Russian Energy in Disarray

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"The constant gyrations of Russia's energy investment strategy do not bode well for European or Asian energy security."

The once all-powerful Russian energy sector appears to be on unpredictable and shaky grounds today. Development of the giant Kovykta gas field is now on hold; the Shtokman field is in trouble; Sakhalin-2 is being forced to divert its gas to the strategic Russian Far East for domestic consumption, while original plans to sell this gas to China are being abandoned.

These fundamental changes come at a time when less-than-transparent deals are taking place in the ownership of Russian oil and gas companies. That raises the question of whether these developments are related and if so, what impact, if any, they could have on European and Asian energy security.

On August 28, Kommersant newspaper reported that Moscow intends to invest US$1.8 trillion to $2.1 trillion in the oil and gas business by 2030 to increase production to keep up with projected European and Asian demand for Russian hydrocarbon exports, as well as with increasing Russian domestic consumption.

The new investment strategy envisions a 3-stage program: 2009–2015, 2015–2022 and 2022–2030. The costliest of which is the third stage when investments into the oil sector are projected at $313 million–$321 million and into the gas industry at $284 million–$299 million. Kommersant noted that because of these investments, gas production would increase by 4% compared to 2008. Oil production is expected to rise by ~9%.

These projections seem to contradict the statistics for 2009, which show that in H109, gas production fell by a record 20.8%, while gas exports fell by 36.7%.

The widespread impression in the West—and among experts in Russia—is that giant Russian energy companies are managed by hidden owners operating as proxies for high-level personalities in the Kremlin. The opacity permeating much of the operations of these companies does little to dispel doubts among investors.

The constant gyrations of Russia's energy investment strategy do not bode well for European or Asian energy security. It creates a high level of anxiety among consumers in the post-recession world economy. The identity of the beneficiaries behind such deals needs to be transparent for the entire Russian energy investment program.

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