Rosneft and its failed merger with Gazprom

In 2005, several major events transformed the oil and gas industry in Russia. In September 2004, Gazprom announced plans to acquire, via a share swap, the 100 percent state-owned oil company, Rosneft. A completed Rosneft-Gazprom merger would have put the new company into competition with Lukoil, the countrys largest oil producer. By 2005, however it was apparent that the merger would not be completed successfully due to Gazproms fears that a merger would leave it open to litigation targeted towards Rosneft as a result of the Yukos Affair.

Yamal-Europe II-Natural Gas Pipeline

The Yamal-Europe I pipeline (1 Tcf), which carries natural gas from Russia to Poland and Germany via Belarus, would be expanded another 1 Tcf under this proposal. Gazprom and Poland currently disagree on the exact route of the second branch as it travels through Poland. Gazprom is seeking a route via southeastern Poland to Slovakia and on to Central Europe, while Poland wants the branch to travel through its own country and then on to Germany.

Russia holds the worlds largest natural gas reserves, with 1,680 trillion cubic feet (Tcf)-- nearly twice the reserves in the next largest country, Iran. Accordingly, in 2004 Russia was the worlds largest natural gas producer (22.4 Tcf), as well as the worlds largest exporter (7.1 Tcf). Production during 2005 is predicted to be about the same. However, Russias natural gas industry has not been as successful as its oil industry, with both natural gas production and consumption remaining relatively flat since independence. Moreover, Gazproms natural gas production forecast calls for only modest growth (about 1.3%) by 2008. Russias natural gas sector has been stunted primarily due to aging fields, state regulation, Gazproms monopolistic control over the industry, and insufficient export pipelines. Three major fields (called the Big Three) in Western Siberia--Urengoy, Yamburg, and Medvezhye comprise more than 70% of Gazproms total natural gas production, but these fields are now in decline. Although the company projects increases in its natural gas output between 2008 and 2030, most of Russias natural gas production growth will come from independent gas companies such as Novatek, Itera, and Northgaz.

Baltic Pipeline System (BPS)

The BPS came online in December 2001 carrying crude oil from Russias West Siberian and Timan-Pechora oil provinces westward to the newly completed port of Primorsk in the Russian Gulf of Finland.Throughput capacity at Primorsk has been steadily increased, reaching around 1.2 million bbl/d by September 2005. The BPS gives Russia a direct outlet to northern European markets, allowing the country to reduce its dependence on transit routes through Estonia, Latvia, and Lithuania. Unfortunately for the Baltic countries, the growth of the BPS has come at considerable cost, as Russian crude which traditionally moved through the Baltic region has been re-routed through the BPS. For example, crude oil shipments have dropped off almost 30 percent since 2000 at the port of Ventspils in Latvia. Russian authorities have stated publicly that when allocating the countrys exports, precedence will be given to sea ports in which Russia has a stake over foreign ones; in other words, BPS over other Baltic ports.

Expanding Russias capacity to export oil in order to keep pace with the countrys growing production is important to both Russian policy-makers and oil companies. However, the two sides are sometimes at odds over how best to boost the countrys export capacity. Crude oil exports via pipeline fall under the exclusive jurisdiction of Russias state-owned pipeline monopoly, Transneft. But bottlenecks in the Transneft system make the companys export capacity incapable of meeting oil producers export ambitions. Although Russia produces almost 7 million bbl/d of liquids (in net) for export, only about 4 million bbl/d can be transported by major trunk pipelines; the rest must be shipped by rail and river routes. Most of the 4 million bbl/d transported via alternative routes are petroleum by-products. Some of the crude oil export capacity deficit is also overcome by exporting these petroleum products. However, all of these alternate methods of exporting oil are much more costly than shipment via pipeline and could become less economical if world oil prices fall. The Russian government and Transneft have acknowledged the capacity problem and have taken steps towards developing new export infrastructure. At issue, however, is not only the direction and scope of enhancements to the countrys export infrastructure, but also the potential role that private firms and investors may play in these projects, presumably at the expense of state-owned Transneft. During the first half of 2005, Russia exported almost 4 million bbl/d of crude oil, well below predictions of 5.5 million bbl/d in late 2004 but 11 percent higher than exports during the same period of 2004. Russia also exported roughly 116,000 bbl/d to China during 2004, expects to export 160,000 bbl/d during 2005, and projects exports of 300,000 bbl/d in 2006. Under the Ministrys economic forecast, Russian oil exports could grow to around 5.8 million bbl/d in 2007, and up to 6.2 million bbl/d by 2015.

According to the Oil and Gas Journal, Russia has proven oil reserves of 60 billion barrels, most of which are located in Western Siberia, between the Ural Mountains and the Central Siberian Plateau. In addition to roughly 67 billion barrels of probable and possible oil reserves, a 1998 USGS survey estimated that undiscovered, technically feasible, conventional reserves were larger than those of any other country in the world.

Russia is important to world energy markets because it holds the worlds largest natural gas reserves, the second largest coal reserves, and the eighth largest oil reserves. Russia is also the worlds largest exporter of natural gas, the second largest oil exporter, and the third largest energy consumer. Russias economy is heavily dependent on oil and natural gas exports, making it vulnerable to fluctuations in world oil prices. Russia is a major world oil producer, second only to Saudi Arabia. Following the collapse of the Former Soviet Union (FSU), Russias oil output fell sharply, and has rebounded only in the last couple years. New field developments will produce almost all of Russias annual oil growth in the next five years and will likely produce more than half of the countrys oil in 2020. Over 70 percent of Russian crude oil production is sent directly abroad for export, while the remaining 30 percent is refined locally. Key to Russias production growth in the upcoming decade will be the availability of viable export routes for the countrys crude oil. Transneft currently has a monopoly over Russias pipeline network. Building the pipeline to Indiga will likely be significantly delayed. Because the Russian government has given priority to the construction of the Taishet- Nakhodka pipeline, Transneft is reluctant to take on two large pipeline projects at the same time. Russia has the largest natural gas reserves in the world, but the countrys aging natural gas infrastructure, and monopolistic industry have created unneeded inefficiency. Russia has the second-largest amount of recoverable coal reserves in the world, and the Russian Energy ministry is optimistic about future growth. Safety concerns and adherence to the Kyoto protocol could hinder the industrys potential. In November 2004, Russia ratified the the Kyoto protocol on climate change. The failed merger of Gazprom and Rosneft, the latent effects of the Yukos affair, and Gazproms acquisition of Sibneft continue to alter the structure of the Russian energy industry. The government has backtracked on the privatizations of the last decade, and has consequently brought key oil and gas assets under government control.

With proven reserves of 910 trillion cubic feet (Tcf), Qatars natural gas resources rank third in size behind Russias and Irans. Most of Qatars natural gas is located in the offshore North Field, which is the largest known non-associated natural gas field in the world. In addition, the onshore Dukhan field contains an estimated 5 Tcf of associated and 0.5 Tcf of non-associated gas. Smaller associated gas reserves also are contained in the Id al-Shargi, Maydan Mahzam, Bul Hanine, and al-Rayyan offhore oil fields. The Qatari government believes that the countrys economic future lies in developing this vast natural gas potential.

Qatar exports almost all of its oil production to Asia, with Japan by far its largest customer. In 2005, net oil exports totaled 1,047,000 barrels per day (bbl/d). During this period, Qatar produced 1,087,000 bbl/d of liquids (including crude oil, natural gas liquids, and condensate), up slightly from 1,069,000 bbl/d in 2005. Qatar also produces a significant amount of lease condensate and other natural gas liquids (NGLs), both of which fall outside the countrys OPEC crude oil production quota, which has been set at 700,000 bbl/d since November 1, 2004. Production on NGLs has been rising as a byproduct of increased natural gas production. Following the coup in 1995, Qatar initiated a number of new policies aimed at increasing oil production, locating additional oil reserves before existing reserves become too expensive to recover, and investing in advanced oil recovery systems to extend the life of existing fields. To accomplish this, the government in recent years has improved the terms of exploration and production contracts and production sharing agreements (PSA). The improved terms are designed to encourage foreign oil companies to improve oil recovery in producing fields and to explore for new oil deposits. Foreign companies now account for more than one-third of Qatars oil production capacity.

Qatar has proven recoverable oil reserves of 15.2 billion barrels.  The onshore Dukhan field, located along the west coast of the peninsula, is the country largest producing oilfield.  Qatar also has six offshore fields, Bul Hanine, Maydan Mahzam, Id al-Shargi North Dome, al-Shaheen, al-Rayyan, and al-Khalij. Qatari crude oil has gravities in the 24º-41º API range. The countrys two primary export streams are Dukhan (41º API) and Marine (36º API) blend. Despite the countrys significant oil production and reserves, oil accounts for less than 15 percent of domestic energy consumption.