Russian Oil and Gas Challenges

Publication Date: February 2006

Publisher: Library of Congress. Congressional Research Service


Research Area: Energy


Coverage: Russia (Federation)


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. In Central Europe, Russian firms with close links to the Russian government have used leverage to buy energy companies to gain control over energy supply. In East Asia, Russia is contemplating a pipeline destination that would allow it to decide to whom its oil gets sold. Also, Russia briefly cut off gas supply to Ukraine because the latter did not agree to greatly increase what it pays for the gas. Russia restored supply after other European countries, which were affected, complained. Much of Russia's gas exports to Europe pass through Ukraine. The dispute was resolved temporarily through a compromise.

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. Moreover, Russia's cutting off gas supply to Ukraine and subsequent actions and events damaged its reputation as a reliable energy supplier.

A number of proposals would build new or expand existing Russian oil and natural gas export pipelines. Some are contentious, and although the Russian government is faced with a perceived need to expand its oil and gas export capacity, it also has limited resources. This report discusses several different major proposals.

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 westward and eastward may tend to 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 noted earlier may have the effect of making less oil available. 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 and investment in Russia. However, while they consider the climate to be improving, potential investors complain that the investment climate in Russia is inhospitable with respect to factors such as poor intellectual property rights protection, burdensome tax laws, and inefficient government bureaucracy. This report will be updated as events warrant.