Russian Oil and Gas Challenges
Prepared for Members and Committees of Congress
Russia is a major player in world energy markets. It has more proven natural gas 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.
Oil and Gas Reserves and Production.............................................................................................1
Exports........................................................................................................................ ..................... 3
Petrol eum .................................................................................................................................. 4
Major Proposed New or Expanded Pipelines................................................................................10
Implications for the United States.................................................................................................15
Figure 1. Russia...............................................................................................................................2
Figure 2. Druzhba and Adria Oil Pipelines...................................................................................10
Figure 3. Selected Northwestern Oil Pipelines...............................................................................11
Figure 4. Proposed Bosporus Bypass Options..............................................................................12
Figure 5. Proposed Far East Oil Pipelines.....................................................................................13
Figure 6. Natural Gas Pipelines to Europe....................................................................................14
Table 1. Oil and Natural Gas Reserves and Production...................................................................3
Author Contact Information..........................................................................................................16
he Russian Federation is a major player in world energy markets. It has more proven
natural gas reserves than any other country and is among the top ten countries in proven 1
oil reserves. It is the world’s largest exporter of natural gas, the second largest oil T
producer and exporter, and the third largest energy consumer. Given that the United States also is
a major energy producer and user, Russian energy trends and policies affect U.S. energy markets 2
and U.S. welfare in general.
Most of Russia’s 60-74 billion barrels of proven oil reserves (Table 1) are located in Western
Siberia, between the Ural Mountains and the Central Siberian Plateau. The ample endowment of
this region made the Soviet Union a major world oil producer in the 1980s, reaching production 3
of 12.5 million barrels per day (bbl/d) in 1988. However, roughly 25% of Russia’s oil reserves
and 6% of its gas reserves are on Sakhalin Island in the far eastern region of the country, just
north of Japan.
Russian oil production, which had begun to decline before the Soviet Union dissolved in 1991, 4
fell more steeply afterward—to less than six million bbl/d in 1997 and 1998. State-mandated
production surges had accelerated depletion of the large Western Siberian fields and the Soviet
central planning system collapsed. Russian oil output started to recover in 1999. Many analysts
attribute this to privatization of the industry, which clarified incentives and shifted activity to less
expensive production. Increases in world oil prices, application of technology that was standard
practice in the West, and rejuvenation of old oil fields helped boost output. After-effects of the
1998 financial crisis and subsequent devaluation of the ruble may well have contributed. Russian
crude oil production reached 9.0 million bbl/d in 2005 and rose slowly in 2006 to 9.2 million 5
1 Oil and Gas Journal, December 19, 2005. Estimates of proven oil and/or gas reserves by country can differ widely,
depending partly on what types of resources are included. Thus, Russia’s ranking of reserve holdings may differ among
organizations that compile such data.
2 For broader coverage of Russian political and economic issues, see CRS Report RL33407, Russian Political,
Economic, and Security Issues and U.S. Interests, by Stuart D. Goldman.
3 BP. BP Statistical Review of World Energy, June 1992. Data for Russia only are not available for 1988.
4 BP. BP Statistical Review of World Energy 1997, June 1997.
5 Energy Information Administration (EIA), Country Analysis Briefs, Russia, April 2007, http://www.eia.doe.gov/
emeu/cabs/Russia/Oil.html viewed January 8, 2007.
Figure 1. Russia
Source: Energy Information Administration. Russia Country Analysis Brief, February 2005 http://www.eia.doe.gov/
emeu/cabs/Region_ni.html, viewed December 3, 2005.
However, Russian crude oil production has been exceeding reserve growth, as “intensive deposit
exploitation” combined with old technology is leaving 65% of the oil in the ground, according to
the director of the Russian Natural Resources Ministry. Between 1994 and 2005, the increase in
Russian oil extraction was about eight billion barrels greater than the increase in reserves.
Reserves in Western Siberia, Russia’s prime oil producing region, shrank by almost 23 billion 6
barrels between 1993 and 2005.
With about 1,700 trillion cubic feet (tcf), Russia has the world’s largest natural gas reserves. In
production by its natural gas industry has increased very little in recent years, and are projected to 7
continue to increase slowly. Exports only have re-attained their level of the late 1990s.
Growth of Russia’s natural gas sector has been impaired by ageing fields, near monopolistic
domination over the industry by Gazprom (with substantial government holdings), state
regulation, and insufficient export pipelines. Gazprom, Russia’s 51%-owned state-run natural gas
monopoly, holds more than one-fourth of the world’s natural gas reserves, produces nearly 90%
of Russia’s natural gas, and operates the country’s natural gas pipeline network. The company’s
tax payments account for around 25% of Russian federal tax revenues. Gazprom is heavily
regulated, however. By law, it must supply the natural gas used to heat and power Russia’s
domestic market at government-regulated below-market prices.
6 “Russian Companies Face Crude Crunch,” FSU Oil & Gas Monitor, April 18, 2007, p. 12.
7 EIA, Country Analysis Briefs, Russia, April 2007 http://www.eia.doe.gov/emeu/cabs/Russia/Natural Gas.html, viewed
May 15, 2007.
Table 1. Oil and Natural Gas Reserves and Production
Proved Reserves (billion bbls of Productiona (mil. bbls/day of
oil/trillion cu. ft. of gas) oil/trillion cu. ft. of gas
BP (End of O & G Journal
Country or Region 2005) (1/1/07) BP (2005)
Russian Federation 74/1,688 60/1,680 9.6/21.1
United 29/193 22/204 6.8/18.9
North Seab n.a./n.a. 13/161 5.9c/n.a. Reference
Saudi 264/244 260/240 11.0/2.5 Areas
WORLD 1,200/6,348 1,317/6,183 80.0/97.5
Sources: BP Statistical Review of World Energy June 2006; Energy Information Administration, Country Analysis
Briefs, North Sea, “Oil,” August 2005 http://www.eia.doe.gov/emeu/cabs/North_Sea/Oil.html; Penwell Publishing
Company, Oil & Gas Journal, December 18, 2006.
a. Includes natural gas liquids.
b. Includes Denmark, Germany, Netherlands, Norway, and United Kingdom.
c. Energy Information Administration estimate.
Potential growth of both oil and natural gas production in Russia is limited by the lack of full
introduction of the most modern western oil and gas exploration, development, and production
technology. Also, oil companies, whose natural gas is largely flared, and independent gas
companies will play an important role by increasing their share of Russian total gas production
from 9 percent in 2005 to around 17 percent by 2010, according to the Energy Information 8
Administration. Their success, however, depends largely on gaining access to Gazprom’s
However, while the investment climate in Russia had been considered to be improving, arguably
there are reasons to posit that it is now worsening. As discussed later, a reported proposal to
tighten restrictions on the extent to which foreign companies can participate in Russian oil and
natural gas production would seem to discourage investment. An unsettled judicial system
provides limited and uncertain protection of property rights and rights of minority shareholders.
Also, investors complain that the climate is inhospitable with respect to factors such as
burdensome tax laws and inefficient government bureaucracy.
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 and gas prices have been relatively high.
This type of growth has made the Russian economy very dependent on oil and natural gas
exports, and vulnerable to fluctuations in world oil prices. Based upon an International Monetary
8 EIA, loc. cit.
Fund study, a $1 per barrel increase in the price of Urals blend crude oil for a year results in a $3 9
billion increase in Russia’s nominal Gross Domestic Product.
Almost three fourths of Russian crude oil production is exported; the rest is refined in the country,
with some refined products being exported. Of Russia’s 6.7 million bbl/d of crude oil exports in
2004, two-thirds went to Belarus, Ukraine, Germany, Poland, and other destinations in Central
and Eastern Europe. The remaining 2¼ million bbls/d went to maritime ports and was sold in
world markets. Recent high oil prices have enabled as much as 40% of Russia’s oil exports to be
shipped via railroad and river barge routes—more costly modes than pipelines. Most of Russia’s
exports of refined petroleum products to Europe are distillate oil used for heating and by trucks.
Russia’s capacity to export oil faces difficulties, however. One stems from the fact that crude oil
exports via pipeline are under the exclusive jurisdiction of Russia’s state-owned pipeline
monopoly, Transneft. Bottlenecks in the Transneft system prevent its export capacity from
meeting oil producers’ export ambitions. Only about four million bbl/d can be transported in
major trunk pipelines; the rest is shipped by rail and river routes. Most of what is transported via
alternative transport modes is refined petroleum. The rail and river routes could become less
economically viable if oil prices fall sufficiently. The Russian government and Transneft are
striving to improve the export infrastructure.
Unless significant investment flows into improving the Russian oil pipeline system, non-pipeline
transported exports probably will grow. For example, rail routes presently are the only way to
transport Russian crude oil to East Asia. Russia is exporting about 200,000 bbl/d via rail to the
northeast China cities of Harbin and Daqing and to central China via Mongolia. Since Yukos was
the leading Russian exporter of oil to China, there was concern that the breakup of Yukos by the
Russian government (see below under “Energy Policy”) might affect rail exports to China.
However, Lukoil now is the chief supplier of Russian oil to China.
U.S. markets could benefit from a proposed pipeline, which would carry crude oil from Russia’s
West Siberian Basin and Timan-Pechora basin westward to a deepwater tanker terminal at
Murmansk on the Barents Sea. This could allow for between 1.6 and 2.4 million bbl/d of Russian
oil exports to reach the United States via tankers within only nine days, much faster than shipping
from the Middle East or Africa. LNG facilities at Murmansk and Arkhangelsk (to the southeast)
also have been suggested, possibly allowing for gas exports to American markets.
Oil transportation in the Black Sea region is in flux. Much of Russia’s oil is shipped by tankers
from the Black Sea to the Mediterranean and to Asia, much of it from the port of Novorossiysk.
However, transit through the shallow and congested Bosporus Straits is limited by Turkey for 10
environmental and safety reasons, limiting the effective capacity of pipelines to Novorossiysk.
9 Antonio Spilimbergo, Measuring the Performance of Fiscal Policy in Russia, IMF Working Paper WP/05/241,
International Monetary Fund, December 2005, p. 7. CRS has applied the IMF sensitivity factor to Russia’s Gross
Domestic Product for 2005 at the official exchange rate, $740.7 billion, as given in The World Fact Book of the Central
Intelligence Agency https://www.cia.gov/cia/publications/factbook/geos/rs.html#Econ.
10 See, for example, Yigal Schleifer, “Russian oil ships stuck in Bosporus strait traffic jam,” Christian Science Monitor,
January 25, 2005. Limited depth, heavy traffic, and environmental considerations have resulted in restrictions by
Turkish authorities on travel through the Bosporus. The Baku to Ceyhan pipeline has an advantage in that Ceyhan, a
Turkish Mediterranean Sea port, can handle very large carriers, while the Novorossisk and Supsa (in Georgia) ports are
Oil shipped through the Baku-Tbilisi-Ceyhan (BTC) pipeline is from Azerbaijan and potentially 11
from Kazakhstan, posing competition to Russian oil. Azerbaijan oil production has risen steeply
in 2007 and, with ample BTC capacity, the Azerbaijan International Operating Company 12
consortium has stopped using the Baku-Novorossiysk pipeline.
Eastward, Russia faces competition for China’s oil market from Kazakhstan, which, with China,
completed in late 2005 the construction of a pipeline from Atasu in central Kazakhstan to 13
Alaskankou on China’s western border. Eventual capacity will be 190,000 bbl/d.
Several consortia have begun producing and exporting oil (mainly to East Asia at present) from
Sakhalin island (Figure 4). They also plan to export gas to the United States via pipelines to the
Siberian mainland and then from liquefied natural gas (LNG) terminals.
Historically, most of Russia’s natural gas exports went to Eastern Europe and to customers in
countries that were part of the Soviet Union. But, in the mid-1980s, Russia began trying to
diversify its export options. Gazprom has shifted some of its exports to meet the rising demand of
European Union countries, Turkey, Japan, and other Asian countries. For Gazprom to attain its
long-term goal of increasing its European sales, it will have to boost production as well as secure
more reliable export routes to the region.
Issues have arisen with the growth of Russia’s gas sales to Europe. EU trade representatives have
criticized Gazprom’s abuse of its dominant market position and two-tiered pricing system, which
charged higher prices on exports than on domestic sales. Russia agreed to grant domestic
independent natural gas producers access to Gazprom’s pipelines, and, in response to calls for fair
pricing, the Russian government doubled prices to Russian industrial consumers. But the new
price level still is less than half of the prices charged at the German and Ukrainian borders. To
correct this, the Russian government has decided increase domestic gas prices gradually over the 14
next few years with the aim of more than doubling them by 2011.
As a major supplier of natural gas to European countries, and the dominant supplier to some, 15
Russia has some ability to set prices. For example, as described later in this report, Gazprom has
threatened to cut off natural gas supplies to certain countries if they didn’t agree to pay higher
prices, and has actually done so. As the only seller of Russia’s gas, Gazprom is Russia’s largest
earner of hard currency.
restricted to smaller tankers that can transit the Bosporus straits. Ceyhan can remain open all year, whereas
Novorossiysk is closed up to two months.
11 Kazakhstan and Azerbaijan have agreed to allow Kazakh oil to flow through the BTC pipeline. See “Kazakhstan Inks
BTC Deal,” The Oil Daily, June 19, 2006, p. 7.
12 “AIOC: Oil Production Up, BTC Now Handling All Exports,” FSU Oil & Gas Monitor, April 25, 2007.
13 Martin Clark. “Beijing Triumphs with Inauguration of Kazakhstani Crude Pipe,” FSU Oil & Gas Monitor, December
14 Ed Reed, “Russian Gas Prices to Rise,”FSU Oil & Gas Monitor, December 6, 2006, p. 2.
15 For detailed data on the extent of Europe’s dependence on Russian natural gas, see CRS Report RS22562, Russian
Natural Gas: Regional Dependence, by Bernard A. Gelb.
Russia’s natural gas exports to Europe declined markedly in January 2006 as a result of severely
cold weather in Russia that greatly increased Russian gas consumption, and also reduced oil 16
exports somewhat. The cold conditions lasted through the month.
As with oil, Russia faces competition for Asian gas markets from Kazakhstan, which, with China, 17
is studying the feasibility of building a pipeline from the former to the latter. Given the
proximity of gas producers Turkmenistan and Uzbekistan to Kazakhstan, it is possible that their
gas also would go to China via that route.
The Russian government has moved to take control of the country’s energy resources, and to try
to use that control to exert influence elsewhere. It is arguable that the push for control was partly
the motivation behind the government’s prosecution of Mikhail Khodorkovski, CEO of Yukos,
who acquired state-owned assets during privatization and adopted open and “transparent”
business practices while transforming Yukos into a major global energy company. Yukos is being
broken up, with its principal assets being sold off to meet alleged tax debts. Yuganskneftegaz,
Yukos’ main oil production subsidiary, was sold at a state-run auction to the Baikal Finans Group
(previously unheard of), the sole bidder, for $9.4 billion, about half its market value according to
western industry specialists. That group soon after sold the unit to Rosneft, the state oil 19
company. Another government takeover followed when Gazprom bought 75% of Sibneft—20
Russia’s fifth largest oil company. Yukos’ creditors voted to liquidate the company on July 25, 21
2006; and the Moscow arbitration court confirmed the vote. Portions of Yukos have been sold
off piecemeal since then.
A possible change to a less aggressive policy was hinted at when President Putin announced on 22
January 31, 2006, that Russia will not seek control of more oil companies. However, the Duma 23
voted to give Gazprom the exclusive right to export natural gas, and, as described below, Russia
moved to limit participation by foreign companies in oil and gas production and Gazprom gained
majority control of the Sakhalin energy projects.
16 “Cold spell cuts Russian gas to Europe,” Financial Times, FT.com, January 18, 2006; “Cold weather cutting Russian
gas exports,” Oil & Gas Journal online, January 23, 2006.
17 “Kazakhstan, China Consider Gas Pipeline Construction,” FSU Oil & Gas Monitor, December 7, 2005.
18 Much of the material in this section is from CRS Report RL33407, Russian Political, Economic, and Security Issues
and U.S. Interests, by Stuart D. Goldman, and CRS Report RL32466, Rising Energy Competition and Energy Security
in Northeast Asia: Issues for U.S. Policy, by Emma Chanlett-Avery.
19 It subsequently was revealed that Baikal Finans was a group of Kremlin insiders headed by Igor Sechin, Deputy
Head of the Presidential Administration and close associate of President Putin. Sechin has been Chairman of Rosneft’s
board of directors since July 2004. The de-facto nationalization of Yuganskneftegaz was declared “the fraud of the
year” by Andrei Illarionov, President Putin’s chief economic advisor http://www.mosnews.com/money/2004//12/
20 “New takeover to make Russia’s giant Gazprom one of the world’s largest oil and gas companies,” Pravda, October
1, 2005 http://english.pravda.ru/russia/economics/01-10-2005/8997-gazprom-0, viewed February 6, 2006.
21 “Yukos: The Final Curtain,” FSU Oil & Gas Monitor, 26 July 2006, p. 5; Ben Aris. “Death of Yukos,” FSU Oil &
Gas Monitor, August 2, 2006, p. 4.
22 “Putin: Private Oil Companies to Remain Private,” FSU Oil & Gas Monitor, February 1, 2006.
23 Tobias Buck and Neil Buckley, “Russian Parliament vote Backs Gazprom Export Monopoly,” Financial Times, June
16, 2006, p. 8.
In Eastern Europe, Russian firms with close links to the Russian government have used leverage
to buy energy companies to gain control over energy supply. For example, Yukos obtained
majority control of a Lithuanian refinery (the only one in the Baltic states) by slowing oil supply
to it, and buying it at a reduced price. The Transneft pipeline monopoly diverted the flow of oil
shipments to Primorsk, a Russian port, stopping flow to the Latvian port of Ventspils. Some see 24
Transneft’s action as a move to obtain control of the firm that operates the Ventspils terminal.
Also, Transneft refused to finalize an agreement to transport Kazakhstani oil to Lithuania,
undermining Kazakhstan’s KazMunaiGaz’s attempt to buy the refinery. After several 25
developments, an agreement was reached for Yukos to sell the refinery to a Polish firm.
Another example of Russia’s efforts to maintain or increase control over energy supplies is the
routing of new and planned export pipelines. For example, Russia has agreed with Germany, with
the support of the United Kingdom (UK), to supply Germany and, eventually, the UK directly by
building a natural gas pipeline under the Baltic Sea, thus bypassing Ukraine and Poland. In late
January 2006, Gazprom was negotiating with Uzbekistan to obtain control of three of that 26
country’s gas fields. Russia also is hoping to participate in the venture that is constructing a gas 27
pipeline between Turkey and Greece.
Several actions in recent years by Russia or its economic agents have been characterized by some
as perhaps overaggressive. In 2005, Gazprom wanted to raise Ukraine’s price, originally a
fraction of the world market price in return for its transmission of the gas to the market level. (A
large share of Russia’s natural gas exports to Western Europe pass through Ukraine and Belarus,
which withdraw a certain amount of gas from the pipelines for its own use.) When negotiations
failed, Gazprom reduced gas pressure and flow through the Ukrainian network on January 1,
2006. Ukraine compensated by using some gas intended for West Europe. Gazprom restored
supply very shortly after, when those countries complained and pointed out that Russia was 28
risking its reputation as a reliable energy supplier. The dispute was resolved temporarily on
January 4, 2006. Gazprom would sell gas at its asking price to a trading company that would mix
Russian gas with less expensive gas from Central Asia and sell the mixture to Ukraine at the
higher price that Ukraine had indicated it was willing to pay, but much lower than Gazprom’s
price. Gazprom would pay cash instead of gas in kind to Ukraine’s pipeline business for increased 29
transit fees. One report stated that Gazprom wanted to gain at least some ownership of 30, 31
Ukraine’s pipeline system.
24 Ariel Cohen, “Don’t Punish Latvia,” Washington Times, May 5, 2003.
25 “Poland’s PKN Buys Lithuania Refinery for $2.6 Billion,” Reuters, May 26, 2006.
26 Vladimir Kovalev. “Gazprom Secures Uzbekistan Gas through Politics and Pipelines,” FSU Oil & Gas Monitor,
January 23, 2006.
27 Kerin Hope. “Russia to discuss Gazprom role in Aegean pipeline,” FT.com, February 5, 2006 http://search.ft.com/
search/quickSearch_Run.html, viewed February 6, 2006.
28 “Russia Turns up the Gas,” Guardian Weekly, December 23, 2005-January 5, 2006, p. 41; Peter Finn. “Russia
Reverses Itself on Gas Cuts,” The Washington Post, January 3, 2006, p. A12; Andrew E. Kramer. “Russia Restores
Most of Gas Cut to Ukraine Line,” The New York Times, January 3, 2006. http://www.nytimes.com/2006/01/03/
international/europe/03ukraine.html?pagewanted=print, viewed January 3, 2006.
29 Graeme Smith. “Russia, Ukraine settle gas dispute,” GlobeandMail.com, January 5, 2006
http://www.theglobeandmail.com/international, type “Russia” in search box, viewed January 5, 2006; Peter Finn.
“Russia and Ukraine Reach Deal on Gas, Ending Dispute,” The Washington Post, January 5, 2006, p. A12; Mark
Smedley and Mitchell Ritchie. “Russia, Ukraine Settle Gas Pricing Dispute,” Oil Daily, January 5, 2006, p. 1.
30 Oil Daily, January 5, 2006.
31 For fuller discussion and analysis of the Russia-Ukraine gas dispute, see CRS Report RS22378, Russia’s Cutoff of
Later in January 2006, through no fault of Russia, the apparent reliability of its natural gas
supplies suffered further when severely cold weather raised Russian gas for gas and cut exports
below contracted volumes. After a few temporary Russia-Ukraine gas price agreements, a deal
was reached in October 2006 in which Ukraine pays a moderate price for gas in return for 32
political and other favors.
In other actions, Russia cut off gas to Moldova in an early January 2006 price dispute. The
countries reached an interim agreement after Moldova had been without Russian gas for two 33
weeks. In late 2006, Gazprom appeared to be preparing to cut off gas supplies to Belarus and
Georgia unless they agreed to pay much higher prices in 2007. Reportedly, Georgia soon 34
“agreed” to a doubling of Gazprom’s prices. Belarus and Gazprom signed a five-year contract
on January 1, 2007, providing that Belarus will pay increasingly more for gas (starting at more 35
than twice the old price) and Gazprom will purchase 50% of Belarus’ gas pipeline network. The
next week, Russia shut off the flow of crude oil to and through Belarus following its
announcement of an oil export tax and Belarus’ (a) imposition of a customs duty on oil transiting
Belarus to other export markets, and (b) taking some of the oil flow as payment of the customs 36
duty. Destination countries had adequate inventory to cope in the short run, but criticized the 37
failure to warn that a shut-off was possible. Oil began flowing again late on January 10, 2007, 38
after Belarus’ lifting of the transit duty helped the countries reach a tentative agreement.
The Moldova, Georgia, and Belarus incidents have heightened concern about Russia’s reliability
and encouraged investigations of non-Russian energy sources by several former Soviet Union as
well as West European countries to explore non-Russian sources of energy.
Russia initially opposed western investment in Caspian Sea energy projects, insisted that oil from
the region be transported through Russian territory to Black Sea ports, and argued for equal
sharing of Caspian Sea oil and gas. This attitude partly reflected the extensive energy ties
between Russia and Central Asian countries stemming from the numerous transportation routes
from that area through Russia. But Russia has become more agreeable, and even cooperative
with, western projects; and it has signed an agreement with Azerbaijan and Kazakhstan on
Caspian seabed borders essentially based upon shore mileage.
Natural Gas to Ukraine: Context and Implications, by Jim Nichol, Steven Woehrel, and Bernard A. Gelb.
32 “Ukraine Secures Gas Supplies for Questionable Political Price,” FSU Oil & Gas Monitor, November 1, 2006, p. 7.
Gas Monitor, 5 July 2006.
33 Neil Buckley and Sarah Laitner. “Moldova reaches gas deal with Gazprom,” FT.com, January 17, 2006
http://search.ft.com/search/quickSearch_Run.html, viewed February 6, 2006.
34 Information Division, OAO Gazprom, “Gazprom Seals Contracts to Supply Gas to Georgia in 2007” (press release),
December 22, 2006; “Georgia ‘agrees (to) Russia gas bill,’” BBC News, December 22, 2006, at
http://newsvote.bbc.co.uk/mpapps/pagetools/print/news.bbc.co.uk/2/hi/business/6203721.stm, viewed January 11,
35 Alan Cullison, “Belarus Yields to Russia,” The Wall Street Journal, January 2, 2007, p. A4; “Belarus, Russian Firm
Sign 5-Year Deal for Gas,” The Washington Post, January 2, 2007, p. A10.
36 “Russian Oil Disruption Rattles European Commission, Germany,” Oil Daily, January 9, 2007, p. 2; Guy Chazen,
Gregory L White, and Marc Champion, “Russian Oil Cutoff Rouses Europe’s Doubt,” The Wall Street Journal, January
9, 2007, p. A3.
37 Gregory L. White and Guy Chazan, “Oil Spat deepens Worry Over Russia’s Reliability,”
38 “Russia, Belarus End Druzhba Spat,” Oil Daily, January 11, 2007, p. 1; Peter Finn, “Russia-belarus Standoff Over
Oil Ends, Clearing Way for Accord,” The Washington Post, January 11, 2007.
In East Asia, China, Japan, and South Korea, are trying to gain access to the largely undeveloped
energy resources of eastern Siberia, as those countries strive to meet their increasing energy needs
while reducing dependence on the Middle East. China and Japan appear to be engaged in a
bidding war over Russian projects and are contesting access to Russian rival oil pipeline routes.
Many observers believe that Russia tried to use potential participation by American firms in
development of the large Shtokmanovskoye gas field as leverage in the negotiations to gain entry 39
into the World Trade Organization (WTO). Ultimately, Russia decided to rule out foreign equity
participation in developing Shtokmanovskoye, but will allow foreign company involvement as 40, 41
contractors and owners of the operating company. Another recent development, the July 2006
initial public offering (IPO) in which 13-14% of state-owned oil company Rosneft was sold, has
been seen by some as an attempt by Russia to attract investments by major oil companies.
Presumably, the latter hope that investing in the Rosneft IPO would gain them easier access to 42, 43
participation in Russian oil and gas projects.
Another instance of Russian moves to gain control of its energy resources is Gazprom’s takeover
of majority interest in the Sakhalin Energy Investment Company (SEIC) on December 21, 2006, 44
from Royal Dutch Shell. SEIC will remain the operator of the Sakhalin II project. The current
SEIC partners will each dilute their stakes by 50% Shell will retain a 27.5% stake, with Mitsui
and Mitsubishi holding 12.5% and 10% stakes, respectively. In another Sakhalin development,
the Russian government effectively rewrote the production sharing agreement for Sakhalin-II,
providing for a large annual dividend to Russia before the project’s shareholders had recovered 45
their capital expenditures as stipulated in the original agreement.
Given foreign companies’ technological capabilities and Russia’s need for the most modern oil
and gas extraction technology, a reported proposal to tighten restrictions on the extent to which
foreign oil companies can participate in Russian oil and natural gas production and other ventures
is potentially significant and perhaps a move against Russia’s own interests. Foreign companies
or companies with 50% foreign participation would not be allowed to develop fields with more 46
than 513 million barrels of oil and 1.77 billion cubic feet of natural gas.
39 Ed Reed, Shtokmnanovskoye: the Wait Continues,” NewsBase CIS Oil & Gas Special Report, July 2006; “G8
Adopts Energy Plan; Shtokman Slipping Away from U.S. Firms?” Oil Daily, July 18, 2006; “Russian State
Interference” and “Test Drilling on Shtokmanovskoye Begins,” FSU Oil & Gas Monitor, 26 July 2006.
40 “Shtokmanovskoye: Door Opens,” FSU Oil & Gas Monitor, December 13, 2006, p. 8.
41 “Gazprom Rethinks Shtokmanovskoye Involvement,” FSU Oil & Gas Monitor, April 11, 2007, p. 6.
42 Steven Mufson, “Russian Oil Firm IPO Ends Early,” The Washington Post, July 13, 2006, p. D5; Gregory L. White
and Alistair MacDonald, “Demand Allows Rosneft to Price IPO at High End,” The Wall Street Journal, July 14, 2006,
43 Selling was stopped when 13-14% of the stock had been sold, yielding about $10.4 billion. Joanna Chung and
Arkady Ostrovsky, “Rosneft IPO fails to attract big players,” Financial Times, July 15-16, 2006, p. 9.
44 Sakhalin Energy, “Gazprom, Shell, Mitsui, Mitsubishi Sign Sakhalin II Protocol,” at
http://www.sakhalinenergy.com/en/ viewed January 11, 2007; Ed Reed, “Sakhalin Smash and Grab,” FSU Oil & Gas
Monitor, January 10, 2007, p. 2.
45 “Moscow to Receive Sakhalin Dividends Ahead of Schedule,” FSU Oil & Gas Monitor, May 2, 2007, p. 11.
46 Arkady Ostrofsky, “Russia may tighten foreign oil groups’ access to reserves,” Financial Times, June 14, 2006, p. 8.
Because Russia’s export facilities have limitations of location and size, there are a number of
proposals to build new or to expand existing Russian oil and natural gas export pipelines and
related facilities. Some proposals are contentious and, while the Russian government perceives a
need to expand its oil and gas export capacity, it has limited resources. Several selected proposals
are discussed below.
With a 1.2-1.4 million bbl/d capacity, the 2,500-mile Druzhba line is the largest of Russia’s oil
pipelines to Europe. It begins in southern Russia, near Kazakhstan, where it collects oil from the
Urals and the Caspian Sea. In Belarus, it forks at Mozyr, from which one branch runs through
Belarus, Poland, and Germany; and the other through Belarus, Ukraine, Slovakia, the Czech
Republic, and Hungary (Figure 2). Work has begun to increase capacity between Belarus and
Poland. An extension to Wilhelmshaven (Germany) would reduce Baltic Sea tanker traffic and
allow Russia to export oil to the United States via Germany.
Figure 2. Druzhba and Adria Oil Pipelines
Source: Energy Information Administration. Russia Country Analysis Brief.
The Baltic Pipeline System (BPS) carries crude oil from Russia’s West Siberian and Tyumen-
Pechora oil provinces westward to the newly completed port of Primorsk on the Russian Gulf of
Finland (Figure 3). Throughput capacity at Primorsk has been raised to around one million bbl/d,
and, pending government approval, will be expanded to 1.2 million bbl/d. The BPS gives Russia
a direct outlet to northern European markets, reducing dependence on routes through the Baltic
countries. The re-routing of Russian crude through the BPS has incurred considerable cost to
those countries. Russian authorities have stated that precedence will be given to sea ports in
which Russia has a stake over foreign ones. But the waterways through which tankers leaving
from Primorsk and most other Russian export ports must transit limit tanker size, and therefore
the price competitiveness of their cargoes.
47 Much of the discussion of Russian oil and gas pipelines is taken from the Russia Country Analysis Brief of February
2005 and April 2007, prepared by the Energy Information Administration.
Figure 3. Selected Northwestern Oil Pipelines
Source: Energy Information Administration. Russia Country Analysis Brief.
Proposed lines would carry oil from Russia’s West Siberian and Tyumen-Pechora basins west and
north to a deepwater terminal at Murmansk or Indiga on the Barents Sea (Figure 3). This would
enable 1.6-2.4 million bbl/d of Russian oil to reach the United States via tankers in only nine
days, much quicker than from the Middle East or Africa. Liquefied natural gas facilities at
Murmansk and Arkhangelsk also have been suggested, possibly allowing for gas exports to
American markets. The Indiga route would be closer to the Tyumen-Pechora oil fields and
shorter; also Transneft’s CEO has said that the Murmansk project is not economically feasible.
However, in contrast with Murmansk, the port of Indiga ices over during the winter, a
disadvantage that may be reduced or eliminated if Arctic ice melting continues.
The Adria oil pipeline runs between Croatia’s Adriatic Sea port of Omisalj and Hungary (Figure
2). Originally designed to load Middle Eastern oil at Omisalj and pipe it northward to Yugoslavia
and then to Hungary, the pipeline’s operators and transit states have been considering reversing
the flow—a relatively simple step—giving Russia a new export outlet on the Adriatic Sea.
Connecting the pipeline to Russia’s Southern Druzhba system requires the agreement of Russia,
Belarus, Ukraine, Slovakia, Hungary, and Croatia. These countries signed a preliminary
agreement on the project in December 2002; however, negotiations over the details (including
tariffs and environmental issues) have been slow. Some analysts expect that the Adria pipeline
could transport about 100,000 bbl/d of Russian crude oil in the first year of reversal, with an
ultimate capacity of about 300,000 bbl/d.
A trans-Balkan Oil Pipeline is being developed as an alternative to bringing oil originating in
Southern Russia and the Caspian region to market through the Bosporus. Passage of oil cargoes
through the Turkish Straits could be disrupted due to weather or tanker and other cargo
congestion. The trans-Balkan pipeline would have a capacity of 750,000 bbl/d. The pipeline
would be supplied by oil delivered to the Black Sea through existing pipelines. The oil would
then be shipped across the Black Sea by tanker from the Russian ports of Novorossiysk and
Tuapse, or the Georgian ports of Supsa and Batumi, to the port of Bourgas in Bulgaria; see
Figure 4. The oil would then enter the proposed 570-mile pipeline across Bulgaria, Macedonia,
and Albania, and terminate at the port of Vlore on the Adriatic Sea, where it could be loaded on
tankers for transit to the European and U.S. markets. The governments of all three Balkan nations
involved in the proposed pipeline have approved the project, and AMBO LLC, the project
developer and coordinator, is seeking financing for the project. Construction could begin in 2008, 48
and the pipeline may become operational by 2011.
Figure 4. Proposed Bosporus Bypass Options
Source: Energy Information Administration, Russia Country Analysis Brief.
The prospective large Chinese market for oil has led to serious consideration of building a
pipeline from the Russian city of Taishet (northwest of Angarsk) to Nakhodka (near the Sea of
Japan) or to Daqing, China (see Figure 5). Both routes pass close to Lake Baikal—a site with
environment-related obstacles. The Nakhodka route, which is longer, would provide a new
Pacific port from which Russian oil could be shipped by tanker to Japan and other Asian markets
and possibly to North America. Japan has offered $5 billion to finance construction and $2 billion 49
for oil field development. The Daqing option is favored by China, although China could obtain
48 Bulgaria Ratifies Trans-Balkan Pipeline, Boston.com World News, May 31, 2007, available at
49 Mark Katz. “Don’t dismiss China’s Daqing oil pipeline,” Asia Times Online, October 1, 2004.
exports via the Nakhodka route. China has pledged to invest US$12 billion in Russia’s 50
infrastructure and energy sector by 2020. From Russia’s point of view, the Nakhoda route would
offer access to multiple markets, whereas a terminus at Daqing would give China control.
However, Russia’s environmental safety supervisory body rejected the shorter route because it 51
would pass too close to Lake Baikal, a United Nations world heritage site.
Figure 5. Proposed Far East Oil Pipelines
Source: Energy Information Administration, Russia Country Analysis Brief.
The 750-mile Blue Stream natural gas pipeline, which has a design capacity of 565 billion cubic
feet annually, connects the Russian system to Turkey. Natural gas began flowing through the
pipeline, 246 miles of which is underneath the Black Sea, in December 2002. There are
discussions In March 2003, Turkey halted deliveries, invoking a contract clause allowing either
party to stop deliveries for six months. Turkish leaders reportedly were unhappy with the price 52
structure. Other possible factors include Turkey’s commitment to receive more gas than its near
term domestic consumption and agreements to transship gas to other countries. An agreement was
reached in November 2003 and the flow resumed in December 2003.
The Yamal-Europe I pipeline (unidentified northern route in Russia in Figure 6) carries 1 tcf of
gas from Russia to Poland and Germany via Belarus. One proposal would expand it by another
tcf per year with the addition of a second branch—Yamal-Europe II. However, Poland wants a
route entirely through its own country and then to Germany (Yamal-Europe on the map), while
Gazprom is seeking a route via southeastern Poland and Slovakia (Yamal II).
50 Sergei Blagov, “China’s Russian pipe dream,” Asia Times OnLine, September 28, 2004.
51 Eric Watkins. “Russia nixes East Siberia pipeline route,” Oil & Gas Journal Daily Update, February 6, 2006
http://ogj.pennet.com/articles/article_display.cfm?article_id=247386, viewed February 7, 2006.
52 Mevlut Katik. “Blue Stream’s Pipeline’s Future in Doubt Amid Russian Turkish Pricing Dispute,” Business &
Economics, June 2, 2003. Eurasianet.org http://www.eurasianet.org/departments/business/articles/
eav060203a_pr.shtml, viewed December 18, 2005.
Figure 6. Natural Gas Pipelines to Europe
Source: Energy Information Administration, Russia Country Analysis Brief.
A North Trans-Gas pipeline, or North European Gas Pipeline (NEGP), extending over 2,000
miles from Russia through the Gulf of Finland to Denmark and, ultimately, to the United
Kingdom, via the Baltic and North Seas was proposed in June 2003 by Russia and the United 53
Kingdom. Gazprom and Germany’s BASF and E.ON agreed on September 8, 2005, to set up a
joint venture to build the pipeline. Originating in the St. Petersburg region, about 700 miles of the
pipeline is to pass under the Baltic Sea. The first leg of the pipeline, which is under construction, 54
is scheduled to come on stream in 2010. Russia sees a gain by no longer having to negotiate
transit fees with intermediary countries or pay them in natural gas. The pipeline agreement is
criticized by some Europeans who object to the fact that it was reached without consultation with
them, and see the pipeline as an unfair bypass with political motivation and environmental risk.
Perhaps to supplement or substitute for the NEGP, Gazprom is planning to build an LNG plant in
the St. Petersburg area.
53 Mark A. Smith. The Russian, German, and Polish Triangle, Russian Series 05/61, Conflict Studies Research Centre,
October 2005, p. 2.
54 Ria Novosti. “Factbox: North European Gas Pipeline,” December 9, 2005 http://en.rian.ru/russia/20051209/
42408722.html, viewed December 28, 2005. BASF is mainly a chemical manufacturer, but has a subsidiary that
explores for and produces oil and natural gas. E.ON is an electric power generator and distributor and a distributor of
In a move that threatens to send substantial quantities of Central Asian natural gas through Russia
to European markets, Russia announced in mid-May 2007 an agreement with Kazakhstan and
Turkmenistan to build a pipeline feeding Central Asian natural gas into Russia’s network of
pipelines to Europe. The pipeline is to send mainly Turkmenistan gas in a route along the Caspian 55
Sea coast through Kazakhstan into Russia.
Rusia Petroleum—a consortium of TNK-BP, South Korea’s state-owned Korea Gas Corporation,
and the Chinese National Petroleum Company—has announced plans to construct a pipeline
connecting Russia’s Kovykta natural gas field (2 trillion cubic meters of gas reserves) to China’s 56
northeastern provinces and across the Yellow Sea to South Korea. The plan calls for a pipeline
that ultimately would have a capacity of 40 billion cubic meters per year, delivering roughly half 57
of its natural gas to China and the rest to South Korea and the domestic market en route.
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 U.S. economic welfare in general in a
Other things being equal, should Russia considerably increase its energy production and its ability
to export that energy both westward and eastward, it may tend to ease the supply situation in
energy markets in both the Atlantic and Pacific Basins. In the Atlantic arena, more Russian oil
could be available to the United States. In the Pacific area, there would tend to be more supply
available to countries trying to assure themselves energy supplies, such as China and Japan. This
may ease the global competition for Persian Gulf oil.
On the other hand, the Russian government’s moves to take control of the country’s energy
supplies noted earlier may have the effect of making less oil available on the world market. This
could occur if Russia’s tendency to limit foreign company involvement in oil and gas
development limits the introduction of the most modern technology, or if Russia intentionally
limits energy development and production.
Possibly as important as Russian oil and gas industry developments is the associated potential for
U.S. suppliers of oil and gas field equipment and services to increase their sales in Russia. As
noted above, potential growth of both oil and natural gas production in Russia is limited by the
lack of full introduction of the most modern western oil and gas exploration, development, and
production technology. Although U.S.-Russian economic relations have expanded since the
collapse of the Soviet Union, as successive Russian leaders have been dismantling the central
economic planning system, including the liberalization of foreign trade and investment, the flow
of trade and investment remains very low. U.S. suppliers of oil and gas field equipment had
established a modest beachhead in Russia. However, whereas U.S. exports of oil and gas field
55 “Caspian Pipeline Deal Increases Russia’s Clout,” The Wall Street Journal, May 14, 2007, p. A6.
56 TNK-BP. “Kovykta Project,” http://www.tnk-bp.com/operations/exploration-production/projects/kovykta, viewed
December 28, 2005.
57 Selig S. Harrison. “Gas and Geopolitics in Northeast Asia,” World Policy Journal, Winter 2002/2003, pp. 22-36.
58 For more discussion and analysis of U.S.-Russian economic relations, see CRS Report RS21123, Permanent Normal
Trade Relations (PNTR) Status for Russia and U.S.-Russian Economic Ties, by William H. Cooper.
machinery and equipment accounted for 14% of U.S. all goods exports to Russia in 2002, they
accounted for only 7% in the first 11 months of 2006.
Similar to U.S. trade with Russia, U.S. investments there, especially direct investments, have
increased since the dissolution of the Soviet Union, but the levels are far below their expected
potential. Even so, as of September 30, 2006, the United States was Russia’s third largest source
of foreign direct investment, with investments largely concentrated in the transportation, energy, 59
communications, and engineering sectors.
In this context, however, Russian economic policies and regulations have been a source of
concerns. The United States and the U.S. business community have asserted that structural
problems and inefficient government regulations and policies have been a major cause of the low
levels of trade and investment with the United States. While they consider the climate to be
improving, potential investors complain that the climate for investment in Russia remains
inhospitable. They point to lack of effective intellectual property rights protection, burdensome
tax laws, jurisdictional conflicts among Russian federal, regional and local governments,
inefficient and corrupt government bureaucracy, and the lack of a market-friendly commercial
code as impediments to trade and foreign investments. And, more specifically, the forced breakup
of Yukos has clouded prospects for private investment.
In addition, Russian energy trends and policies have possible implications for U.S. energy
security. In its oversight role, Congress may have an interest in Russia’s large role as a supplier to
world energy markets in general, in Russia’s role as a possible major exporter of energy to the
United States, and in the changed patterns of world energy flows that could result from the
completion of new Russian oil and natural gas export pipelines and related facilities or the
expansion of existing export pipelines and related facilities.
Specialist in Energy Economics
59 CRS Report RS21123, Permanent Normal Trade Relations (PNTR) Status for Russia and U.S.-Russian Economic
Ties, by William H. Cooper.