RUSSIA: THE LARGEST PRODUCER
According to EIA, 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 40% of the federal budget revenues.
Russia is a major producer and exporter of oil and natural gas. Russia's economic growth is driven by energy exports, given its high oil and natural gas production. Oil and natural gas revenues accounted for 43% of Russia's federal budget revenues in 2015.
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 2015, with average liquids production of 11.0 million barrels per day (b/d). Russia was the second-largest producer of dry natural gas in 2015 (second to the United States), producing 22.4 trillion cubic feet (Tcf), according to Russian Energy Ministry data.
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 almost 30% of European Union crude imports and more than 30% of natural gas imports coming from Russia in 2015. Russia is dependent on Europe as a market for its oil and natural gas and the revenues those exports generate. In 2015, almost 60% of Russia's crude exports and more than 75% of Russia's natural gas exports went to Europe.
Russia is the third-largest generator of nuclear power in the world and has the fifth-largest installed nuclear capacity. With seven nuclear reactors currently under construction, Russia is second to China, in terms of number of reactors under construction as of August 2016.4
Russia consumed 30.52 quadrillion British thermal units (Btu) of energy in 2013, the majority of which was in the form of natural gas (53%). Petroleum and coal accounted for 22% and 14% of Russia's consumption, respectively.
Effects of sanctions and lower oil prices
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 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 in 2012 and 2013 to explore Arctic fields.
At the same time as the United States and the European Union were applying sanctions, oil prices fell by more than half, from an average Brent crude oil price of $109/barrel (b) in the first half of 2014 to just $52/b in 2015 and to $40/b in the first half of 2016. 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.
With lower oil prices, Russian state revenues from oil and gas activities have declined dramatically, and the state's budget deficit has grown. In response, the Russian government has implemented or proposed various measures to increase revenues. The Russian government has changed the minerals extraction tax and export taxes on hydrocarbons several times over the last couple of years. The most recent changes and proposals for upcoming changes all tend to raise the taxes paid by oil and gas companies.
In addition to taxes, the Russian government also collects dividends from oil and gas companies in which the state is a shareholder. In April 2016, the Russian government directed state-controlled companies to pay out a minimum of 50% of 2015 net income as dividends, nearly double the dividends companies would normally pay. Oil companies have objected to both the tax and dividend increases, arguing they divert money from capital investment programs. Based on similar arguments, Rosneft negotiated a lower dividend payout.
In January 2015, the Russian government announced its intention to sell some of its shares in several Russian companies, including Bashneft and Rosneft. Bashneft was one of Russia's 10 largest oil producers. In October, the federal government sold its 50.08% controlling stake in Bashneft to Rosneft for $5.3 billion. The Russian government currently owns 69.5% of Russia's largest oil producer, Rosneft. It intends to sell up to 19.5% of the company, retaining a controlling interest.
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 2016, 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 2015, Russia produced an estimated 11.03 million b/d of petroleum and other liquids (of which 10.25 million b/d was crude oil including lease condensate), and it consumed about 3.5 million b/d (Figure 2). Russia exported more than 7 million b/d in 2015, including roughly 5 million b/d of crude oil and the remainder in products and other liquids.
In 2015, Russia had roughly 7.6 million b/d of petroleum and other liquids available for exports, including almost 5 million b/d of crude and condensate exports. The majority of Russian crude oil exports (70%) went to European countries, particularly Germany, the Netherlands, Belarus, and Poland. Revenues from crude oil and products exports in 2015 accounted for 46% of Russia's total export revenues. Additionally, 43% of Russia's federal budget revenue in 2015 came from oil and natural gas activities. While Russia is dependent on European consumption, Europe is similarly dependent on Russian oil supply, with almost 30% of European Union crude oil imports in 2015 coming from Russia.
Asia and Oceania accounted for 28% of Russian crude exports in 2015, with China and Japan accounting for a growing share of total Russian exports. Part of the increase in Russian crude exports to China has been growing exports to independent teapot refiners in China. Russian ESPO crude does not have to travel as far as Middle East crude to reach Chinese ports. This allows Russian crude to be shipped in smaller volumes and with more flexible scheduling, which makes it more desirable to independent refiners. 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 1.6 million b/d of fuel oil and an additional 960,000 b/d of diesel in 2014. 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 the country's upstream natural gas sector, although production from other companies has been growing.
According to Oil and Gas Journal, Russia held the world's largest natural gas reserves, with 1,688 trillion cubic feet (Tcf), as of January 1, 2016. Russia's reserves account for about one 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 2014, Russia was the world's second-largest dry natural gas producer (20.4 Tcf), surpassed only by the United States (25.7 Tcf). Independent natural gas producers 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.
Natural gas exports
In 2015, almost 90% of Russia's 7.3 Tcf of natural gas exports were delivered to customers in Europe via pipeline, with Germany, Turkey, Italy, and Belarus receiving the bulk of these volumes. Much of the remainder was delivered to Asia as LNG. Ukraine's imports of Russian natural gas in 2015 were less than 30% of 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 has decreased the natural gas it buys from Russia and increased the natural gas it buys from its western neighbors.
Revenues from natural gas exports in 2015 accounted for about 13% 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 natural gas. Europe, likewise, is dependent on Russia for its supply of natural gas. In 2015, the European Union received more than 30% of its natural gas imports from Russia. 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, natural gas consumption in OECD Europe 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.
Liquefied natural gas
Russia has a single operating liquefied natural gas (LNG) export facility, Sakhalin LNG. This facility has been operating since 2009 with an original design capacity of 9.6 million tons (mt) of LNG per year (approximately 460 Bcf of natural gas). The majority of the LNG has been contracted to Japanese and South Korean buyers under long-term supply agreements. Debottlenecking and optimization of the facility added up to 3.2 mt (150 Bcf) of capacity in 2011,81 with much of the additional LNG sold under shorter-term agreements or on spot markets. In 2015, Sakhalin LNG exported slightly more than 500 Bcf of gas, which went to Japan (72%), South Korea (24%), Taiwan (2%), and China (2%).
In 2013, Russia modified its Law on Gas Exports to allow Novatek and Rosneft to export LNG, breaking Gazprom's monopoly on all gas exports. There are a number of proposals in various stages of planning for new LNG terminals in Russia, including a second LNG liquefaction facility that is under construction. Yamal LNG, which began construction in 2013, is owned by a consortium, led by Novatek with a 50.1% interest. Total and CNPC each have 20% interest, and the Silk Road Fund (an investment fund established by the Chinese government) holds the remaining 9.9% interest in the project. The first of three liquefaction trains is scheduled to be online in 2017. The three trains will each have a capacity of 5.5 mt of LNG per year, and they will draw gas from the South Tambeyskoye natural gas and condensate field located in the northeast of the Yamal Peninsula.
To transport LNG from its arctic location, Yamal LNG has commissioned the construction of up to 16 ice-class tankers. Exports are mainly aimed at Asian LNG markets, and during most of the year, the ice-class tankers will take cargoes west from the Yamal peninsula directly to Asia, transiting the Arctic Ocean and the Bering Strait. In winter, when the direct route is too ice-bound to be navigable, the ice-class tankers will take cargoes west from the Yamal peninsula to Europe. In Europe, the LNG will be loaded on to regular LNG tankers that will deliver the cargoes to Asia via the Suez Canal.
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