IEEJ: May 2011

Special Bulletin
A Japanese Perspective on the International Energy Landscape (40)

April 22, 2011

Recent International Energy Situation and Russia
Ken Koyama, PhD
Director
Strategy and Industry Research Unit
The Institute of Energy Economics, Japan

From April 18 to 21, I had an opportunity to visit the Russian capital of Moscow for talks
with experts on Russian energy. Based on the talks, I would like to make my comments about what
energy policy or strategy Russia is planning and implementing under the recent fast-changing
international energy situation.
First, an important point is that the international situation surrounding Russia has beenchanging dramatically. Following the global financial crisis, the Russian economy decelerated
rapidly and plunged into a contraction as oil and gas export revenue was reduced while European gas
prices declined on rapid drops in crude oil prices amid a global energy demand slowdown. This
simply indicated how the Russian economy depended on the oil and gas sector. Later, however,
crude oil prices turned up. They have recently shot up on the destabilized Libyan situation, asindicated by the European benchmark Brent crude oil futures price's rise above $120/barrel. Russiancrude oil output turned up in 2009 after a decline in 2008 and has continued a moderate upward
trend. Under such situation, the Russian economy has turned up. Several Russian policymakers havebegun to make remarks indicating that they are gradually confident of Russia's recovery from theeconomic crisis. During the recent Moscow visit, I sometimes saw Russian experts making
optimistic or upbeat comments about the present Russian economy and the future course of its
energy sector including the gas market.
Second, I felt many Russian experts recognize that their urgent challenge is to overcome
various problems existing in the Russian economy and its energy sector, even though Russia has
passed the worst phase and continued improvements. The first problem is that Russia should shift
away from its economic structure which is heavily dependent on the oil and gas sector and promote
its structural improvement and advancement. The second is that Russia needs to promote
institutional reforms and improvements to resolve tax, resources development access and otherproblems that have made the future course of the oil and gas sector uncertain and which arerestricting the future growth of the sector. The third problem is that Russia should address various
energy supply/demand and policy problems with reference to European market, on which theRussian oil and gas sector depends heavily. Russia is now required to overcome a wide range ofproblems.
These problems will have great impacts on and relations to the future advancement anddevelopment of Russia's politics, economy and society. For example, the first problem will become
one of the important policy challenges toward the March 2012 Russian presidential election. The
second problem strongly reflects great insecurities and uncertainties about the future course of1

IEEJ: May 2011

Russian crude oil and gas production that has continued to expand up to now. Regarding European
market that absorbs most of Russia's oil and gas exports, accounting for 60-70% of its total export
revenues, there is a mountain of tough problems including Europe's future oil and gas demand, its
introduction of LNG competing with Russian pipeline gas, tough negotiations with European buyers
on pricing formulas under these problems, and discussions about the application to Russia'sGazprom of the EU's third “Energy Package” that calls on EU energy companies to unbundle energy
production and transportation and give third parties access to transportation infrastructure.
I also feel that Russia's attention to and expectations on Asia have grown dramatically undersuch situation. First, Russia may have to seek for better economic integration with Asia and reap theeconomic fruits of Asian development to help promote its own economic recovery as Asia including
China is becoming the driving force of the world economy. Russia may also have to enhance its
partnership and cooperation with Japan and other Asian countries in diversifying and improving its
economic structure. In a specific effort, Russia will pursue its partnership and cooperation with
Asia-Pacific countries in various areas when it hosts the annual APEC summit in Vladivostok in2012.
Russia also has natural reasons to increase its attention on Asia in the energy area. First, theenhancement of energy relations with Asian countries, including China with energy demand
expanding under rapid economic growth, is a major challenge for Russia. China-Russia energy
relations have made dramatic progress over the past decade. For example, Russia's pipeline oilexports to China started this year on the completion of the East Siberia-Pacific Ocean oil pipeline'sportion and branch line for China, deepening bilateral energy trade. Still, there are some difficult
bilateral problems, including China's rejection of payments for the amount with which they havedispute over pricing for their pipeline oil imports. But Russia's relationship with China is likely togrow more important as the neighbor has a great presence in terms of economic and energy marketsizes.
Second, Russia has made progress in expanding energy supply from its regions neighboring
Asian countries to meet growing Asian demand. Russian crude oil exports to Asia have grown close
to 1 million barrels per day as Russia has realized exports under the Sakhalin 1 and 2 projects, ESPO
crude exports from Kozmino and those to China as noted above. LNG exports under the Sakhalin 2project have also become an important energy source for Asia. Russia also has pending oil and gas
production plans including those for Sakhalin and Eastern Siberia. As Western Siberia is losing its
position as Russia's mainstay energy producer on a production decline, oil and gas production
expansion plans in Sakhalin and Eastern Siberia close to Asia have become significant for Russia.
Third, Russia has recently been paying growing attention to Japan. Just after the March 11
East Japan Earthquake, Russian Prime Minister Vladimir Putin offered support for Japan, giving
statement to provide Japan with additional LNG when necessary. On March 22, Russian Deputy
Prime Minister Igor Sechin proposed (1) an increase in LNG exports under the Sakhalin 2 project,(2) an expansion in coal exports, (3) the installation of submarine cables for electricity supply, andother measures at his meeting with Japanese Ambassador to Russia Masaharu Kono. In addition,
Russia has reportedly proposed cooperation with Japan in energy projects including the developmentof the Kovykta and Chayanda gas fields. For Japan that has suffered from heavy earthquake-tsunami
damage and is destined to see growing demand for LNG and other fossil fuels for electricity
2IEEJ: May 2011

generation this summer, fuel procurement is very important. In this respect, support and cooperationfrom Russia and other oil-producing/resource-rich countries are significant. During my recent talks
with Russian experts, I had an opportunity to come to know Russia’s kind willingness to support andcooperate with Japan which is suffering from the heavy disaster damage. I also felt that Russia has
great interest in Japan with regard to how to deepen energy relations in response to Japanese energy
supply/demand problems over a medium to long term in addition to over a short term. Nowadays, it
seems Japan has emerged a key point for Russia that is paying growing attention to Asia.
Contact: report@tky.ieej.or.jp

The back issues are available at the following URL.
http://eneken.ieej.or.jp/en/whatsnew/JPOIEL.html

3