RUSSIA: THE LARGEST
Russia is the world's largest producer of crude oil (including lease condensate) and the second-largest producer of dry natural gas. Russia also produces significant amounts of coal. Russia's economy is highly dependent on its hydrocarbons, and oil and natural gas revenues account for more than 50% of the federal budget revenues.
Russia is a major producer and exporter of oil and natural gas, and its economy largely depends on energy exports. Russia's economic growth is driven by energy exports, given its high oil and natural gas production. Oil and natural gas revenues accounted for 50% of Russia's federal budget revenues and 68% of total exports in 2013.
Russia was the world's largest producer of crude oil including lease condensate and the third-largest producer of petroleum and other liquids (after Saudi Arabia and the United States) in 2014, with average liquids production of 10.9 million barrels per day (b/d). Russia was the second-largest producer of dry natural gas in 2013 (second to the United States), producing 22.1 trillion cubic feet (Tcf).
Russia and Europe are interdependent in terms of energy. Europe is dependent on Russia as a source of supply for both oil and natural gas, with more than 30% of European crude and natural gas supplies coming from Russia in 2014. Russia is dependent on Europe as a market for its oil and natural gas and the revenues those exports generate. In 2014, more than 70% of Russia's crude exports and almost 90% of Russia's natural gas exports went to Europe.
Russia is the third-largest generator of nuclear power in the world and fourth-largest in terms of installed nuclear capacity. With nine nuclear reactors currently under construction, Russia is the second country in the world, after China, in terms of number of reactors under construction as of March 2015.
Russia consumed 31.52 quadrillion British thermal units (Btu) of energy in 2012, the majority of which was in the form of natural gas (51%). Petroleum and coal accounted for 22% and 18%, respectively.
Effects of recent sanctions
Sanctions and lower oil prices have reduced foreign investment in Russia's upstream, especially in Arctic offshore and shale projects, and have made financing projects more difficult.
In response to the actions and policies of the government of Russia with respect to Ukraine, in 2014 the United States imposed a series of progressively tighter sanctions on Russia. Among other measures, the sanctions limited Russian firms' access to U.S. capital markets, specifically targeting four Russian energy companies: Novatek, Rosneft, Gazprom Neft, and Transneft. Additionally, sanctions prohibited the export to Russia of goods, services, or technology in support of deepwater, Arctic offshore, or shale projects. The European Union imposed sanctions, although they differ in some respects.
In recent years, the Russian government has offered special tax rates or tax holidays to encourage investment in difficult-to-develop resources, such as Arctic offshore and low-permeability reservoirs, including shale reservoirs. Attracted by the tax incentives and the potentially vast resources, many international companies have entered into partnerships with Russian firms to explore Arctic and shale resources. ExxonMobil, Eni, Statoil, and China National Petroleum Company (CNPC) all partnered with Rosneft to explore Arctic fields. Despite sanctions, in May 2014, Total agreed to explore shale resources in partnership with LUKoil, but then, because of sanctions, halted its involvement in September. ExxonMobil, Shell, BP, and Statoil also signed agreements with Russian companies to explore shale resources. Virtually all involvement in Artic offshore and shale projects by Western companies has ceased following the sanctions.
Arctic offshore and shale resources are unlikely to be developed without the help of Western oil companies. However, these sanctions will have little effect on Russian production in the short term as these resources were not expected to begin producing for 5 to 10 years at the earliest. The immediate effect of these sanctions has been to halt the large-scale investments that Western firms had planned to make in these resources.
At the same time as the United States and European Union were applying sanctions, oil prices fell by more than half, from an average Brent crude oil price of $108/barrel (b) in March 2014 to just $48/b in January 2015. Both the sanctions and the fall in oil prices have put pressure on the Russian economy in general, and have made it more difficult for Russian energy firms to finance new projects, especially higher-cost projects such as deepwater, Arctic offshore, and shale projects.
Most of Russia's oil production originates in West Siberia and the Urals-Volga regions. However, production from East Siberia, Russia's Far East and the Russian Arctic has been growing.
Russia's proved oil reserves were 80 billion barrels as of January 2015, according to the Oil and Gas Journal. Most of Russia's reserves are located in West Siberia, between the Ural Mountains and the Central Siberian Plateau, and in the Urals-Volga region, extending into the Caspian Sea.
In 2014, Russia produced an estimated 10.9 million b/d of petroleum and other liquids (of which 10.1 million b/d was crude oil including lease condensate), and it consumed slightly more than 3.5 million b/d. Russia exported more than 6 million b/d in 2013, including roughly 5 million b/d of crude oil and the remainder in products. According to EIA's International Energy Outlook 2014, Russia's petroleum and other liquids production grows modestly over the long term.
In 2014, Russia had roughly 7.3 million b/d of petroleum and other liquids available for exports. The vast majority of Russian crude exports (72%) went to European countries, particularly Germany, Netherlands, Belarus, and Poland. Revenues from crude oil and products exports in 2013 accounted for 54% of Russia's total export revenues. Additionally, half of Russia's federal budget revenue in 2013 came from mineral extraction taxes and export customs duties on oil and natural gas. While Russia is dependent on European consumption, Europe is similarly dependent on Russian oil supply, with more than 30% of European crude oil supplies in 2014 coming from Russia.
Asia accounted for 26% of Russian crude exports in 2014, with China and Japan accounting for a growing share of total Russian exports. Russia's crude oil exports to North America and South America have been largely displaced by increases in crude oil production in the United States, Canada, and, to a lesser extent, in Brazil, Colombia, and other countries in the Americas. Russia's Transneft holds a near-monopoly over Russia's pipeline network, and the vast majority of Russia's crude oil exports must traverse Transneft's system to reach bordering countries or to reach Russian ports for export. Smaller volumes of exports are shipped via rail and on vessels that load at independently-owned terminals.
Russia also exports fairly sizeable volumes of oil products. According to Eastern Bloc Research, Russia exported about 1.5 million b/d of fuel oil and an additional 860,000 b/d of diesel in 2013. It exported smaller volumes of gasoline (100,000 b/d) and liquefied petroleum gas (60,000 b/d) during the same year.
Russia holds the largest natural gas reserves in the world, and is the second-largest producer of dry natural gas. The state-run Gazprom dominates Russia's upstream natural gas sector, although production from other companies has been growing.
Russia held the world's largest natural gas reserves, with 1,688 trillion cubic feet (Tcf), as of January 1, 2015.50 Russia's reserves account for about a quarter of the world's total proved reserves. The majority of these reserves are located in West Siberia, with the Yamburg, Urengoy, and Medvezhye fields accounting for a significant share of Russia's total natural gas reserves.
Exploration and production
The bulk of the country's natural gas reserves under development and production are in northern West Siberia. However, Gazprom and others are increasingly investing in new regions, such as the Yamal Peninsula, Eastern Siberia, and Sakhalin Island, to bring gas deposits in these areas into production. Some of the most prolific fields in Siberia include Yamburg, Urengoy, and Medvezhye, all of which are licensed to Gazprom. These three fields have seen output declines in recent years.
In 2013, Russia was the world's second-largest dry natural gas producer (22.1 Tcf), surpassed only by the United States (24.3 Tcf). Independent gas producers such as Novatek have been increasing their production rates, with non-Gazprom sources expected to continue to increase in the future. Higher production rates have resulted from a growing number of companies entering the sector, including oil companies looking to develop their gas reserves. Russian government efforts to decrease the widespread practice of natural gas flaring and to enforce gas utilization requirements for oil extraction may result in additional increases in production.
In Russia, natural gas associated with oil production is often flared. According to the U.S. National Oceanic and Atmospheric Administration, Russia flared an estimated 1,320 Bcf of natural gas in 2011, the most of any country. At this level, Russia accounted for about 27% of the total volume of gas flared globally in 2011. A number of Russian government initiatives and policies have set targets to reduce routine flaring of associated gas. Also, regulatory changes have made it easier and more profitable for third-party producers to transport and market their natural gas. However, little progress has been made to reduce routine gas flaring in Russia.
Natural gas exports
In 2014, almost 90% of Russia's Tcf of natural gas exports were delivered to customers in Europe via pipeline, with Germany, Turkey, Italy, Belarus, and Ukraine receiving the bulk of these volumes. Much of the remainder was delivered to Asia as LNG. Ukraine's imports of Russian natural gas in 2014 were about half the level in 2013, when Ukraine was the third-largest importer of Russian natural gas. Because of a pricing and payments dispute and as part of the wider tensions between the two countries, Ukraine did not buy natural gas from Russia during most of the second half of 2014.
Revenues from natural gas exports in 2013 accounted for about 14% of Russia's total export revenues. While not as large as Russia's export earnings from crude oil and other liquids, Russia still has a significant level of dependence on Europe as a market for its gas. Europe is, likewise, dependent on Russia for its supply of natural gas. In 2013, Europe received about 30% of its natural gas from Russia, with about half of that volume delivered via Ukraine. Additionally, some countries within Europe, especially Finland, the Baltics, and much of Southeast Europe, receive almost all of their natural gas from Russia.
Since the mid-2000s, Western European natural gas consumption has generally been flat to declining, prompting Russia to look to Asia and LNG as a means to diversify its natural gas exports. U.S. and European Union (EU) sanctions, implemented in 2014, accelerated Russia's pivot to the east, with Russia signing two pipeline deals with China in 2014 covering exports that could eventually reach 2.4 Tcf per year.
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