Russian Pipelines: Back to the Future?
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Pipe Dreams? Russian Pipelines Back to the Future? Edward C. Chow In Soviet mythology, the health of the country's economy, Edward C. Chow is Visiting Scholar at the national power, and influence in the world are directly linked Carnegie Endowment to the performance of its oil and gas industry. It is ironic, for International then, that peak oil and gas production in the U.S.S.R. was Peace. reached in the late 1980s just as economic collapse brought political disintegration. At the time, the Soviet Union was the biggest oil producer in the world, generating 12 million bar- rels per day, 11 million in Russia alone. Peak consumption at this time was over 8 million barrels per day in the Soviet Union and 5 million barrels per day in Russia. Considerable volumes of crude oil and petroleum products were exported by the Soviet Union, first to other countries in the Eastern Bloc, and then approximately 3 million barrels per day to those outside of the Comecon.1 Oil and gas were part of the important barter trade in the Communist block and provided economic leverage for Russia in maintaining cohesion of the sphere. Moreover, they served as principal sources of hard currency and geopolitical assets in the Soviet Union's relationship with the outside world. Given the remote location of many Russian production fields, pipelines have always played a critical role in transporting oil and gas. The construction of a vast system of pipelines was often cited as a crowning achievement of the Soviet oil and gas Winter/Spring 2004 [27] RUSSIAN PIPELINES industry. They were designed to move new export facilities—large-diameter production primarily within the Soviet pipelines and deep-water marine termi Union and Eastern Europe and secon nals—to transport increasing volumes of darily for export to the West. oil to higher-value world markets in the Today's Russia inherited from the large ocean-going tankers favored in U.S.S.R. 46,000 km of these crude oil international trade. Otherwise, both the pipelines, 15,000 km of petroleum performance of its petroleum industry, product pipelines, and 152,000 km of which has been the growth engine for the natural gas pipelines, almost all of which Russian economy in recent years, and its are still owned and controlled by the ambitions of playing a larger role in state. By contrast, the United States, with world oil trade will suffer. only 55 percent of Russia’s land mass, has In order to harness the potential of its over four times more oil pipelines and energy sector and capture new markets, two times more natural gas pipelines, three key projects on the drawing board almost none of which are owned or con- are being discussed widely. These include trolled by the government.2 new pipelines to Murmansk, to Daqing The Russian oil industry privatized in northeast China, and to Nakhodka on and modernized throughout the mid- Russia's Pacific Coast. The way in which 1990s. A more competitive cost structure Russia handles these pipelines and its after the ruble collapse of 1998, petroleum resources will signal the likely improved property rights protection direction in which its uncertain economic leading to greater reinvestment, and the future will unfold. introduction of Western technology and business practice allowed Russian oil Multiple Pipelines: The Answer? production to recover from a low of 6 November 2002 saw an unprecedented million barrels per day to nearly 8 mil- display of unity by usually-competitive lion barrels per day. This is still far below oligarchs. The four heads of Russia's the level achieved in the peak production major private oil companies announced year of 1988. Nevertheless, domestic oil an agreement to build a pipeline from consumption has dropped to only about their booming oilfields in West Siberia 2½ million barrels per day with lower (and high-potential fields elsewhere) to economic activity and better energy effi the arctic port of Murmansk on the ciency. As a result, much more oil is Barents Sea. From Murmansk, crude oil being exported today, and Russia has (and perhaps one day oil products and become the second largest oil exporter in liquefied natural gas) would go to markets the world after Saudi Arabia.3 primarily in the United States and Russian oil production is forecast to Europe. Only a year old and still maintain this rapid growth while domes- unproven by rigorous commercial evalu- tic consumption is expected to be rela- ation, the Murmansk pipeline proposal tively flat in spite of better economic per has already come to represent a number formance. The existing pipeline system of trends in Russia, including its eco- was, however, designed to move oil to nomic and political transition, and inte- now diminished domestic markets and gration with the world. less desirable markets in Eastern Europe. Fundamentally, Murmansk is a mile- Thus, Russia is desperately in need of stone that challenges Russia to make crit- [28] Georgetown Journal of International Affairs CHOW Pipe Dreams? ical decisions that will permanently shape pany, marked the threshold of something the relationship between the state and the new: the possible end of the post-Soviet economy. For example, it raises questions scrap for assets, and a new era marked by of whether it is better to maintain strong business cooperation in which the whole elements of central planning and control is greater than sum of the parts, with a by expending public effort and scarce true and concrete partnership with the financial resources to manage the alloca- United States and Europe at the heart of Russia has become the second largest oil exporter in the world after Saudi Arabia. tion of economic resources (such as Russia's key industry. From Murmansk to pipeline capacity or upstream petroleum Nakhodka on the Pacific Coast, and investment), when the private sector is Samara to Novorossiysk on the Black Sea, perfectly capable of doing so efficiently. to the refineries of America, Europe, Or should Russia leapfrog these vestiges and Asia, and the hallways of decision- of the Soviet era and adopt the proven making in the Persian Gulf and OPEC international market economic model? headquarters in Vienna, people are wait- Indeed, the public can entrust the private ing for President Putin's decisions on sector to conduct business while "con how to cross this threshold. trolling" the private sector through taxes, fair regulation, and publicly enacted legis- Central Planning: Last Throes or lation rather than through state owner- Retrenchment? In October, Minister ship and intrusive state planning. of Energy Yusufov made some economi Another issue is whether expanding pro cally-bizarre statements about the Far duction to seize greater oil market share is Eastern pipelines and Murmansk in call sustainable in the face of weak world ing for a Nakhodka pipeline before any demand growth and a disciplined consideration of either a Daqing pipeline OPEC—a possible recipe for confronta- or even a Murmansk pipeline, which, he tion. And finally, it is not clear that claimed, could at best be considered Russia's own public institutions are capa- simultaneously with one in Nakhodka. In ble of transforming fast enough to live by the same interview, he claimed that the international model. Can they cap "Murmansk will definitely develop...[but] ture only the economic rent necessary to we should do it in stages." He noted that provide for the public welfare and defense the uncertainty over which pipeline would while celebrating "useful greed" rather obtain political approval was the result of than ostracizing businessmen that make a a "need to assess the balance of our sup lot of money? plies to the international and the domes Yet, that unique moment of coopera- tic markets." Moreover, he claimed that a tion in November 2002, followed by the Japanese offer to commit to one million merger of TNK and BP in Russia and the barrels per day of oil imports from news of a potential merger between Nakhodka to help finance the line is actu YukosSibneft and a major U.S. oil com- ally unnecessary, given the wide array of Winter/Spring 2004 [29] RUSSIAN PIPELINES potential customers in the Pacific Basin.4 Japan Inc., the Manchurian Yet, the state-run oil pipeline monopoly Candidate, Eastern Supporters. Transneft excuses the delay of the Japan has offered to finance the Murmansk line by citing the need for the Nakhodka line up to $5 billion, with United States to commit to volume pur another $2 billion for exploration of chases from the pipeline even though any East Siberian resources to fill the line. As port serving the Atlantic basin would have justification for a willingness to commit an equally broad market at its disposal. such huge sums from a beleaguered The Nakhodka proposal and the Japanese economy in such an undevel Murmansk initiative are two entirely dif- oped idea, Japanese officials claim that ferent creatures—any state effort evaluat- diversification of supplies is paramount ing the merits of Nakhodka versus for the future of the Japanese economy. Daqing cannot provide a guide in com But this argument is highly suspect, paring Nakhodka and Murmansk. For for a number of reasons. First, since example, the private Russian companies Japan has a huge economy concentrated have pledged publicly up to 3 million on relatively small islands it has already barrels per day of crude oil to the ideal diversity of supply—they can buy Murmansk line from their future grow- from anyone in the world by tanker. If ing production in West Siberia and the Japan thinks Russian supplies from Timan Pechora region. No one has Nakhodka will somehow be lower priced pledged any oil from anywhere to the than competing supplies arriving by Nakhodka line.