The Russian Energy Sector in 2006 – From the NRG Expert Historical Data Series

Russia ended 2005 with its seventh straight year of growth, averaging 6.4% annually since the financial crisis of 1998. High oil prices and a relatively cheap ruble are important drivers of this economic rebound, but since 2000 investment and consumer-driven demand have played an increasing role.

Russia has formidable assets with its energy resources; it has the largest reserves of natural gas in the world, it is the second largest exporter of oil and the sixth largest producer of coal. It also has very large district heating and electricity systems.

These industries and systems were all constructed by Soviet Union central planners. They have been starved of investment and much of the infrastructure is past its design life or is obsolete. They are all in need of maintenance and modernisation.

Restructuring of the industries to introduce competition and greater efficiency has started although in some cases it has been long delayed. The coal and oil sectors have been opened up, electricity is now in the midst of radical restructuring and the district heating sector faces an uncertain future because large customers are increasingly generating their own heat. The nuclear industry remains under state control and the huge gas industry is almost entirely a state enterprise, with marginal private involvement.

Oil Sector

In 2005 Russia was the second largest producer of oil after Saudi Arabia and the second largest exporter. Its oil reserves are estimated at 10,200 million tonnes, about 4.5% of the world’s proven reserves and enough to last for 21 years.Oil accounts for 19% of total final energy consumption.

The 1990s saw a 45% fall in refinery throughputs to only 163 Mt in 1998 but has now recovered. Transneft operates the trunk pipeline system which dominates Russian oil transportation. The system is however, in poor condition due to its age.

The Russian oil industry has undergone fundamental changes since the collapse of the Soviet Union and the monopoly in the Soviet oil industry has now been replaced by a number of oil companies, the best known of them being LUKOIL. The industry has been reorganised into several large vertically integrated companies (VICs), each combining exploration, production, refining, distribution and retailing.

The oil industry has been one of the most prominently involved in the emergence of the “oligarchs”. The states decision to directly challenge the power they have amassed has led to the Kremlin, not the private sector, becoming the key decision maker in the licensing of oil fields, determining the location of pipelines and approving consortia for production and transportation.

The Russian government is increasingly penalising foreign companies, and in mid-February 2006, it was announced that Moscow would keep Western companies from bidding on major natural resources mining and drilling licenses.

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