The Russia Journal

The world market for oil and gas is ever-mutable and affected by various factors that are sometimes not related to each other (supply, demand, local conflicts, climate changes, etc.). For example, last year's global economic downturn caused a considerable drop in electrical power production and, consequently, forced production cuts in fuel sectors. Simultaneously, electricity rates went up, causing many industries in Russia and in the West to reduce output, which again hit the market for oil and gas, pushing prices further down.

As of early 2002, the share of OPEC in global production of oil and gas fell to 38 percent and 15 percent respectively, which looks particularly dramatic given that these countries control more than 78 percent of discovered oil reserves and approximately 46 percent of discovered reserves of natural gas. The proportion of natural gas has approached 50 percent of the combined total of discovered global reserves of hydrocarbons and 41 percent of global production of hydrocarbons.

The world market's oil price averaged $21.5 a barrel in 2001, dropping to $18-$19 a barrel toward the year's end. In response to the price drop, OPEC reduced oil production by 10.5 million barrels and a number of independent oil exporters joined the agreement on self-imposed limits of oil production. This helped achieve a reversal of the trend, and currently oil costs around $23-$24 per barrel and is tending to go up.

It is clear that none of the countries from the group of major hydrocarbon producers are able to process its entire product by themselves. Therefore, the development of pipeline networks (as the cheapest, safest and most effective way of transportation) has been given primary attention and priority in investment by oil and gas companies. A total of more than 60 large-scale pipeline projects (over 150-200 kilometers) are being considered and/or implemented in the world at present. After these projects are completed (according to plans, this will happen by 2005-2007), the global pipeline network will add 47,000 kilometers. Gas pipelines are prevalent in terms of both overall length and number of projects under way.

Almost all of the biggest projects are connected with countries that showed the highest economic-development rates over the last decade but have relatively undeveloped industrial infrastructures, and countries that are starting to develop their recently discovered oil and gas deposits. These countries include China, Taiwan, Korea and Malaysia and C.I.S. countries involved in the Caspian Sea shelf project and also the deposits of eastern Siberia and the Pacific shelf.

The largest and most significant of the projects being considered at this moment is that of laying a trans-China gas pipeline from the Xintsyan-Uigur province to Shanghai. Its total length will be over 4,200 kilometers and necessary investment is $14 billion. Russia is among those that are directly interested in the project: The Chinese company Petochina (the government operator of the project) has put two Russian companies, Gazprom and Energomashexport, on the list of potential contractors, which also includes Exxon Mobil, Royal Dutch Shell and British Petroleum. Gazprom and Energomashexport have huge experience in projecting and laying such pipelines in similar geographical and climatic conditions, and their chances for winning the tender are considered to be pretty high.

Also being actively developed are gas-pipeline projects in North and South America. The development of gas fields in Alaska required laying a number of ducts. Being implemented at the moment is a project of laying a gas pipeline from Alaska to the Canadian province of Alberta, which will be over 2,800 kilometers long and cost around $3 billion to $3.5 billion.

In the next five years it is planned to lay pipeline networks connecting Argentine and Brazil (via Uruguay); Indonesia and Singapore; Australia and Papua-New Guinea; and Egypt and Turkey.

The European project of laying a ring-pipeline at the Austrian segment of the trans-European gas pipeline – via which Russian gas is transported to Italy – is being continued. The project is expected to increase the pipeline's throughput to 33 billion cubic meters a year.

Speaking of Russia, it is most important to note that, for several years now, Russia has been reducing its share in Europe's overall supply of natural gas. Russia is not supplying gas to Spain, Portugal, South Italy, Belgium, Ireland, Sweden and Great Britain. On the other hand, Russia's position as a gas supplier is strong in France, Finland, North Italy and Germany (see Table 1).

Russia's role in Europe's gas market is not making everyone happy. Except for Finland, European countries are trying to diversify their gas imports by re-orienting to suppliers in Algeria, Egypt and other countries in North Africa and the Middle East. Over the last five years, a number of European countries have achieved a considerable change in the "balance of forces" on their local markets and managed to partially "escape" from Russia's orbit (see Table 1). Russia's share as Europe gas supplier to Europe is declining at a pretty noticeable pace, while that of Third World countries is increasing. Thus, Russia's share of Italy's gas market is declining at the rate of 1 percent per year (mainly due to Algerian supplies, which have increased by 8 billion cubic meters in the last few years), and Russia's share of France's gas market is falling at the rate of 1.5-2 percent a year. Meanwhile, Holland has more than doubled its gas exports and Qatar and Nigeria are also gaining momentum.

Russia is an active player on the world oil market, possessing more than 12 percent of global discovered-oil reserves and exporting more than 125 million tons of oil every year. The market situation is generally favorable for Russia, as demand for oil from European countries is steadily increasing. Besides, there is a stable demand from the countries of South-East Asia (see Table 2).

Therefore, in this situation, the prerequisites exist for Russia to further expand into the markets of Western Europe and East Asia. There are a number of pipeline projects under way designed to increase oil traffic to the importing countries. Fig. 1 shows the geographic destinations of Russia's oil and gas exports.

As things stand today, Russia's oil exporters are employing the "pipeline plus tanker" scheme, which is, in fact, the perfect solution, especially given that most of Russia's discovered oil fields are located in the remote areas in eastern Siberia, where climatic conditions are far from favorable and, hence, the costs of pipeline construction and maintenance are much higher than the average world level.

Nevertheless, there are a number of projects that provide for laying long pipelines, for example, from eastern Siberia to China (Table 3 shows where major pipeline projects in Russia or involving Russia are).

Pipeline construction is not only a matter of economics, but also of geopolitics; in this connection, it is extremely important for Russia to set priorities in orientation to either Western countries or those of Southeast Asia.

The construction of the Baltic Pipeline System and completion of the Northern Gates project will make Russia independent of the countries that are currently providing their territories for oil transit and will eventually allow Russia to increase the efficiency of its oil export and pursue an independent policy on the European market.

On the other hand, laying a gas pipeline to China will help Russia to consolidate its presence in Southeast Asia and, consequently, strengthen the country's weakened prestige in this region.

In a word, the market poses many challenges, something that is exacerbated by increased political activity of the interested countries. Ukraine, for example, which has not yet made a final decision on its strategic political orientation, is actively lobbying its own pipeline-construction projects for supplying Russian oil and gas to Western consumers. Meanwhile, France and Italy are actively re-orienting toward alternative gas suppliers to break free from the Russian orbit, and the countries of the Middle East are asserting their presence in Western and Central Europe.

Therefore, each pipeline project will involve certain difficulties for Russia. At the same time, the trends that have been seen in the last several years allow one to conclude that even the most daring projects are realistic, and the chances for Russia to maintain its position among the strongest players on the market are fairly high.

(The author is analyst from the MetalTorg.ru project)