When
the Soviet Union collapsed in 1991, the government opened up the energy sector
and sold shares to private investors. The sector has suffered from years of
stagnation and underdevelopment, leaving it inefficient and uncompetitive.
Accordingly, the new Russian energy companies faced substantial challenges in
creating successful enterprises. Many of these new energy companies sought to
overcome their obstacles by inviting foreign investors to assist in the transformation
of the industry. These investors – including ExxonMobil and Total S.A – brought
their modern technology and expertise to help Russian energy company’s modernize
and become more efficient. Today the Russia’s oil and natural gas output is among
the largest in the world.
While
the country has been able to capitalize on its vast reserves of natural
resources it has again reached a point of stagnation in its energy sector. State
owned energy companies dominate the industry and despite years of high energy
prices these state owned enterprises have begun to grow inefficient and lack to
capabilities to exploit new energy sources. This is attributable to the lack of
competition these companies face, resulting in reduced incentives to innovate and
become more efficient. Gazprom, which maintains a virtual monopoly on the nation’s
natural gas industry is a wonderful example of this. Seemingly, Russia’s recent
agreement’s with China show an appreciating for the need to modernize and expand
its energy industry.
Russian
companies such as Gazprom and Novatek (Russia’s second largest natural gas
company) are aiming to develop gas reserves in Eastern Siberia. This is a
massive undertaking that requires a substantial capital investment. Given the
EU’s falling demand for energy and China’s growing demand for energy resources,
it seems logical to attempt to push into Eastern Siberia in the search of oil
and natural gas. Moreover, the need for capital to develop new energy sources
makes China an ideal partner.
PetroChina
has recognized the opportunity that investment into Russian oil fields presents
and is reportedly considering a $10 billion Russia Gas investment. Spokesman
Mao Zefeng has stated that they are willing to promote cooperation with Russia’s
oil companies in the hopes of investing in Russia’s upstream oil and gas
exploration. Furthermore, the Chinese National Petroleum Company (“CNPC”) has agreed
to buy 20% of the Yamal LNG development, controlled by OAO Novatek. This will
be a mutually beneficial deal because it will allow for the development of
Russia’s Siberian oil fields and will give the Chinese company a substantial
interest in a profitable venture. Furthermore, it allows China to hedge any
higher natural gas import prices they may have to pay since they will share in
the profits.
In
the 1990’s Russian entrepreneurs were able to utilize foreign capital to develop
an industry that has allowed Russia to prosper and regain its position as a
dominant international power. Today Russia has recognized that it will once
again need foreign investment to further develop its energy industry. Yet many
of those private investors who pledged billions of dollars in the 1990’s to develop
Russian energy companies were left in the cold once Russia nationalized much of
the industry. China is likely aware of this and will proceed with some level of
caution.
PetroChina Said to Study $10 Billion Russia Gas
Investment,
http://www.bloomberg.com/news/2013-09-10/petrochina-said-to-study-10-billion-investment-in-russian-gas.html
Power
of Siberia, http://www.gazprom.com/about/production/projects/pipelines/ykv/
The
Russian Oil and Gas Industy After Yukos: Outlook for Foreign Investment, Jason
Waltrip.
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