Wednesday, September 06, 2006
Anatomy of an Error
09-06-2006 Kommersant by Vladimir Milov, president of the Institute of Energy Policies - // The Doctrine of an “Energy Superpower” Harms the Development of Power Engineering and the Economy as a Whole
The idea of transforming the country into an “energy superpower” has become extremely popular in Russia over the last year. But does the concept of an “energy superpower” make any sense economically? How close is Russia to having that status? And what kind of economic benefits could be derived from such status? What kinds of possibilities will it open up for Russia’s financial modernization and competitiveness, as well as the strengthening of the country’s international standing?
Not Enough Money
One of the most important tricks involved in considerations of Russia’s energy potential is to abandon comparisons of absolute quantities of the production and export of energy resources, as well as compounded export revenues on a countrywide scale and the modernization challenges that the country faces. Yes, we produce a lot of oil and gas, but only countries with populations of five million or less have the possibility of converting their export revenues into a high level of per-capita GDP (a purchasing power parity rate of more than $20,000). In countries with populations larger than 50 million, the achievement of a high quality of life using only hydrocarbon potential is impossible. For that it would be necessary to export 40-50 tons of oil equivalent per capita per year. Russia exports approximately three tons, and even if the extraction of oil and gas were doubled (which is unrealistic), all the same the country could not export more than ten tons.
Is it possible in this situation to use revenues from oil and gas exports to accomplish large-scale modernization of the economy, the infrastructure, or the army? The basic modernization plans in the works – the government program for arms development for 2007-2015, transport strategies, the building of new nuclear power plants, programs for the development of the Yamal, Western Siberia, and Far East gas fields, and the development of a unified energy system – in total require a volume of yearly financing that exceeds Russia’s entire stabilization fund. And there is still the need to build houses, modernize communal infrastructures, and deal with the growing deficit in the pension fund. Revenues from oil and gas exports will allow for the realization of a small selection of projects, but the large-scale modernization of Russia is beyond their capacity.
An “Engine” in Stagnation
What possibilities are there for the energy sector to support a brisk pace of economic growth? For reasons that are most likely linked with the policies of the Russian authorities, in 2005-2006 this sector posted its worst growth rate ever. Oil extraction, which could reach 550 million tons a year, is growing by only a little over two percent, versus an average growth rate of 8.5% in 2001-2004. In the gas field, the situation is even worse: although the existing reserves would allow for the extraction of a trillion cubic meters of gas per year, the extraction level is stagnant. Gazprom’s extraction rate in 2005 and the first half of 2006 did not increase at all, while the increasing rate of extraction by independent producers substantially slowed down, dropping from 10.5% in 2000-2004 to 5% in 2005.
In the gas sector, the influence of political factors is becoming more obvious. A refusal to carry out structural reforms has led to the preservation of Gazprom’s monopoly, as well as to the company’s failure to fulfill the basic function of developing the country’s national gas extraction industry. In 2003-2006, Gazprom invested approximately $18 billion in the purchase of assets in sectors other than gas extraction, which exceeded the company’s entire capital investment in gas extraction for the past decade. And even if internal gas prices rise sharply, the additional funds will undoubtedly be used not for long-term investment in gas extraction but for the purchase of “non-gas” assets. And this is all at a time when Russia is entering the phase of depletion of its primary hydrocarbon fields. The development of new fields is linked with large-scale capital formation that requires stockholder rather than lender financing. Russian companies have no such capabilities, and the government has begun to introduce stringent restrictions on foreign investment.
Export Restrictions
It is also important to remember that Russia is first and foremost a consumer rather than an exporter of energy resources. In 2005, we used about half of the hydrocarbon resources that we extracted. Russia’s economy will remain very energy-consuming unless wide-ranging structural reforms and liberalization of internal prices for energy resources are carried out. Currently 75% of the country’s energy resources are purchased by the final consumers for regulated prices, as a result of which internal demand for energy is continuing to grow. In the near future, this could lead not to the strengthening of a “superpower” status, but to the necessity of limiting exports of energy resources.
Today almost 100% of Russia’s energy is exported to Europe. This is entirely logical: deliveries to Europe are minimally expensive, and the prices, especially in comparison to China, are high. Even if projects for the development of the production of liquid natural gas are realized, the volume of exports from them will not make up more than 10% of all Russian gas exports in 2015. Similarly, the realization of all gas and oil pipeline projects in the Asian-Pacific region (ATR) to export hydrocarbon products to the countries of the ATR will result in exports that are no more than 20% of the overall volume of oil exports and not more than 15% of all gas exports. In other words, even from a long-term perspective we will remain a regional supplier of energy resources, not a global supplier.
Energy and Politics
It is highly unlikely that the use of energy in pursuit of foreign-policy goals has an economic motivation. The reverse situation is more probable: energy will increasingly become the hostage of foreign-policy ambitions. And the risks involved in a politically-motivated supply interruption will foster serious changes in the behavior of the consumer countries. The best example is the Arab oil embargo of the 1970s. After the embargo, the importer countries achieved great success in lowering demand for oil: oil’s share in electricity production in the countries of the OECD fell from 25.3% in 1973 to less than 5% in 2005.
As a result of the Russian government’s policies, the level of trust in Russia as a reliable supplier, a perception that remained from the days of the USSR, has sharply declined. This is made clear by the behavior of Russia’s European partners, both in the search for a quick switch to other import sources and in the drive to make the conditions of contracts with Gazprom more unfavorable for the company (for example, turning down the take or pay condition) in negotiations concerning restrictions on Gazprom’s purchase of shares in European companies (although Russian companies had earlier easily bought such shares: YUKOS in Slovakia and Lithuania and LUKoil in Bulgaria and Romania).
In sum, it can be said that the idea of an “energy superpower” elicits heightened expectations in society and is the exact opposite of the real state of the country’s energy affairs. Russia is truly a large producer of energy resources, and in recent years it has managed to stabilize the functioning of its energy sector. But energy is only one of the sectors of the economy, and it is necessary to develop the energy sector in accordance with the demands of the market: a completely different model than the one currently being followed by the government. And further imaginary notions of “super ideas” that accompany increasing political interference in the energy sector are capable only of undermining the sector’s balanced development.
# posted by Deval : 5:39 AM
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