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Western and Eastern Vectors of the Russian Oil and Gas Sector Development

Western and Eastern Vectors of the Russian Oil and Gas Sector Development

The idea of diversification is strongly rooted not only in the minds of European consumers. Russia is also actively promoting this issue focusing on diversification of supplies. The country’s official energy strategy stipulates deliveries of Russian hydrocarbons to new markets, first of in Asia.

On one side, this looks logical since Asian countries are becoming major driving forces of the demand for raw energy resources. Moreover, many Asian nations experience serious problems with hydrocarbon reserves, which contributed to growth in imports. On the other side, the Russian energy strategy proceeds from a rather doubtful supposition that the domestic oil and gas production will surge, which will allegedly enable Russia both to retain the European market and gain a place in the Asian sun.

However, there are well grounded concerns about substantial growth in production of hydrocarbons in Russia. Thus, the ideology of entering the Asian market means gradual redirection of export flows from the European direction to the Asian one, rather than diversification. This is also confirmed by statistics – production in the east of the country is increasing rather slowly; this is why a pipeline system to redirect flows of hydrocarbons from Western Siberia to China is being created.

The economic reason for such decisions is not always clear – eastern projects receive oil and gas production tax preferences, there is no export duty on supplies through ESPO and Transneft has preferential tariffs in the eastern direction. As a result, exports to China are ensured by supplies of hydrocarbons from deposits economically unprofitable for such deliveries. Simultaneously, new routes of oil and gas supplies to the West are being laid.

So, a strategic dilemma of the oil and gas sector development is becoming more and more obvious, while its political hidden motive is getting more and more interesting.

The report elaborates on the following issues:

  • Pace of development of Eastern Siberia and Russia’s Far East

    • Problem of a resource base for oil and gas supplies to China and other Asian countries
    • Construction of the Purpe-Samotlor oil pipeline and amounts of future oil supplies from Western Siberia to Asia
  • BPS-2 and ESPO: choosing priorities

    • What to lay first and which pipe not to fill in?
  • Struggle for the eastern “tax heaven”

    • Economic profitability of eastern projects and expediency of redirecting export flows
  • Problems of gas supplies to Asia

    • The Altai project’s fate
    • Pricing negotiations with China
    • Struggle for Kovykta
    • Possibility of Yakutia deposits’ development
    • Outlooks for filling in the Sakhalin-Vladivostok pipe
  • Political motives behind struggle of export strategies

    • Pro-European and pro-Chinese factions
    • V. Putin’s position
  • Forecast of developments

The contents of the report:

Introduction 2
Chapter 1. Production of Hydrocarbons  – Main Risk 4
1.1. Current Output Level 4
1.2. Dreaming of Growth 6
1.3. Production Prospects in the East 8
Chapter 2. Political Aspect of East-or-West Choice 17
Chapter 3. Tax Conditions for Eastern Projects. 21
Chapter 4. Oil Pipeline War 25
Chapter 5. Gas Supplies to China 34
5.1. Resumption of Altai Gas Pipeline Construction 36
5.2. Kovykta  – Possible Breakthrough Point 39
5.3. Sakhalin: Between China and Other Asia Pacific Ñonsumers 41
5.4. Prospects of Supplies from Yakutia 42
Chapter 6. Prospects of Medium-Term Developments 45
Date of issue 19th April 2010

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