Saturday, November 2, 2013

Russia's Energy Producing Competition

While Russia 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.[1] 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 of the consequences of an inefficient marketplace.[2]  
            Moreover, during the past decade the United States has begun to revolutionize the oil industry with the advent of horizontal drilling and fracking along with other methods of drilling to create fracture in shale rock. This has opened up vast reserves of natural gas and oil that previously were commercial unviable. Production in the US has boomed and oil output from North Dakota’s Bakken Basin has grown from one hundred thousand barrels a day in 2007 to one million barrels per day in 2012.[3] Recently the International Energy Agency (IEA) declared that the US would overtake Russia as the biggest oil producer by next year. During the same five year period that saw US oil output boom, Russian oil companies increased their spending fourfold yet only experience growth of a mere 5%.[4] Naturally, the increase in oil supplies over the last few years has resulted in lower oil prices.
            This change in the global energy market has a profound impact on Russia’s economy, which relies on oil and gas to account for 2/3rds of its exports, 50% of its federal budget and 20% of its Gross Domestic Product.[5] The impact of falling energy prices can be seen in the recent cuts to Russia’s GDP growth. The nation that was growing at an astonishing 7-8% in the past decade has seen its growth slashed to 1.8%. The World Bank has explained that the cause for this downgrade relates to Russia’s high dependence on oil and gas exports leaving the nation at the mercy of international commodity markets.[6] Furthermore, the nation’s other sectors are generally non-competitive and consumer spending has slowed down.[7]
            Despite the seemingly dreary outlook, Russia has a tremendous number of untapped resources both in the form of its natural and human resources. Experts project the nation has not even begun to tap into its vast oil reservoirs, which lay in the country’s oil shale. Studies suggest that the Bazhenov formation located in central Siberia contains the largest accumulations of shale on the planet.[8] Supposedly, the formation contains five-time more recoverable oil than the Bakken formation, although some speculate the play in Western Siberia to be an astonishing eighty times greater.[9] The ability to extract and deliver oil and natural gas from new sources would be a cure for an energy sector that has been seeing shrinking output.
            This is certainly not the only untapped resource that Russia possesses but the costs associated with the development and implementation of new drilling technologies as well as the cost of building new transportation networks means that Russia will not be able to afford such investment on their own. Yet at this very time Russian Minster of Economic Development, Alexey Ulyukaev has stated, “investment in Russia is shrinking”.[10] This is partially attributable to the global economic slowdown and partially because Russia has not been able to create investing rules that parallel international norms.[11] The Kremlin has decided that the solution to its capital inflow problems lies to its east.



[2] Id
[3] Guy Chazan, Russian Energy: Frozen Assets, The Financial Times (Sept. 25, 2013), available at http://www.ft.com/intl/cms/s/0/17e0e3d0-25c6-11e3-aee8-00144feab7de.html#axzz2hsHj9jjZ
[4] Id.
[5] Holly Ellyatt, Why Russia Must Reform its Energy Sector, available at http://www.cnbc.com/id/100834136
[6] World Bank lowers Russian 2013 GDP growth forecast to 1.8%, 2014 to 3.1%, 2013 WLNR 25621415.
[7] Id.
[8] Supra note 3.
[9] Id.
[10] Kenneth Paroza, Why Russia is China in Reverse, available at http://www.forbes.com/sites/kenrapoza/2013/10/08/why-russia-is-china-in-reverse/
[11] Id

1 comment:

  1. Nice post, but I think you left out one important variable. The few Americans I know who have been involved with Russian business tell me that corruption and bureaucratic hurdles make it nearly impossible to invest in Russian industry. Unless the American firm has firm guarantees from someone high within the Kremlin (who will protect the investment from quasi-government raiders), there is a very good possibility that the investment will be stolen or misappropriated.

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