Russian energy under Putin’s next presidential term

Aleksanteri election seminarAleksanteri Institute, 14 March 2012

1. What is to be expected in the gas and oil sector development?

2. What role for the energy sector in Russian economy?

Russian energy exports revenue (2000-2010, billion USD)

0

20

40

60

80

100

120

140

160

180

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Crude oil

Oil product

Natural gas

An almost fourfold increase in total export revenues between 2000-2010

Crude oil export price and volume growth, 2000=100%

0

50

100

150

200

250

300

350

400

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Oil product export price and volume growth, 2000=100%

0

50

100

150

200

250

300

350

400

450

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Gas export price and volume growth, 2000=100%

0

50

100

150

200

250

300

350

400

450

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Much of the potential for volume growth has exhausted.

Price effect is primarily externality, downward risks are present.

Oil production

(1) Stabilizing production is a major challenge – flat or slightly declining output.

(2) Major additions are due to come only after 2015 in Eastern Siberia.

(3) Increasing domestic consumption will likely further constraint export potential.

Implications for West-Russia relations

(1) Further shift of exports toward the Far East (appr. 20-25% of exports).

(2) Preparation of Arctic off-shore development has to be started, if Russia wantsconsolidate output in the 2020s.

Oil products

(1) Heating oil and refinery complexity is the last big efficiency reserve in oil sector.

(2) Domestic consumption, rather than exports will be the main driver of development.

Implications

(1) Corporate investments into refineries will be sluggish, despite government pressure.

(2) Due to low refinery margins, investments in Western assets are possible.

Natural gas

(1) Huge additions both in transport and production during this decade.

(2) Flat domestic and CIS demand, growing potential for exports.

(3) European market remains strongly competitive for Russian incremental supplies.

Implications for EU-Russia relations

(1) Growing Russian temptation to export more gas even at cheaper prices to Europe.

(2) Gazprom’s contractual system has been changing, adapting more flexible forms.

(3) Despite all this much of the tension will remain in 3rd package and security issues.

Russia is not a classical oil state, growth is not exclusively oil related.

Oil Price (USD/barrel, 2000-2011)

27.3923 22.81

27.69

37.66

50.0458.3

64.2

91.48

53.48

71.21

87.04

01020

3040506070

8090

100

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Budgetary deficits (%, 2000-2011)

-0.12

2.47 2.63

7.02

2.2

5.27

9.888.03

5.54.1

-7.9

-3.9

-10-8

-6-4-2

02

468

1012

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

The memories of 1998 have been fading away?

High oil prices already locked in the Russian budgetary policy.

Can the oil revenues further support fiscal expansion?

Trends after 2008:

(1) Oil revenues too volatile and could not support further social spending:

Increasing taxation of non-oil related sectors (labour, sectoral taxes).

(2) Selective, pin-point tax exemptions for some companies (primarily NOCs)

Tax potential erased slightly, new investments will probably provide less taxes.

The share of oil revenues have been slightly decreasing in total revenues.

Incremental social spending have been financed from other, than energy-related revenues (primarily living up the reserves).

Thank You for your attention!