The Geopolitics of Natural Gas the Geopolitics of Russian Natural Gas

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The Geopolitics of Natural Gas the Geopolitics of Russian Natural Gas The Geopolitics of Natural Gas The Geopolitics of Russian Natural Gas Harvard University’s Belfer Center and Rice University’s Baker Institute Center for Energy Studies February 2014 JAMES A. BAKER III INSTITUTE FOR PUBLIC POLICY RICE UNIVERSITY THE GEOPOLITICS OF RUSSIAN NATURAL GAS BY TATIANA MITROVA, PH.D. HEAD OF THE OIL AND GAS DEPARTMENT ENERGY RESEARCH INSTITUTE RUSSIAN ACADEMY OF SCIENCES FEBRUARY 21, 2014 The Geopolitics of Russian Natural Gas THESE PAPERS WERE WRITTEN BY A RESEARCHER (OR RESEARCHERS) WHO PARTICIPATED IN A BAKER INSTITUTE RESEARCH 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. © 2014 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 The Geopolitics of Russian Natural Gas Acknowledgments The Center for Energy Studies of Rice University’s Baker Institute would like to thank ConocoPhillips and the sponsors of the Baker Institute Center for Energy Studies for their generous support of this program. The Center for Energy Studies further acknowledges the contributions by study researchers and writers. Energy Forum Members Advisory Board Associate Members Accenture Direct Energy The Honorable & Mrs. Hushang Ansary Hess Corporation Baker Botts L.L.P. Tudor, Pickering, Holt & Co. LLC Baker Hughes Incorporated Members BP California Energy Commission Afren Resources USA Cheniere Energy, Inc. Air Products and Chemicals, Inc. Chevron Corporation American Air Liquide Holdings, Inc. ConocoPhillips Apache Corporation Deloitte Aramco Services Company EDP Renewables North America, LLC IPR - GDF SUEZ North America Energy Future Holdings Corporation Pioneer Natural Resources USA Inc. ExxonMobil Corporation Rockwater Energy Solutions, Inc. The Institute of Energy Economics, Japan (IEEJ) TOTAL E&P New Ventures, Inc. Marathon Oil Corporation TOTAL E&P USA, Inc. Saudi Aramco VAALCO Energy Schlumberger Shell Oil Company Supporting Members Shell Exploration & Production Co. Deloitte MarketPoint LLC Trinity Industries, Inc. Energy Intelligence Wallace S. Wilson 3 The Geopolitics of Russian Natural Gas Acknowledgments The Geopolitics of Energy Project at Harvard University’s Kennedy School is grateful for the support it receives from BP, as well as the Belfer Center for Science and International Affairs. It also appreciates the work and contributions provided by the scholars who have participated in this program. 4 The Geopolitics of Russian Natural Gas About the Study Some of the most dramatic energy developments of recent years have been in the realm of natural gas. Huge quantities of unconventional U.S. shale gas are now commercially viable, changing the strategic picture for the United States by making it self-sufficient in natural gas for the foreseeable future. This development alone has reverberated throughout the globe, causing shifts in patterns of trade and leading other countries in Europe and Asia to explore their own shale gas potential. Such developments are putting pressure on longstanding arrangements, such as oil-linked gas contracts and the separate nature of North American, European, and Asian gas markets, and may lead to strategic shifts, such as the weakening of Russia’s dominance in the European gas market. Against this backdrop, the Center for Energy Studies of Rice University’s Baker Institute and the Belfer Center for Science and International Affairs of Harvard University’s Kennedy School launched a two-year study on the geopolitical implications of natural gas. The project brought together experts from academia and industry to explore the potential for new quantities of conventional and unconventional natural gas reaching global markets in the years ahead. The effort drew on more than 15 country experts of producer and consumer countries who assessed the prospects for gas consumption and production in the country in question, based on anticipated political, economic, and policy trends. Building on these case studies, the project formulated different scenarios and used the Rice World Gas Trade Model to assess the cumulative impact of country-specific changes on the global gas market and geopolitics more broadly. Study Authors Rawi Abdelal Simon Henderson David Mares Luay Al Khatteeb Trevor Houser Kenneth B. Medlock Govinda Avasarala Amy Myers Jaffe Keily Miller Beibei Bao Robert Johnston Tatiana Mitrova Soner Cagaptay Ken Koyama Isidro Morales Charles Ebinger Azzedine Layachi Martha Brill Olcott Jareer Elass Michael Levi Meghan O’Sullivan Andreas Goldthau Steven Lewis Ronald Ripple Peter Hartley Suzanne Maloney 5 The Geopolitics of Russian Natural Gas Introduction Russia is one of the world’s leading producers of primary energy resources, and is especially well known for its strong position in the global gas markets. It holds the world’s largest gas reserves and is currently the world’s second gas producer after the United States, which recently outstripped Russia because of the shale revolution. Nevertheless, Russia still preserves its status as the largest gas exporter in the world, leaving Qatar and Norway far behind (see Figure 1), and most likely will keep this position in the future (although Australia and the US are expected to become top exporters by the end of this decade). Figure 1. Main Net Exporters of Gas (Pipeline and LNG) in 2012 Source: BP Statistical Review of World Energy 2013 Russia has a unique transcontinental infrastructure in the heart of Eurasia (150,000 km of trunk pipelines), which also makes it a backbone of the evolving, huge Eurasian gas market (which could include Europe, North Africa, the Commonwealth of Independent States (CIS), Caspian 6 The Geopolitics of Russian Natural Gas Sea region, and Northeast Asia). Control over the transportation assets in this region together with vast gas reserves make Russia the key element of this new market. Most of Russia’s gas exports are directed to Europe and CIS, and in the future, a significant increase in Asian exports is expected. Russia’s total of 170–200 bcm of gas exports make it significant from a natural gas perspective, as currently it alone provides for about 20% of the international gas trade. As a dominant supplier of both the European and the CIS gas markets (nearly 50% and 100% of total gas imports, respectively), Russia has a huge influence on the prices and on the “rules of the game” in these regions, as well as a certain geopolitical leverage. Protecting oil indexation and long-term take-or-pay contracts, Russia remains a citadel of the traditional gas market model. Subsequently, it is one of the main ideologists of the Gas Exporting Countries Forum, promoting a “security of supply” approach to energy security with strong guarantees to producers. In the context of this study, another unique feature is that Russia has used gas as an important geopolitical tool for many years. Gas is one of the key (and contradictory) elements of EU- Russian economic and political interplay. In the FSU and former Eastern Block area, gas is perhaps the main instrument of integration, allowing Russia to exercise its influence over these countries. Plans to expand LNG and pipeline exports to Asia reflect the Russian desire to extend relations and maybe even build strategic alliances with Asian countries (mainly China) in opposition to the US and Europe. This geopolitical use of gas by the Russian government is often regarded as a geopolitical “weapon.” However, a more appropriate term would be “an instrument to obtain influence”—for the former empire, it is very important to possess such an instrument for international negotiations and to strengthen its soft power. 7 The Geopolitics of Russian Natural Gas Russian Energy Policy Background Russian Primary Energy Balance Russia is the world’s third-largest producer and consumer of energy after China and the US. It produces 10% and consumes 5% of the planet’s energy resources. Russia’s energy sector, with its output of about 1300 thousand tons of oil equivalent (mtoe) (42% of which is provided by gas), allows the country to export 600 mtoe—12% of the world’s energy trade. This makes Russia a global leader in energy exports and, at the same time, one of the largest energy consumers in the world with a huge domestic market (see Figures 2 and 3, and Table 1). Figure 2. Russian Primary Energy Production, 2000–2011 Source: IEA statistics, September 2013 Figure 3. Russian Primary Energy Consumption, 2000–2011 Source: IEA statistics, September 2013 8 The Geopolitics of Russian Natural Gas Table 1. Russia’s Exports of Energy Resources, 2005–2013 2005 2006 2007 2008 2009 2010 2011 2012 Oil, million tons 252.5 248.4 258.6 243.1 247.5 250.7 244.5 240.0 Oil products, million tons 97.1 103.5 112.3 118.1 124.5 133.2 132.1 138.2 Natural gas (pipeline), bcm 209.2 202.8 191.9 195.4 168.4 177.8 189.7 178.7 LNG, bcm 0.0 0.0 0.0 0.0 5.1 14.6 13.9 13.1 Hard coal, million tons 79.7 91.4 98.0 97.4 105.1 115.7 110.5 130.4 Electric power, TWh 17.9 18.6 15.8 18.6 15.0 19.1 18.7 13.1 Note: Figures include oil and gas exported to member states of the Customs Union. Sources: Bank of Russia, “Customs statistics of foreign trade of the Russian Federation” 2005-2013, data from OJSC Gazprom’s website The energy sector is traditionally a crucial part of the Russian economy, providing for the bulk of its export revenues, budget incomes, and GDP.
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