Russian Oil and Gas Challenges

The Congressional Research Service, a department of the Library of Congress, conducts research and analysis for Congress on a broad range of national and international policy issues. Some of the CRS work is carried out specifically for individual members of Congress or their staff and is confidential. However, there is also much CRS compiled material which is considered public but is not formally published on the CRS website.

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In some cases hyperlinks allows you to access all versions of a report, including the latest. Note that many reports are periodically updated.Russia is a major player in world energy markets. It has more proven naturalgas reserves than any other country, is among the top ten in proven oil reserves, is the largest exporter of natural gas, the second largest oil exporter, and the third largest energy consumer. Energy exports have been a major driver of Russia’s economic growth over the last five years, as Russian oil production has risen strongly and world oil prices have been very high. This type of growth has made the Russian economy dependent on oil and natural gas exports and vulnerable to fluctuations in oil prices.

The Russian government has moved to take control of the country’s energy supplies. It broke up the previously large energy company Yukos and acquired its main oil production subsidiary. The Duma voted to give Gazprom, the state-controlled natural gas monopoly the exclusive right to export natural gas; Russia moved to limit participation by foreign companies in oil and gas production and Gazprom gained majority control of the Sakhalin energy projects. Russia has agreed with Germany to supply Germany and, eventually, the UK by building a natural gas pipeline under the Baltic Sea, bypassing Ukraine and Poland. In late 2006 and early 2007, Russia cut off and/or threatened to cut off gas or oil supplies going to and/or through Ukraine, Moldova, Georgia, and Belarus in the context of price and/or transit negotiations — actions that damaged its reputation as a reliable energy supplier. Russia’s ability to maintain and expand its capacity to produce and to export energy faces difficulties. Russia’s oil and gas fields are aging. Modern western energy technology has not been fully implemented.

There is insufficient export capacity in the crude oil pipeline system controlled by Russia’s state-owned pipeline monopoly, Transneft. And, there is insufficient Investment capital for improving and expanding Russian oil and gas production and pipeline systems. A number of proposals would build new or expand existing Russian oil and natural gas export pipelines. Some are contentious, and while the Russian government is faced with a perceived need to expand its oil and gas export capacity, it also has limited resources. In mid-May 2007, Russia announced an agreement with Kazakhstan and Turkmenistan to build a natural gas pipeline feeding Central Asian natural gas into Russia’s network of pipelines to Europe.

Given that the United States, as well as Russia, is a major energy producer and user, Russian energy trends and policies affect U.S. energy markets and economic welfare in general. An increase in Russia’s energy production and its ability to export that energy could ease the supply situation in energy markets in the Atlantic and Pacific Basins. On the other hand, the Russian government’s moves to take control of the country’s energy supplies may reduce the amount of oil available. Possibly, U.S. suppliers of oil and gas field equipment and services could increase sales and investment in Russia. However, while the investment climate in Russia had been considered to be improving, it arguably is now worsening, as investors complain that it is inhospitable with respect to factors such as poor property rights protection, burdensome tax laws, inefficient government bureaucracy, and a tendency to limit foreign investor participation. This report, which will be updated as events warrant, was originally written by Bernard A. Gelb, CRS Specialist in Industry Economics, retired.

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