IEEJ：July 2020©IEEJ 2020
Special Bulletin
A Japanese Perspective on the International Energy Landscape (488)

July 10, 2020

Russia’s Significance for International Energy LandscapeKen Koyama, PhD
Chief Economist, Senior Managing Director
The Institute of Energy Economics, JapanOn July 9, the Institute of Energy Economics, Japan, held a webinar titled “COVID-19 andRussia: The Present Status and Outlook of the Energy Situation and Putin Regime.” In the first half of
this webinar on Russia suffering from the huge negative impact of COVID-19, an IEEJ expert made apresentation on the present status and problems of oil and gas production and exports. In the second
half, another IEEJ expert gave a presentation on policy challenges for President Vladimir Putin whoseems to have gained public confidence through the recent national referendum. These presentations
were followed by question-and-answer sessions. In the following, I would like to summarize key
points of Russia’s significance for the international energy landscape that I felt anew through thewebinar.
Russia is a leading energy producer and exporter. Regarding oil, the most important good ininternational energy trade, Russia produced 11.54 million barrels per day in 2019, ranking third in theworld. As for natural gas, the second most important internationally traded energy commodity, Russian
production in the year came to 679 billion cubic meters (BCM), ranking second. The United States
was the world’s largest oil and gas producer. The second largest oil producer was Saudi Arabia. Russia
exported 9.19 million bpd in oil (gross exports) and 256.6 BCM in gas in 2019, being the largest oiland gas exporter in the world. Russia is thus an oil and gas giant rivalling the United States and SaudiArabia. The three countries are competing against each other in the entire international energy market.
The oil and gas production and export policies of Russia, as the energy giant, are one of themost important matters of concern to the United States, Saudi Arabia and other energy stakeholders inthe world. Given that the three countries are natural competitors against each other, whether the UnitedStates or Saudi Arabia could strategically cooperate with Russia would be the key to internationalenergy market stabilization.
A typical case is Russia’s participation in joint oil production cuts by the Organization of thePetroleum Exporting Countries and non-OPEC oil-producing countries. Whether Russia participatesin OPEC-plus cooperation in production cuts has been the most important matter for OPEC and its
leader Saudi Arabia over the past years. Russia has held the key to the joint production cuts for thestabilization of the global oil supply-demand balance. This is the reason Russia’s refusal to enhance
the production cuts in March this year led the OPEC-plus cooperation framework to collapse, plunging
the international oil market into a price war. Russia’s strategic conclusion that the enhancement would
only benefit the United States to the disadvantage of Russia thus triggered an oil price crash.
Amid the COVID-19 disaster, however, the price war cost all stakeholders too much. In aninteresting development, U.S. President Donald Trump served as a mediator to stop the price war. As
a result, Russia came back to OPEC-plus to rebuild the OPEC-plus cooperation framework, leading
the group to launch record production cuts in May. Russia has thus played a role in leading oil prices
to turn up from record lows. Recently, however, the fate of the OPEC-plus production cut policy
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including Russia’s policy has been attracting attention from oil market players again.
Whether and how long Russia would cooperate with OPEC is becoming a matter of interest
to oil market players. Russia for its part has implemented production cuts mainly at relatively
inefficient run-down oil fields, according to analysts. Russia could switch from the production cuts.
However, it is uncertain how much Russia could increase oil production or how much the Russian oil
industry hit hard by the oil price crash and an oil demand plunge under the COVID-19 disaster could
recover investment. Although the Russian oil industry has requested various rescue measures from thegovernment, we will have to closely watch how such rescue measures would be implemented or how
they would be effective. It is important to assess investment recovery in anticipating Russian oil andgas production over a short to medium term.
Russia’s presence in the international natural gas market is also very great. Russian natural
gas exports account for more than a quarter of global trade and mostly go to Europe linked to Russia
through pipelines. Russia is also trying to expand gas exports to China. Russian gas exports have thus
become a key factor exerting great influence on the Eurasian energy landscape and energy geopolitics.
Russia has also increased its presence in the liquefied natural gas market in recent years thanks toemerging Russian energy company Novatek’s growing LNG exports. As LNG has become a global
good, Russia’s presence has been rising not only in Eurasia but also in the global natural gas and LNG
market.
However, Russia’s gas sector has faced serious difficulties this year. Its pipeline gas exports
to Europe, the most important market for Russia, in the first quarter of this year plunged some 30%.
Factors behind the plunge include a warmer winter in Europe, a European gas reserve expansion
prepared for a breakdown in negotiations on Russian gas exports via Ukraine, the successful
conclusion of the negotiations late last year, European economic deterioration and lockdowns under
the COVID-19 disaster, and Europe’s LNG import expansion. European LNG imports expanded
despite an overall natural gas consumption plunge as Europe became the last-resort buyer of LNG
amid oversupply and weak prices. Russia has thus been affected by all such supply and demandchanges. Whether Russia would remain the gas market supply-demand adjuster or change its course
to restore its market share would have great influence on the European natural gas market and theinternational LNG market and should be closely watched.
Russia has recognized energy’s strategic importance for itself. President Putin might havebeen well aware of the importance and been strategically considering how to use energy in the bestinterest of Russia. While Saudi Arabia’s oil sector is monopolized by state-run Saudi Aramco, Russia’s
oil and gas sector has multiple leading companies. Russia thus differs from Saudi Arabia in terms ofconditions regarding the government and the energy industry. In Russia, energy giants, including
Rosneft in the oil sector and Gazprom and Novatek in the gas sector, have close relations with thePutin regime. When analyzing the Russian energy situation, we must consider and check these energy
giants’ behaviors and business strategies as well as their relationship with Russia’s national strategies.
Energy policies and strategies of Russia, which is strongly conscious of viewing energy as
a strategic good, will remain a key factor exerting great influence on the international energy landscapeand energy geopolitics. However, we must take note of the fact that Russia and its energy sector facevarious challenges. The most important among the latest challenges are a sharp fall in export revenue
and a remarkably negative impact on the national economy, which have resulted from an energy export
decline and weak energy prices under the COVID-19 disaster. Other challenges include constraints onenergy development under the prolonged and enhanced Western economic sanctions, growing
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dependence on China amid Western sanctions and soured relations with Western countries, Russia’s
relatively weaker position against China, the need for addressing the global low-carbonization ordecarbonization trend mainly seen in Europe as Russia’s key market, and the diversification andadvancement of Russia’s economic structure depending heavily on oil and gas exports. How Russia
would tackle these challenges will be a key point for analyzing the future international energy
landscape. It is important for Japan to consider Russian policies and strategies in formulating nationalstrategies.

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