimler Smart Fortwo ED.

“We need to be serious about diversification of energy sources,” said Spencer Abraham, the Chairman and CEO of The Abraham Group and former U.S. Secretary of Energy. “We’re going to need new resources if electric vehicles are really going to take off in the United States. We’ll need serious baseload and that means clean coal and nuclear energy. We are not going to be able to do it with renewable energy alone.”

Abraham and Upton were joined by a distinguished group of energy advocates at the forum, including Dave McCurdy, President and CEO of the American Gas Association, Denise Bode, CEO of the American Wind Energy Association, Daniel J. Weiss, Senior Fellow and Director of Climate Strategy at the Center for American Progress, and Bob Simon, Democratic Staff Director for the Senate Energy and Natural Resources Committee.

In recent years, the U.S. energy landscape has become more diverse. While oil remains a critical energy resource, utility companies have looked to expand their energy mix with fossil fuel and renewable resources. The examples of this U.S. diversification are many:

  • More than 6500 MW of new coal capacity was added in 2010, and some 8000 MW is under construction;
  • Total natural gas reserves increased by 11 percent with potential shale gas production in 2009;
  • Twenty percent of the nation’s electricity comes from nuclear power, and plants are operating, on average, at 90 percent of capacity;
  • As of the third quarter of 2010, there were 530 MW of new photovoltaics installed last year, up from 435 MW in installations in 2009; and
  • Fourteen states have installed more than 1000 MW of wind power, and 37 states have at least some utility-scale wind power installed. Wind power accounted for 40 percent of all new power selected by utilities in 2008 and 2009.

Upton noted that nuclear power plays a vital role in U.S. electricity production, and Congress needs to speed the federal process for renewing licenses and seeking new ones. “On the merits, it shouldn’t take much longer than two years to process an application for an extension, yet we see some now that are taking four and five years,” said Upton. “That is too long. We need to streamline the process otherwise we’ll be taking a lot of megawatts off-line.”

Not surprisingly, renewable energy producers are seeking the same sort of tax incentives and federal research and development opportunities that fossil fuel producers have long enjoyed, both to keep kilowatt prices affordable and to encourage the sector’s growth. “It is in the national interest to have an all-of-the-above policy on energy,” said Bode. “I think the renewable sector deserves the same sort of long-term support [given to fossil fuels] to become part of the long-term energy mix.”

Given today’s federal budget climate, it may be difficult to find support to grow the number and size of financial incentives to purchase electric vehicles or to support renewable energy development and research. Republican leaders have made it clear that deficit reduction is their top priority in this Congress, but energy advocates are hoping that economic pressures may increase interest in economy-building incentives. “We need to create an incentive for people to buy an electric vehicle, and we need subsidies to help finance new technology,” said Weiss, noting that the federal government’s financial incentives proved very effective with advanced battery technology. “When President Obama took office, we had two advanced battery facilities in this country and now there are two dozen.”

While electric vehicles do hold great promise for the future, McCurdy suggested that to win congressional approval and public support for federal financial incentives to broaden energy resources, advocates need to show the incentives make good economic sense and provide greater security for the United States as well. “As much investment that has gone into electric vehicles, they’re still in the 3 percent range of the total auto fleet in terms of annual sales,” said McCurdy. “Scaling it is going to be a real challenge.”

European Energy Security: Natural Gas and Russia

Today in Europe the most important energy security issue is the region’s dependence on imported natural gas, which leaves Europe beholden to the political and economic interests and whims of its suppliers, especially Russia.

For Europe, natural gas imports today comprise about 46 percent of demand, while for the European Union (EU) gas imports account for about 59 percent of demand. Russia is a significant factor in these imports, providing about 25 to 26 percent of total gas demand for Europe and the EU. Although the International Energy Agency (IEA) expects slow growth in European and EU gas demand through 2030—about 0.7 to 0.8 percent per year—in absolute terms more gas will be necessary. Unfortunately, for Europe and the EU, internal production is declining, except for Norway, leaving Europe and the EU increasingly dependent on foreign sources.

As a sign of the significance of the issue, Europe and the EU’s natural gas dependence was highlighted at the 11th IAEE European Conference “Energy Economy, Policies and Supply Security: Surviving the Global Economic Crisis” in Vilnius, Lithuania.

Looking to the future, gas import dependence will likely grow rapidly. By 2015, European gas imports will increase to 49 percent and by 2030 to 66 percent. For the EU, gas import dependence will be even greater, reaching 69 percent by 2015 and 83 percent in 2030. A major difference between European and EU dependence is Norway, a part of Europe but not the EU. Norway, whose production is expected to increase through 2030, is a major gas exporter to the rest of Europe. European imports also come from North Africa (Algeria and Libya). Internal supplies come from the Netherlands and the United Kingdom, which are both experiencing declining production.

Dependence on Russian imports will increase as well, rising in Europe to 29 percent in 2015 and 36 percent in 2030. For the EU, Russia’s share of the gas import market will increase to an estimated 30 percent in 2015 and 38 percent in 2030. By 2030, Russia will be supplying more gas to Europe and the EU in absolute volumes than any other source, a terrifying prospect for today’s policy makers.

Still, Russian gas dependency differs considerably among European countries. Three countries, Finland, Macedonia and Slovakia, are completely dependent upon Russia for their gas supplies. Several others, Bulgaria, Greece and Serbia-Montenegro, are more than 80 percent dependent. Additionally, nine countries (Austria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovenia and Turkey) rely on Russia for at least 50 percent of their natural gas supplies. For Germany, France and Italy, Russian gas imports range from 20 to 36 percent, although the total volume that Russia supplies is substantial.

Most of future gas imports will be used for electric power generation, which is expected to grow faster than total gas demand. Europe’s emphasis on reducing its carbon footprint and the fact that natural gas is the least harmful of fossil fuels will result in more demand for gas in the future. As electric power demand continues to grow in the coming decades, natural gas will likely be the fossil fuel of choice rather than coal or oil. Europe is relying on demand reduction strategies and enhanced reliance on renewable energy to meet its climate change goals; however, gas will continue to play an important part of its energy strategy.

With the shift to natural gas, import dependency, especially reliance on imports from Russia, looms as a growing political issue. There are good reasons for the concern. In the past four years, European gas supplies from Russia were severely disrupted twice. In January 2006, Russia and Ukraine had a dispute over gas prices. Russia turned off its gas valves for several days, and Ukraine did not send on to Europe the gas transiting its country. As a result, Europeans froze. In January 2009, a similar Russian-Ukrainian gas dispute led to a two-week shutdown of the gas transit system. Europeans felt the frigid impact again until the dispute was settled, even though the EU was better prepared for this disruption. A minor dispute in Belarus in June 2010 did not lead to a disruption but was another reminder of constant problems.

Disruptions in Ukraine and Belarus are important since 80 percent of Russian gas exports to Europe go through Ukraine, with the remainder going through Belarus. Russia and Ukraine resolved their natural gas contractual dispute in April 2010 (two months after a pro-Russian government was installed in Ukraine); however, future natural gas pricing and other contractual disputes cannot be ruled out. These incidents underlie the concerns in Europe and the EU on increasing dependence on Russian gas. Where Russia used to be a reliable supplier to Europe, politicians and policy makers now view Russia with skepticism and uncertainty.

Both Russia and the EU are advancing different energy systems to solve the uncertainty.  Russia is proceeding with two different pipeline bypasses that would eliminate the need to cross Belarus and Ukraine. The northern pipeline bypass is Nord Stream that will transport gas from Russia under the Baltic Sea to Germany. The first of two lines is under construction and is expected to open in 2011, while the second line is expected to open in 2013 or 2014. The second pipeline system is South Stream that would originate in Russia and transport gas under the Black Sea to Bulgaria and, eventually, to the European gas hub in Austria. Russia continues to announce progress on South Stream. But its expense, in the $15 billion range, and the uncertainty in gas supplies, leave many in Europe skeptical of this system. Russia has another option: using the existing Blue Stream gas system from Russia to Turkey as a way of bypassing Ukraine and transporting gas to Europe. Blue Stream is underutilized, and using this system would require the cooperation of Turkey and other transit countries.

The EU is looking to the Caspian and the Middle East for potential new sources of natural gas, with the Nabucco Pipeline as the primary transportation system. This system is in the advanced planning stages; however, many obstacles remain, including gas supply sources, transit agreements and financing. Neither South Stream nor Nabucco are certainties.

In the meantime, Europe and the EU have been diversifying their gas imports by turning to liquefied natural gas (LNG). This allows access to a variety of sources in Africa, the Middle East and the North Atlantic. Using LNG can increase flexibility when demand is uncertain, and LNG facilities can serve as storage facilities, again enhancing flexibility during times of uncertainty.

As the EU and Europe look toward the future, several important questions must be answered: Will Russia again be a reliable partner or will it exacerbate the EU and Europe’s import dependence problems? Can the EU’s development of Nabucco be a part of the solution to future gas import uncertainty? Will Europe be able to develop its unconventional gas resources as the U.S. has done, allowing it to increase internal production while limiting future gas imports? Will LNG become a greater part of the diversification strategy, again limiting increases in pipeline gas deliveries? All of these questions raise interesting and important issues for EU energy security. Until more definitive answers are provided by key European, EU and Russian leaders, Europe and the EU will continue to worry about their future natural gas supplies.

Analysis by Abraham Energy Report Contributing Editor Leonard L. Coburn who spoke at and moderated a panel at the 11th IAEE European Conference “Energy Economy, Policies and Supply Security: Surviving the Global Economic Crisis.”

Gulf Oil Spill Further Slowing Oil and Gas Development on Public Lands

The disastrous oil spill in the Gulf of Mexico has not only put a freeze on plans to expand offshore drilling, it has added to an already chilled environment for developing oil and gas resources on public lands in the West.

The specter of the oil spill was raised two weeks ago when Interior Secretary Ken Salazar announced the department’s final reforms of its oil and gas leasing policies. Under the new guidelines, the Bureau of Land Management will develop “master leasing plans” in consultation with the public, allowing the agency to review other natural resource issues before deciding to lease lands for development.

“We must continue to move forward quickly and responsibly on our agenda to reform the management of our nation’s onshore and offshore energy resources and our oversight of the companies that develop them,” Salazar said in a statement. “The BLM reforms we are finalizing today establish a more orderly, open, and environmentally sound process for developing oil and gas resources on public lands. The BP oil spill is a stark reminder of how we must continue to push ahead with the reforms we have been working on and which we know are needed.”

Salazar started 2010 proposing these new restrictions on oil and gas leases and drilling permits, following up on his withdrawal one year earlier of nearly 2 million acres in three states that had been approved for development by the Bush administration.

Salazar took another step backward—at least in the view of energy producers—in March when he tightened limits on the use of “categorical exclusions” that had been authorized in the 2005 Energy Policy Act to streamline environmental reviews for new wells on public lands. The action, initially proposed in the changes announced in January, officially came in a settlement of a lawsuit over exemptions from environmental studies that had been granted for thousands of wells in the Rocky Mountain region from 2006 to 2008.

Two weeks ago, Salazar confirmed the agency’s new policy requiring a review of “extraordinary circumstances” before applying the “categorical exclusions” provision. A review would be triggered if the proposed actions were deemed to be of a degree or nature that they warranted environmental analysis.

Already, U.S. Sens. John Barrasso of Wyoming and Robert Bennett of Utah have sponsored legislation to block the reforms, responding to what they see as policies that exacerbate the already “uncertain business environment on public lands,” threatening jobs and communities throughout the West.

The pullback from drilling on federal lands in the West comes just as the need is growing to produce more energy from a region that has an estimated one-quarter of the gas reserves in the continental United States. Additionally, the Gulf spill triggered the recent Obama Administration announcement to freeze new deepwater drilling for six months as well as halted scheduled new exploration in Alaska waters and an upcoming lease sale off the Virginia coast.

Slowing offshore production would be a huge setback in efforts to increase domestic energy supplies, says Barry Russell, president and CEO of the Independent Petroleum Association of America. He cites estimates that there are 288 trillion cubic feet of natural gas and 59 billion barrels of oil still untapped in the Outer Continental Shelf off the U.S. coast, not counting Alaska.

More than half of all domestic supplies of natural gas come from federal lands, with roughly equal amounts produced onshore and offshore, according to the Interior Department.

The Gulf crisis has already made a bad situation worse in the western states, say independent oil and gas producers who do 90 percent of the drilling in the region, providing 236,000 jobs and nearly $6 billion in annual revenues for the federal government.

“It’s kind of hard to imagine it being any more difficult to operate on public lands in the West,” said Kathleen Sgamma, government affairs director for the Independent Petroleum Association of Mountain States, which represents more than 400 energy companies in the region. “Already this year we’ve seen $3.9 billion leave our region as a result of Interior policies that make it even more difficult to operate in our region.”

Now some members of Congress are having “knee-jerk reactions” to the Gulf spill, Sgamma said. “There are already several pieces of legislation that would make it even more difficult to operate onshore in the Rockies,” she said.

One is a bill introduced by Rep. Edward Markey, D-Mass., on the day after the oil rig exploded off the coast of Louisiana on April 20. The legislation would impose new fees on oil and gas leases on public lands that are inactive for more than 90 days per year. The bill is targeted at offshore leases that were exempted from making federal royalty payments under a 1990s law aimed at expanding domestic energy production. But Markey’s bill would apply to leases on both “onshore and offshore lands,” in effect assessing an added annual tax of $4 to $6 per acre for any leases not yet producing oil and gas in the West.

Western producers say Salazar put a chill on their industry as soon as he took office last year and halted leasing on 77 parcels near national parks in Utah that had been opened up by the Bush administration. A few weeks later, Salazar also rescinded lease offers and canceled a low royalty rate that had been granted for oil-shale development on 1.9 million acres in Colorado, Utah and Wyoming.

Last September, Salazar responded to an earlier scandal in the department’s Minerals Management Service (MMS) by eliminating the ability of producers on federal lands to fulfill royalty obligations with oil and gas in lieu of making cash payments. MMS officials were accused several years ago of using the royalty-in-kind program to solicit gifts and personal favors from the industry.

Then Salazar capped a year of new restrictions on western development by announcing regulatory reforms in January 2010 requiring extensive scrutiny of every proposed lease, including “public participation, an interdisciplinary review of available information, confirmation of Resource Management Plan (RMP) conformance, and national, state, and local guidance.”

Salazar also took a swipe at the Bush administration when he announced the changes, saying, “Under the previous administration, the oil and gas companies were kings of the world, with Interior their handmaiden.”

The energy industry responded that such claims are based on misconceptions, when in reality the Bush administration put more than 2 million acres off limits to drilling, designated 750,000 acres as “Areas of Critical Environmental Concern,” and increased the stipulations added to lease agreements.

Oil and gas production did increase on federal lands during the previous administration, the drillers acknowledge, but it has dropped precipitously under President Obama. There were 1,934 fewer leases and 1.1 million fewer acres open to development in 2009 than there were in the first year of the Clinton administration, according to statistics compiled by the Independent Petroleum Association of Mountain States.

Even some Democrats are upset about the trend. “To stifle the growth of this industry in the midst of record-setting national deficit and unemployment levels is not only outrageous but irresponsible,” said Rep. Dan Boren, D-Okla.

Perhaps adding insult to injury, Interior announced in April that it would launch a study of how other countries collect royalties on oil and natural gas as part of an effort to increase the return on development of energy resources on public lands.

U.S. royalty rates are currently 12.5 percent of the value of oil and gas produced from onshore leases and up to 18.75 percent for offshore leases, but a recent study by the Government Accountability Office found that U.S. revenues are well below the royalties received in other countries from oil and gas leases.

Despite the Administration’s claims of support for new domestic oil production, its recent actions both before and after the Gulf spill undermine the important goal of U.S. energy security—and at a significant cost to jobs and local economies.

The wrenching news and photos of the oil spill in the Gulf of Mexico have emboldened opponents of domestic oil and gas development, leaving supporters of this key industry to silently wait their turn until the next oil shortage or spike in gas prices.

Russian Oil—The Long-Term View

Russian oil production is hitting historic highs today, yet the question for the long term is whether the Russian oil sector can maintain these elevated levels of production. In March this year, Russian oil production hit 10.12 million barrels per day, a post-Soviet high. Russia’s latest energy strategy, issued in the autumn of 2009, calls for Russian oil production in 2030 to be 11 million barrels per day, about 10 percent greater than today’s production. Can Russia achieve this increase?

An increase of only 10 percent in Russian oil production by 2030 represents a significant challenge to the Russian oil sector. Most of today’s oil production comes from West Siberian oil fields, fields that have been producing oil for decades. Many of these fields have been rehabilitated during the past 10 years and are largely responsible for the 50 percent increase in Russian oil production during the last decade. But many of these fields have been substantially depleted and are nearing the end of their useful lives. To reach the goal of 11 million barrels per day, the Russian oil industry will have to find large amounts of investments to keep Western Siberian fields producing while developing new production in East Siberia, Sakhalin, Caspian and the extreme Northern fields.

Attracting investment in Russia’s oil industry has been a challenge. In 2009, only 60 percent of planned investments were realized in the energy sector as a whole (both oil and gas). While the oil sector has experienced significant investments, it has not been sufficient to stem the high depletion rates of old West Siberian fields, which are about 80 percent depreciated. To meet the goals of the 2030 strategy, four questions must be answered: How much money is needed? Where will this money come from? How much oil does Russia have to meet its future goals? Where is the oil located?

According to the Russian energy strategy, $600 billion must be invested in the oil industry through 2030 (in 2007 dollars). To break down this enormous number, the strategy assumes that the exploration and production (E&P) sector will need $110 billion from today to 2016, an additional $110 billion will be necessary from 2016 to 2022, and, finally, another $275 billion from 2022 to 2030. The remaining $105 billion will be needed in refining, transportation and marketing. According to the strategy, most of the E&P investment (approximately 70 percent) will have to be made in East Siberia and Sakhalin due to the very high cost of development in those regions. To compare this government estimate with a private-sector forecast, Lukoil estimated that $1 trillion would be needed over the next 20 years just to maintain Russian production at the 10-million-barrels-per-day level.

Before answering the question of where the money will come from, the answer to the third question—is there enough oil to reach the 2030 goal—appears to be yes. There is plenty of oil still to be developed. The strategy suggests that 77 billion barrels of oil, a cumulative total, will have to be produced by 2030, requiring Russia to increase its production to 11 million barrels per day in the intervening years. Today, Russia has a productive capacity of about 30 billion barrels. According to the strategy, if $600 billion is invested in production, it will lead to an additional 91.5 billion barrels productive capacity through 2030. This new capacity will be brought on line in stages with most of the new productive capacity in West Siberia (45.4 billion barrels), East Siberia (18.8), European North (4.6), and other areas that include Sakhalin, Volga/Urals, and Caspian (22.7 billion barrels). All the investments are made according to the Russian energy strategy, Russian oil productive capacity will total more than 120 billion barrels (new plus existing capacity). This is more than enough to meet the goal of 77 billion barrels (11 million barrels per day by 2030), with some 40 billion barrels remaining that can be produced in the post 2030 period.

But this analysis assumes sufficient reserves and sufficient investment. Are there reserves to meet these goals? BP’s annual analysis of worldwide reserves indicates that Russia’s proved oil reserves amount to 79 billion barrels, although there are large areas of undeveloped reserves that are not included in this total. Other analysts say that with enough investment in higher-cost regions, Russia could meet its future needs.

This brings us back to the most important question: Where will the money come from to meet the investment needs of Russia’s long-term strategy? In resolving this question, Russia’s fiscal and tax policies play an important role. Since 2004, Russia has put in place an extremely high tax regime to meet its budgetary needs. For exported oil, Russia takes 90 percent of revenues in total taxes on the marginal barrel produced and exported.  For all oil on an average basis, Russia’s taxes take about 60 percent or more of revenues.  To further clarify this analysis, one recent analyst indicated that for the last eight years, Russia’s gross oil revenues were about $1 trillion. Of this, about $700 billion went directly to taxes and only about $150 billion could be considered net income. Out of the $150 billion, only $50-70 billion was reinvested in the domestic oil industry. Many of the large Russian oil companies moved their investments offshore rather than put their money back into Russia. Meanwhile, the state-controlled companies—Gazprom and Rosneft—are not putting sufficient amounts of their profits back into the domestic industry to meet future goals. Foreign investment in the Russian oil sector has been declining sharply due to Russia’s policies of renationalizing oil assets, limiting where investments can be made by declaring the most important oil fields “strategic” (a designation of “strategic” severely limits foreign participation in the deposit), and undermining the investment environment through a variety of hardball tactics, high levels of corruption and the weak rule of law. The level of risk is much too high for large foreign investors in Russia today. While Russia has provided some tax incentives for new fields in East Siberia, these incentives have been viewed as inadequate to draw the kind of investments from Russian and foreign companies necessary to sustain long-term production. Thus, it is questionable whether Russia will be able to attract the level of investment necessary to meet its long-term goals. If this is true, then Russia’s long-term energy strategy is in doubt.

The last question is where is the oil located that will be developed? Today, the Russian oil industry’s focus is East Siberia. Tax incentives, pipeline infrastructure and investments have been concentrated there, making East Siberia the future for Russian oil production. But some analysts do not think that is where Russia’s oil future lies. They believe that West Siberia, Timan Pechora (northern provinces of Russia) and the North Caspian are the regions with the most oil. These analysts estimate that East Siberia only has about 5 billion barrels of oil reserves, far less than estimated in the Russian energy strategy.

The future for the Russian oil industry rests on answering these four questions in a way that supports its strategy to 2030. The plan estimated that $600 billion is needed, while one private Russian company estimated that $1 trillion is necessary. In either case, the level of investment necessary is massive. The strategy indicated that in addition to the current productive capacity of 30 billion barrels, another 77 billion barrels would be needed to increase overall oil production to 11 million barrels per day. Most analysts conclude that Russia has more than enough oil resources (proved reserves and yet-to-be-developed oil) to meet its expectations. While today’s focus of development is on East Siberia, a region that must be developed to meet future needs, some think that more should be going into the traditional regions of Russia and especially West Siberia. Of the four questions raised in this article, the most vital of the outstanding issues is where Russia will find the money to meet its future production goals. Today, both domestic and foreign investments are inadequate. Russia will have to change its investment environment to provide the incentives and stability necessary to attract the level of investment that is essential to meet its future goals. Without sufficient changes in its policies, Russia’s ability to achieve its oil production goals by 2030 is in doubt.

Analysis by Contributing Editor Leonard Coburn

« Older Entries