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Russia and the Caspian States in the Global Energy Balance

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Russia and the Caspian States in the Global Energy Balance Russia and the Caspian States in the Global Energy Balance Scenarios for Russian Natural Gas Exports: The Role of Domestic Investment, the Caspian and LNG Peter Hartley, Ph.D., and Kenneth B. Medlock III, Ph.D. ENERGYforum James A. Baker III Institute for Public Policy • Rice University JAMES A. BAKER III INSTITUTE FOR PUBLIC POLICY RICE UNIVERSITY SCENARIOS FOR RUSSIAN NATURAL GAS EXPORTS: THE ROLE OF DOMESTIC INVESTMENT, THE CASPIAN, AND LNG BY PETER HARTLEY, PH.D. RICE SCHOLAR, JAMES A. BAKER III INSTITUTE FOR PUBLIC POLICY, AND GEORGE AND CYNTHIA MITCHELL PROFESSOR OF ECONOMICS, RICE UNIVERSITY AND KENNETH B. MEDLOCK III, PH.D. JAMES A. BAKER, III, AND SUSAN G. BAKER FELLOW IN ENERGY AND RESOURCE STUDIES, JAMES A. BAKER III INSTITUTE FOR PUBLIC POLICY, AND ADJUNCT PROFESSOR OF ECONOMICS, RICE UNIVERSITY PREPARED IN CONJUNCTION WITH AN ENERGY STUDY SPONSORED BY THE JAMES A. BAKER III INSTITUTE FOR PUBLIC POLICY AND THE INSTITUTE OF ENERGY ECONOMICS, JAPAN MAY 6, 2009 Scenarios for Russian Natural Gas Exports THESE PAPERS WERE WRITTEN BY A RESEARCHER (OR RESEARCHERS) WHO PARTICIPATED IN A BAKER INSTITUTE RESEARCH/IEEJ PROJECT. WHEREVER FEASIBLE, THESE PAPERS ARE REVIEWED BY OUTSIDE EXPERTS BEFORE THEY ARE RELEASED. HOWEVER, THE RESEARCH AND VIEWS EXPRESSED IN THESE PAPERS ARE THOSE OF THE INDIVIDUAL RESEARCHER(S), AND DO NOT NECESSARILY REPRESENT THE VIEWS OF THE JAMES A. BAKER III INSTITUTE FOR PUBLIC POLICY OR THE INSTITUTE OF ENERGY ECONOMICS. © 2009 BY THE JAMES A. BAKER III INSTITUTE FOR PUBLIC POLICY OF RICE UNIVERSITY THIS MATERIAL MAY BE QUOTED OR REPRODUCED WITHOUT PRIOR PERMISSION, PROVIDED APPROPRIATE CREDIT IS GIVEN TO THE AUTHOR AND THE JAMES A. BAKER III INSTITUTE FOR PUBLIC POLICY. 2 Scenarios for Russian Natural Gas Exports ACKNOWLEDGMENTS The Energy Forum of the James A. Baker III Institute for Public Policy would like to thank The Institute of Energy Economics, Japan, and the sponsors of the Baker Institute Energy Forum for their generous support of this program. The Energy Forum further acknowledges contributions by study researchers and writers. ENERGY FORUM MEMBERS ACCENTURE AIR LIQUIDE U.S.A. L.L.C. ANADARKO PETROLEUM CORPORATION THE HONORABLE & MRS. HUSHANG ANSARY APACHE CORPORATION BAKER BOTTS L.L.P. BAKER HUGHES INCORPORATED BP CALIFORNIA ENERGY COMMISSION CHEVRON CORPORATION CONOCOPHILLIPS DELOITTE DUKE ENERGY INTERNATIONAL ENERGY FUTURE HOLDINGS CORPORATION EXXONMOBIL CORPORATION GDF SUEZ ENERGY NA GE ENERGY HORIZON WIND ENERGY THE INSTITUTE OF ENERGY ECONOMICS, JAPAN (IEEJ) KINDER MORGAN KOCH SUPPLY AND TRADING KUWAIT PETROLEUM CORPORATION MARATHON OIL CORPORATION MORGAN STANLEY PARKER DRILLING COMPANY SCHLUMBERGER SHELL OIL COMPANY SHELL EXPLORATION & PRODUCTION CO. SIMMONS & COMPANY INTERNATIONAL TOTAL E&P NEW VENTURES, INC. TOTAL E&P USA, INC. TUDOR, PICKERING, HOLT & CO. L.L.C. VANCO ENERGY COMPANY WALLACE S. WILSON 3 Scenarios for Russian Natural Gas Exports ABOUT THE STUDY: RUSSIA AND THE C ASPIAN S TATES IN THE GLOBAL ENERGY BALANCE Russia’s position as a major energy supplier has great significance not only for its foreign policy but for its relationships with major energy-consuming countries. The nature of Russia’s future geopolitical role in world energy markets has become a major concern of international energy security with important implications for Europe, Japan, and the United States. Given a range of economic and geopolitical uncertainties, the fate of Russian and Caspian natural gas exports remains a major risk factor in global energy supply. For this study, researchers examined several scenarios for Russian and Caspian oil and natural gas production, possible export routes, and the geopolitics involved. STUDY AUTHORS JOE BARNES STACY CLOSSON JAREER ELASS PETER R. HARTLEY AMY MYERS JAFFE KENNETH B. MEDLOCK III MARTHA BRILL OLCOTT NIKOLAI PETROV LILIA SHEVTSOVA LAUREN SMULCER XIAOJIE XU 4 Scenarios for Russian Natural Gas Exports ABOUT THE E NERGY FORUM AT THE JAMES A. BAKER III I NSTITUTE FOR PUBLIC POLICY The Baker Institute Energy Forum is a multifaceted center that promotes original, forward-looking discussion and research on the energy-related challenges facing our society in the 21st century. The mission of the Energy Forum is to promote the development of informed and realistic public policy choices in the energy area by educating policymakers and the public about important trends—both regional and global—that shape the nature of global energy markets and influence the quantity and security of vital supplies needed to fuel world economic growth and prosperity. The forum is one of several major foreign policy programs at the James A. Baker III Institute for Public Policy of Rice University. The mission of the Baker Institute is to help bridge the gap between the theory and practice of public policy by drawing together experts from academia, government, the media, business, and nongovernmental organizations. By involving both policymakers and scholars, the institute seeks to improve the debate on selected public policy issues and make a difference in the formulation, implementation, and evaluation of public policy. JAMES A. BAKER III INSTITUTE FOR PUBLIC P OLICY RICE UNIVERSITY – MS 40 P.O. BOX 1892 HOUSTON, TX 77251–1892 USA HTTP://WWW.BAKERINSTITUTE.ORG [email protected] 5 Scenarios for Russian Natural Gas Exports ABOUT THE AUTHORS PETER R. HARTLEY, PH.D. BAKER INSTITUTE RICE SCHOLAR, JAMES A. BAKER III INSTITUTE FOR PUBLIC POLICY GEORGE AND CYNTHIA MITCHELL CHAIR AND PROFESSOR OF ECONOMICS, RICE UNIVERSITY Peter R. Hartley is the George and Cynthia Mitchell Chair and a professor of economics at Rice University. He is also a Rice scholar of energy economics for the James A. Baker III Institute for Public Policy. Hartley has worked for more than 25 years on energy economics issues, focusing originally on electricity, but including also work on natural gas, oil, coal, nuclear, and renewables. He wrote on reform of the electricity supply industry in Australia throughout the 1980s and early 1990s and advised the government of Victoria when it completed the acclaimed privatization and reform of the electricity industry in that state in 1989. Apart from energy and environmental economics, Hartley has published research on theoretical and applied issues in money and banking, business cycles, and international finance. In 1974, he completed an honors degree at The Australian National University, majoring in mathematics. He worked for the Priorities Review Staff, and later the Economic Division, of the Prime Minister’s Department in the Australian government while completing a master’s degree in economics at The Australian National University in 1977. Hartley obtained a Ph.D. in economics at The University of Chicago in 1980. He came to Rice as an associate professor of economics in 1986 after serving as an assistant professor of economics at Princeton University from 1980 to 1986. KENNETH B. MEDLOCK III, PH.D. JAMES A. BAKER, III, AND SUSAN G. BAKER FELLOW IN ENERGY AND RESOURCE ECONOMICS, JAMES A. BAKER III INSTITUTE FOR PUBLIC POLICY, AND ADJUNCT PROFESSOR OF ECONOMICS, RICE UNIVERSITY Kenneth B. Medlock III is currently the James A. Baker, III, and Susan G. Baker Fellow in Energy and Resource Economics at the James A. Baker III Institute for Public Policy and adjunct professor in the Department of Economics at Rice University. He is a principal in the development of the Rice World Natural Gas Trade Model, which is aimed at assessing the future of liquefied natural gas (LNG) trade. Medlock’s research covers a wide range of topics in energy economics, such as domestic and international natural gas markets, choice in electricity generation capacity and the importance of diversification, gasoline markets, emerging technologies in the transportation sector, modeling national oil company behavior, economic development and energy demand, forecasting energy demand, and energy use and the environment. His research has been published in numerous academic journals, book chapters, and industry periodicals. For the Department of Economics, Medlock teaches courses in energy economics. 6 Scenarios for Russian Natural Gas Exports Abstract Russia is the largest global natural gas supplier and has the potential to expand its production significantly. Europe depends on Russia for more than a quarter of its natural gas supply, placing Russia in a position to project its power to achieve political goals, higher prices, or both. However, pricing disputes that have led to short term supply reductions, most notably with Ukraine in the winters of 2005–06 and 2008–09, have caused European gas consumers to reconsider Russia’s role in European energy security. Specifically, many European nations have significantly expanded liquefied natural gas (LNG) import capability, and there has been substantial effort devoted to looking at the development alternative pipeline routes to Europe for natural gas from the Caspian states of the Former Soviet Union. Scenario analysis using the Baker Institute World Gas Trade Model (BIWGTM) indicates that Russia may be less able to negatively influence the Western European gas market in future years. In general, as a global market for natural gas continues to develop the diversity of alternative suppliers will increase thereby lessening the effects of instability in any single region. Specific to Europe, while increased LNG import capability certainly plays an important role, the response of European consumers to future supply disruptions also accelerates other import avenues. Specifically, natural gas supplies imported by pipeline from the Middle East, in particular Iraq, could play a key role. The importance of the Middle East to European supply diversification, however, means any collusion between Russia and the major producers in the Middle East could pose a significant threat to global energy security. I. Introduction According to the U.S. Energy Information Administration (EIA), Russia is the largest natural gas supplier, with dry gas production in 2007 of 23.1 trillion cubic feet (tcf) representing over 20 percent of global output. Russia could also significantly expand production.
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