AI-Jane Political, And Economic Forums

Full Version: Russia's Energy Export Dilemma
You're currently viewing a stripped down version of our content. View the full version with proper formatting.
Even if Russia is one of the richest oil and natural gas nations, it is clearly showing why it is not capable of exploiting this advantage. Inefficiency within state owned businesses highlight this problem that she should have learned to correct, after more than 70 years of communism. Clearly, Putin is not interested in promoting Free Enterprise within his country, and it will only add to it's problems as a natural gas hungry Europe, and others who would love to rely upon it's market find that it can not rely upon it to respond.

As this article by Stratfor shows, Russia's state owned enterprises are not conducive to foreign investment, and until it makes a drastic change, do not look for Russia to be able to do more than muddle along in it's current of state of mediocracy.

-------------

Russia: Pipeline Monopolies Stymie Infrastructure Improvement
April 21, 2006 19 29 GMT


Summary

Russia's oil and natural gas pipeline infrastructure badly needs improvement. Paradoxically, inefficient pipelines are being financed with state money, while those that would make sense are not being built. Foreign investors will not fund needed pipeline improvements because of the actions of Russia's state-owned pipeline monopolies, Gazprom and Transneft, which have deterred investment by their refusal to grant control proportionate to the financing foreign investors might provide. The monopolies' influence on Russian policy is likely to increase, thus continuing to discourage investment. Meanwhile, Russia's neighbors have taken advantage of foreign investment, and have planned and completed pipelines of their own.

Analysis

Russia needs new oil and natural gas pipelines; it also needs to shore up its deteriorating infrastructure. It also needs funds for these projects. Gazprom and Transneft, the state-controlled natural gas and oil pipeline monopolies charged with carrying out such projects, are busy promoting inefficient projects supported by state money and deterring the foreign investment needed for more feasible projects, however.

Foreign investors have encountered increasing difficulties dealing with the two Russian monopolies. More and more, the terms presented to them lately have sounded like ultimatums. Capital-starved Gazprom badly needs foreign investment, but its demands to have control of potential projects without making proportionate financial contributions have thwarted foreign participation. Its usual pattern is to have foreign investors finance joint projects, while Gazprom retains a majority stake. Gazprom says it repays its partners with tax breaks, but that usually means that if the foreigners do not comply, Gazprom would push them out of the project by using its influence with the Russian government to exert pressure on them.


Take, for example the proposed Northern European Gas Pipeline(NEGP), which would transport Russian natural gas to Germany without going through troublesome Ukraine. Political considerations determined the route -- namely, the desire to give Germany a direct source of energy -- rather than cost effectiveness. With its low preliminary estimate of $5 billion, NEGP looked like the ultimate solution to Germany's energy problems, and enjoyed wide political support. Even assuming the pipeline could be built at that cost, however, it hardly constituted a dream solution for Germany, since it would make it reliant on Russia for 80 percent of its natural gas. True to form, Gazprom has hesitated to grant its German partners a control over the project commensurate with their investment. With estimates of NEGP's final costs now rising upward of $20 billion (not counting the cost of developing the giant offshore Shtokman field needed to supply the pipeline), Gazprom's German partners fear they will be stuck with the bill. Not surprisingly, the Germans are not pleased with the prospect.

Gazprom's minimum investment in updating its technology and skills constitutes yet another reason partnering with the Russian monopoly is difficult, since Gazprom expects its foreign partners to provide modern equipment as well as to train its personnel.

Gazprom also has been a difficult partner in the proposed Russia-China natural gas pipeline, which originates near the giant Kovykta deposit. It has stalled the project by not finalizing agreements with the Russian-British joint venture TNK-BP because Gazprom desires to protect its export monopoly, as well as to retain control of as much of Russia's natural gas as possible. Even though agreements have been reached with Chinese partners, the pipeline might not be completed. In any case, the Chinese have learned not to rely completely on Russia, and to seek alternative sources of energy. (Geopolitics also plays a significant role in the project's probable failure: China is reasserting claims and encouraging migration to Eastern Siberia; highly nationalist Russia resents this encroachment, including China's economic investment in the region.)

In contrast to these doomed projects, many that do make sense will probably never be built. For example, the proposed Yamal II pipeline to Germany would parallel an existing line, requiring no additional preparatory work. Also lowering costs, it would be constructed over land. The pipeline would not provide a direct link to the large German market. Instead, it would have to pass through Belarus (which the Russians fear may one day interfere with its operations, as Ukraine has) and Poland (not exactly a Russophile). Nevertheless, the pipeline still makes economic, if not political, sense.

The Russian projects that are moving forward are funded by the state. One of these proposed projects that could reach completion is the oil pipeline from Siberia to Russia's Pacific coast. The project is not, however, an efficient use of Russia's resources, since the pipeline must plow a new route through rough terrain. State-controlled Sberbank has pledged at least enough funds for the first leg of construction; more state money is sure to come. Further down Moscow's list of priorities is a pipeline from Western Siberia to the Barents Sea port of Murmansk. The deep-water port does not freeze, and is more or less on a direct line with Western Siberia's large oil and natural gas deposits. But while the Murmansk pipeline makes economic sense, Russia's tight infrastructure budget will not permit such a project's completion.

Another state-funded project, the Baltic Pipeline System (BPS), came online in December 2001. It carries oil from Western Siberia to the Gulf of Finland, an arm of the Baltic Sea. Since the state paid for it, the project was carried out regardless of future profitability, though the BPS offers Russia the geopolitical advantage of bypassing the Baltic states, hardly the most pro-Russian of European nations. The pipeline, entirely on Russian soil, is thus secure against political and disruption.

The behavior of Russia's monopolies on occasion has prompted foreign states and companies to seek to bypass Russia entirely. The Baku-Tbilisi-Ceyhan oil pipeline and the South Caucasus natural gas pipeline are examples of cooperation between Western companies and post-Soviet states seeking to avoid dealing with Transneft and Gazprom. And though instability in the South Caucasus and production delays still plague the project, the participants still enjoy being able to conduct their business without Moscow's involvement. The Kazakhstan-China partnership has also managed to circumvent Russia. The two nations built an oil pipeline, which went online in December 2005, using Soviet infrastructure, and are considering three options for a natural gas pipeline. Bypassing the Russian monopolies has proved very beneficial to Sino-Kazakh energy relations, and China has reduced the risk that uncooperative Russian policies will interfere with Beijing's plans to develop new energy supplies.

Even the agreement concluded between China and the erratic Turkmenistan could be implemented, provided China agrees to do all the hard work. Such a deal, which would necessitate a natural gas pipeline passing through Kazakhstan and perhaps Uzbekistan, might come to fruition if China decides it needs the natural gas supplies badly enough to negotiate delivery through nations unfriendly to Turkmenistan.

While foreign companies offer the best hope of developing and modernizing Russia's woefully inadequate pipeline infrastructure, the obstacles presented by the Russian pipeline monopolies pose a powerful deterrent to international cooperation on Russian pipeline projects. Moscow's practice of using the state-controlled companies as part of its foreign policy has thus delayed the progress in raising production and export of Russian energy, and it will continue to do so.
John,

I think most Russki agree that government control of assets is appropriate. They could care less about "western" ideas of free enterprise.

They have little understanding of what it is,they really think like Muslims in that they view our ideas as "conspiratorial" and meant to harm them.

Putin shares this asinine view.
First, I don't trust Stratfor.
Second, I don't trust American capitalists, of whose interests Stratfor is in service.
Third, as far as I know Gazprom is rather effficient company, because it sells the most demanded product - the gas and sells it with huge profit abroad. Inner tariffs are smaller.
Fourth, I never heard about any breakdown in Gazprom pipeline system due to the wear-out.
Fifth, Gazprom pipelines is not the only Russian company that uses obsolete equipment, but makes good money.
Sixth, taking into account that the West always mix politics to economics, I side with Putin.
I think you are right Patrick. We have at least one of them here on this forum. Oh well, it is their Major Loss. But unfortunately, this little game that the Ruskies are playing is going to backfire on them.

Somehow, Russia is more than capable of doing more damage to itself than any US official could ever do. Just my opinion.
Green Wrote:First, I don't trust Stratfor.
Second, I don't trust American capitalists, of whose interests Stratfor is in service.
Third, as far as I know Gazprom is rather effficient company, because it sells the most demanded product - the gas and sells it with huge profit abroad. Inner tariffs are smaller.
Fourth, I never heard about any breakdown in Gazprom pipeline system due to the wear-out.
Fifth, Gazprom pipelines is not the only Russian company that uses obsolete equipment, but makes good money.
Sixth, taking into account that the West always mix politics to economics, I side with Putin.

And I wasn't even thinking of you Green. Yet you make my point first. In case you are not aware, the entire Russian supply chain for energy is in terrible shape, period. But if you guys love it, then you will have to enjoy it; and live with it, won't you?

I will tell you that Stratfor is absolutely Right about one thing. Outside investors are not going into Russia and invest in it's business prospects.
John, we will talk about it later, when Russian GDP growth is equal to zero.
Now this talk is useless.