By Viktor Khristenko, Minister of Industry and Energy of Russia. Breakthrough to the East

Vedomosti (Moscow) February 5, 2006.

Breakthrough to the East

Russia’s eastern-oriented energy strategy has been causing increasing interest recently both inside the country and abroad. A major contribution to this was made by Russia’s vigorous foreign policy in the Far East and South-East Asia. Numerous meetings, including summits, were devoted to extensive discussions of energy issues on a par with general economic and political subjects. All these visits, meetings, and debates have given us one more chance to feel the intricate, non-linear dependence between domestic, regional, and global problems and processes.

New Reality

Russia is a country with a market economy, and the Russian market is part of the global one. Russia’s integration into the new world economic system has been practically accomplished. This fact may cause different responses, but it remains a fact – integration has become reality. On the one hand, the new reality faces Russia with new challenges and problems, but on the other, it is a good opportunity to occupy a befitting place in the new, dynamic world, where the ratio of politics and economics has undergone a major change. In the past, economics often paid for political ambitions, whereas now politics serves economic interests.

In the 21^st century geopolitics is being replaced with geoeconomics, which gives priority to a nation’s ability to compete with others. Geoeconomics is determined by the market capacities and positions, flow of goods, capital, services and manpower, integration, and cooperation in the economy and other spheres. Therefore, it is vital for us to learn to make effective use of our competitive advantages, which include natural resources, research and engineering schools, high tech industries, and unique geographical location. We should find such comprehensive solutions, which would allow us to effectively connect our performance on the world market, in global situations with the advance of our own economy. This is the gist of today’s industrial policy, including its energy sector.

World Energy Security and Russia

Forecasts say that global energy consumption could grow by a third within the next 15 years and by some 45% within 20 years. The global demand for oil may grow by 35 million barrels a day (up by 42%) and for gas by 1.7 trillion cu m a year (an increment of 60%) by 2025.

The current situation on the world’s market is noted for four crucial elements:

1) A rapidly growing energy demand in the emerging Asian nations (up to 45% of the prospective growth of the global oil requirements);

2) A growing gap between oil and gas consumption and production in industrialized nations (by 2020, from 60% to 70% of gas consumed in Europe will be imported, while the majority of major Asian nations have already exceeded this ceiling);

3) A shortage of oil refining and transportation systems and a limited number of additional oil production facilities;

4) Insufficient transparency of the global oil trade.

We realize that Russia holds a special place among energy suppliers for reserves, geography (hence its role in energy transit), and reliability (stability) of supplies.

Today the problem of security has moved to the fore in its most different interpretations, including energy security. In this context Russia is becoming a key player in the global economy (and, hence, policy). We have given priority to energy security and energy effectiveness both for the G8 agenda in 2006 and in its contacts with Asia and the Pacific. We have done this because we see this problem both domestically and internationally, as a common, global requirement for reliable supplies of energy carriers.

Eastern Bridgehead 

 Energy and other markets of Asia and the Pacific are the most dynamically developing ones in the world. In the estimate of the International Energy Agency, the Asian demand for energy resources has been growing faster than in all other countries – annual consumption of oil by 3%-4%, and of gas, by 4%-6%. For this reason we are going to pay increasing attention to Asian and Pacific nations. We expect the Asian share in our exports of oil to go up from today’s three per cent to 30% in 2020 (up to 100 million tons), and of gas from five per cent to 25% (up to 65 billion cu m).

We are looking at the East as a strategic direction because Russia borders on such leaders of the world economy as Japan and Korea, on China and India with their enormous markets and potential for industrialization, and the dynamic and ambitious South-East Asian nations. It would be very difficult to involve Western resources in the development of East Siberia and the Far East, if only because of transportation costs. Under the circumstances, we have a real opportunity to put into practice famous Russian scientist Lomonosov’s saying, which is probably known to every resident of Siberia: “Russia’s greatness shall grow out of Siberia”. 

Emphasis on East Siberia and Far East

Today we are actively implementing the program for the development of East Siberia and the Far East (including Sakhalin), and the project of the Eastern oil pipeline to connect Siberia with the Pacific Coast.

The program for the development of gas resources in East Siberia and the Far East will be a major step in the creation of a new oil-and-gas province in Russia. It provides for the formation of a unified system for the production, transportation and delivery of gas with the account of its exports to the markets of China and other Asian and Pacific nations, which are linked with the Ministry of Natural Resources’ program for geological surveying and putting to use of hydrocarbon deposits of East Siberia and the Far East. The proven reserves, and the expected growth will allow Russia to produce up to 150 billion cu m of gas a year in eastern areas by the year 2030.  

This fact shows that East Siberia and the Far East are rich in hydrocarbons, and that it is safe to develop major centers of gas industry in the east of the country.

Development of Sakhalin shelf projects will make it possible to set up a new center of oil and gas production. The latter has already started, and the future looks very optimistic. I would like to stress that this is not simple production of gas, but application of new technologies and industrial advancement. The plant for the production of liquefied natural gas under the Sakhalin-2 project is a testing ground for new approaches and technologies. Positions of Russia in the liquefied natural gas market are so far weak, and the commissioning of the plant will allow us to make a breakthrough.

Developing Infrastructure

Another major project is the construction of the East Siberia-Pacific oil pipeline. We have made a strategic decision to build this pipeline with a branch to China. It will transfer up to 80 million tons of oil a year, out of which up to 30 million tons will go to China. The pattern has been determined, and will now be followed by designing and commercial calculations. Discussion of the first stage of construction (Taishet-Skovorodino section) has moved onto a corporate, pragmatic level – potential forms of participation of different companies, and risk diversification. Under the plan, construction of the first stage will be completed by late 2008.

Expecting the pipeline to be filled from the reserves of West Siberian oil and gas bearing province at the first stage, we are planning to simultaneously step up the exploration and development of resources in East Siberia and the Far East. We understand that we have to create substantial incentives in order to attract investors to the development of “difficult to extract” deposits (which prevail in the region). Therefore, our Ministry has suggested tax breaks (for 5-7 years) for new deposits. We believe that zero severance tax in combination with a subsoil user’s priority right to develop the deposit it discovered, are the best way to encourage companies to engage in high-risk development of the resources of East Siberia, the Far East and of the shelves.

Construction of the pipeline and the appearance of subsoil users, which are prepared to invest their funds in the development of a reliable resource foundation are the two indispensable prerequisites for going over to the second stage of the Eastern Siberian-Pacific pipeline project. We favor a flexible system of design and construction, which implies that every step should lay the groundwork for the next one. We are not going to build a system, which will be idle, but are trying to exploit our previous developments.

The said projects will not be limited to the pipeline. No doubt, these are basically the infrastructure projects. Private business will not cope with them single-handed if only for this reason. The government will have to bear a considerable portion of risks, although we are trying to diversify them by cooperating with private business. But infrastructure is a prerequisite and a sine qua non for industrial progress. It gives the impetus to the development of deposits; processing plants and industrial centers are being set in its major nodules.

Development of gas and oil industry in East Siberia and the Far East implies not only the traditional use of hydrocarbons as fuel, but also the formation of a new industry for the manufacture of products with high added value (oil- and gas refining, oil and gas chemistry). We are actively discussing a project for building a new oil refinery at the end of the East Siberian-Pacific pipeline.

We hope that this infrastructure will help us enter the fuel and energy markets of Asia and the Pacific, and develop Siberia and the Far East. It is impossible to separate these two aspects, just as it is impossible to isolate energy policy from the industrial policies as a whole.

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