IEEJ：October 2003

Oil Development in Russia and the Caspian States andIts Implication to the International Energy Market
Ken Koyama, PhD
Energy Strategy Department
The Institute of Energy Economics, Japan<Research Objective>
Since 1999 Russia’s oil production has been on the sharp rise and nowadays
reached some 8.40 million barrels a day (B/D). Thus, once again Russia has been
increasing its influence/presence on the international oil market as a major producing
country comparable to the world’s largest oil producer, Saudi Arabia. Also, the statesround the Caspian Sea, notably Kazakhstan and Azerbaijan, have had sharply growing
oil production as a result of successful foreign capital introduction. Such being thesituations, oil development trends in these former Soviet producing countries now
attract attention as a focal point of crucial importance in envisaging a future shape of
not only the international oil market but also the Asian oil market, including Japan.
Based on the aforesaid recognition, this paper, focusing on oil production and export
infrastructure projects in Russia and the Caspian states, analyzes their recent trends andprospects, based on which their implications to the international oil market is gropedfor1.
<Major Conclusions>
1. It is expected that Russia’s oil production keeps growing steadily ahead. From
now on, a fall in the crude oil price, if any, could decelerate the speed of output
increases. Yet, given Russia’s huge resource potentials, sustainability of the effectof recently introduced advanced technologies by Russian oil firms and ample roomfor expanding applications of technology introduction, output increases can beexpected from production expansion in the existing oil producing area (WestSiberia) as well as from newly developed blocks. As a result, the strong
likelihood is Russia’s oil production will reach nearly 10 million B/D by 2010,2.

1up from 7.66 million B/D in 2002.
Also in Kazakhstan and Azerbaijan, considerable oil production gains areThis paper is based on the results of a research the IEEJ conducted in FY2002 on behalf of theAgency for Natural Resources and Energy, the Ministry of Economy, Trade and Industry. This time,these are published with a permit of the METI. Acknowledgements are due to all the concerned atthe METI for their kind understanding and cooperation.

IEEJ：October 2003

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likely. In Kazakhstan, oil flows from the leading Tengiz oilfield will be enhancedby planned output increases, and full-scale development of giant projects, such as
the Karachaganak and Kashagan oilfields, are on the waiting list. If these projects
are favorably in progress, oil output can reach nearly 2.00 million B/D by 2010
(compared with 940,000 B/D in 2002). In Azerbaijan too, along with favorable
progress in the Azerbaijan International Operating Consortium (AIOC) project, thecountry’s biggest foreign capital project, rising output will continue, and total oil
output in 2010 is likely to reach a level above a million B/D (310,000 B/D in 2002).
The three countries all are badly in need of sizeable oil (crude oil) export
infrastructure construction that can match future output increases. In particular,
for Russia with the existing export infrastructure (chiefly to Europe) runningalmost at full capacity, to advance new projects is the top priority. At present,roughly classified, (1) Europe/America-bound export infrastructure projects (e.g.
the U.S.-bound Murmansk project) and (2) Asia-bound export infrastructure
projects (e.g. a 600,000 B/D export pipeline project to Daqing of China, and aPacific route of a-million B/D pipeline project) are under consideration. Itappears, taking into account not only economics of each project but also

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diversification of export destinations, control of oil export system, andinternational politics towards Europe, the U.S., China, Japan and others,
Russia will implement these projects selectively by making strategic
judgements.
On the other hand, in Kazakhstan and Azerbaijan, exportinfrastructure projects, all designed to serve the big European market, are inprogress in order to reduce their dependence on Russia.
These projects areexpected to surely bolster output increases in the future.
With the three countries combined, total oil production could increase by as muchas 4.00 million B/D between 2002 and 2010 if their development projects arefavorably in progress. As an expected effect, such a sizeable output increase
from these countries can curb market share as well as market power to be heldby the OPEC. Also, under such conditions as the crude oil price spike since 1999
and tensions in the Middle East after September 11 and the war in Iraq, there areinternationally growing concerns over energy security.

For this reason, from thestandpoint of diversifying supply sources (and lowering/curbing the Mideast
dependence), greater oil production/exports by the three countries areattached an increasing importance in strategic terms. From now on, major
consuming countries all are likely to show stepped-up moves to strengthen their ties
with Russia, in particular.

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The Northeast Asian oil market including Japan is heavily reliant on the Middle
East, and this area as a whole is expected to become even more dependent on oil
imports in the years to come. On these accounts, it is expected that particularly oil
imports from Russia helps lower the Mideast dependence, which, in turn brings
about a stronger bargaining power against the Middle East, thus playing vital roles
in securing oil supply at a more competitive price. From now on, in order topromote giant projects in East Siberia, Sakhalin, etc. designed to serve theNortheast Asian market, and realize/enjoy their potential merits, there are points ofcrucial importance. They include (1) stepped-up efforts to improve project
economics, (2) strategic consideration by taking into account hardly quantifiable
elements like a stronger bargaining power, and (3) confirmation and sharing of thewill to promote regional energy cooperation so as to pursue the merits of Northeast
Asia as a whole.
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