Will energy ties between Russia and US be expanded?

by Yuri Filippov

Prospects for energy co-operation are still high on the economic agenda of a Russo-US dialogue. The USA has started looking for an alternative to Middle Eastern suppliers of energy resources. When explaining the need to draw up a new energy strategy, President Bush said that America imported a lot of energy, but many of the exporting countries had no great love for the States.
The USA, the world's largest consumer of energy resources, may well find a reliable and benevolent supplier of oil and gas in the form of Russia. Russian experts put the country's oil reserves at a maximum of 62-63 bn tons, or 13 % of world reserves.
Russia daily supplies 5 mm barrels of crude oil and petroleum products to the global market, a little less than the world's leading exporter, Saudi Arabia. Over the past two years, oil production in Russia has grown by more than 1 mm bpd and is approaching 8 mm barrels. Russian Energy Minister Igor Yusufov believes the country's output will reach 10-11mm bpd within the next 10-15 years.

Russia has the world's biggest reserves of natural gas: 32 % of the world's prospected reserves of this environmentally friendly fuel and valuable organic raw material can be found within the country. It is therefore no surprise that the Americans' desire to lessen their dependence on the Middle East's energy exporters is inspiring great hope in Russian politicians and energy sector executives.
The former are attracted by the possibility of bolstering the basis for the "anti-terrorist" partnership with the USA with a solid economic foundation. For the latter, an outlet to the rich US market promises extra profits and gives them a good chance to make their business truly international, raising it to the world level.
Apart from that, they stand to gain, just like millions of ordinary Russians, from the increased geographical scope of Russia's energy exports, as this would lead to greater prosperity and the country strengthening its position in the global economy.

In spring 2002, when Russia's Yukos oil company was preparing the first Russian tanker for a voyage to the East Coast of the USA, Russian oil on the US markets made up 1 % of total US oil imports. By the end of the year, the figure had reached 1.3 % and is expected to exceed 4 % in 2003.
Russian President Vladimir Putin has stated that this is still not enough, and has urged the government to use Russia's raw material advantages in the international division of labour. In directing the government to stimulate science-intensive industries, he has advised them "to feel free" to make the most of the economy's raw material and energy potential.

Putin cites France as an example. It is one of the most industrialised countries, which, at the same time, remains a major agricultural producer, that is, it falls into the category of "agrarian countries". The Russian leadership does not consider the country's raw material export orientation to be something archaic, holding the nation back. On the contrary, thisis a factor that must be taken into account when building the future of Russia.
By 2010, "the five sisters" of Russian oil production -- Yukos, Sibneft, LUKoil, Tyumenskaya Neftyanaya Kompaniya (Tyumen Oil Company) and Surgutneftegaz -- intend to meet 13 % of the USA's requirements for oil. In current prices, this will be worth $ 10 bn annually.

In setting their sights on the US market, Russian oilmen are proposing to build a new pipeline from the northern and yet untapped oil and gas fields of Russia to Murmansk, Russia's largest ice-free Arctic port. This is far closer to the East Coast of the USA and Canada than the Persian Gulf. LUKoil analysts cite exact figures: 5,800 miles as against 12,800 miles. The cost of transporting one barrel of Russian oil would be approximately $ 3.5.
However, one should not hope that the ambitious project can be implemented overnight. Although a feasibility study has not been conducted yet, it is obvious that this project will be expensive and labour-consuming, while the development of deposits and the construction of the pipeline will take several years. In optimistic estimates, the project will be implemented in 2007-2008. Prospects for the construction of the Murmansk oil refinery depend also on the willingness of the USA's East Coast oil enterprises to accept Russian oil, as it differs in chemical composition from the raw material with which they work today.

The Russian-US energy summit which closed in St Petersburg the other day showed that there perhaps is no point in being obsessed with the idea of pumping northern oil and building the Murmansk oil pipeline. The Americans, who are experiencing a shortage of LNG, are interested in the possibility of producing this type of fuel in Russia and subsequently transporting it to the USA. ExxonMobil is prepared to build a plant to produce LNG here. This can be done both in Murmansk and Sakhalin, a Russian island off the Pacific coast.
The problem is that the Russian side has not yet calculated the commercial gains to be made from gas co-operation with the Americans. Russian energy exporters have been traditionally orientated towards oil and natural gas, which are supplied in large amounts to the EU countries. They have had virtually no experience with liquefied gas.

When commenting on the ExxonMobil proposal, Gherman Gref, Russia's economic development and trade minister, only said that "the Murmansk direction may be very promising from the viewpoint of liquefied gas exports".
However, he also believes that the Sakhalin project may also be a highly promising venture.