Saturday, September 11, 2010

Pessimism in Russian Energy Industry

Sixty one percent of participants in a session of the St. Petersburg International Economic Forum predicted Russian economic stagnation in the next 2-5 years. In another session, 55% predicted stagnation in the next ten years. ("Russia's Resource Curse," Oil & Gas Eurasia, No. 7, July-August 2010.) The Russian economy is highly dependent on the sale of oil and natural gas, and recent events in the energy sector would appear to support this pessimism.

According to, production of natural gas in the first half of 2010 was 19% higher than the first half of 2009, but most of the production was consumed domestically. While exports increased 27% over the previous year, most of the exports went to countries of the former Soviet Union instead of to the hard currency markets of the European Union. The increase in sales to the EU was only about 4%, not an ambitious feat since sales in 2009 had dropped 11.5% from the year before. The 2010 increases may also be transient, as reports that sales to the EU in June dropped over 40% (Oil and Gas Eurasia, 27 August 2010).

Gas volumes only tell half the story: the natural gas being sold is being discounted. European gas purchasers demanded price reductions in 2009, and Gazprom gave at least five clients discounts amounting to $2 billion annually. Now, one of Gazprom's biggest customers, the German company E.On, is demanding further reductions. This Spring, E-On convinced Gazprom to allow it to buy at least some of its contracted gas purchases at the lower spot price until 2012. E-On has asked for a further price reduction, claiming it will be in the red by October unless suppliers reduce their price (The St. Petersburg Times, 24 August 2010).

Problems are not limited to natural gas. According to LUKOIL Vice President Leonid Fedu, Russian crude production will begin to fall in 2015-2016. (Oil & Gas Eurasia, 8September 2009).

It is difficult to interpret what a long-term reduction in energy revenues would mean to the Russian state. On the one hand, a reduction in economic rents could force the government to become more dependent on the good will of the people. Under this theory, reduced rents leads to increased responsiveness to the people, and eventually to democracy. On the other hand, a reduction in economic rents could lead to a reduction in services to the people, creating social unrest, and a strengthening of totalitarian tendencies.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at