Oil of Russia

Foreword

In the early 21st century, mankind has encountered serious global problems that pose considerable complications for the further development of civilization. Who can forget the major climate changes that produced heavy snowfalls in various European countries this past winter and brought snow even to New Zealand in October 2009? Over the past 30 years, the world’s average temperature has risen 1.1°F. Meanwhile, a more arid climate has already shortened the growing season in the Sahel region of sub-Saharan Africa, fueling ongoing armed conflicts in a region already suffering from a shortage of water and foodstuffs. And in Central America, stronger hurricanes threaten to seriously undermine the economy of developing countries and destabilize the political system, thereby encouraging a new flow of migrants.

Here we should also include the visible consequences of biosphere degradation: in the last two centuries, the world has lost two-thirds of its forests, two-thirds of its arable land, and seen its ocean, sea, and river bioresources seriously depleted. The Earth’s biodiversity is threatened— 110 vertebrate species have already completely disappeared. Mankind is beginning to experience a shortage of drinking water and nearly 1.2 billion of the Earth’s population now suffer from a shortage of water resources, while 2.6 billion have no access to elementary sewage systems.

These alarming trends are precisely why the Millennium Declaration, adopted by the UN in 2000 and approved by all its members, identified the assurance of sustainable environmental development and the formation of a global development partnership as its principal goals.

At present, the ever-faster globalization of the world economy due to objective factors in the development of modern civilization requires further and further extension of the international division of labor and economic specialization at the national level, acceleration of scientific and technical progress, computerization, enhancement of the roles of financing and services in all commercial fields (especially in transportation and communications), and reduction in the economic distance between countries to bring them closer together and unite them. Literally before the eyes of a single generation, enormous new regions in the former stagnant periphery and areas of human activity have been introduced into the world economy. The Internet and mobile telephone communications have destroyed the mental boundaries between countries, bringing hundreds of millions of people of various nationalities and faiths together to share common human values and scientific advances. It is this very rapprochement and unification of countries and ethnic groups that reveals globalization’s most important economic essence: globalization as a worldwide process of growing economic interdependence among all the world’s countries, with a tendency toward a gradual transition toward the development of those countries based on a higher principle, that of economic complementarity.

Yet, despite the benefits of a more interconnected world economy, this new era of globalization and development is not without its own consequences. In particular, the current state of the world’s energy industry and the prospects for its development give great cause for concern. World energy consumption is growing rapidly, by an average of 20% per decade over the past 30 years. Added to this is the fact that the first eight years of the new century were marked by both a deepening of old factors and the appearance of many new ones and trends in the world energy markets and in international relations, primarily on the oil and gas issue, which require thorough analysis and day-to-day observation for the adoption of decisions at the international level.

An additional cause for serious concern came in 2009 from the results of the first comprehensive study by the World Energy Agency (WEA); this study verified the status of more than 800 oil fields in various parts of the world, which account for some 75% of the world’s total “black gold” reserves. The study found that most of these oil fields had already passed their production peak and production was now falling nearly twice as fast as forecast just two years before. According to WEA data, world oil production is declining 6.7% annually, while a similar study in 2007 showed a decline of only 3.7% annually.

The WEA reviews of recent years have consistently raised the question of the serious imbalance of world energy generation in the long-term future. If current world economic trends continue, a possible physical shortage of oil production in 2030 is forecast, amounting to 12.5 million barrels a day (with a demand of 116 million barrels). That is, the oil deficit could exceed 10%. In turn, according to data from the Russian Institute of Energy and Finances, demand for primary energy resources in 2015–2030 will grow at rates that could create difficulties with supply, with a baseline scenario for world economic development that is unsustainable from the standpoint of ensuring energy supply in future decades.

Indeed, the latest WEA study warns that if governments continue present policies, global energy demand in 2030 will be 50% higher than it is today. Developing economies will account for 74% of the growth in demand, with China and India together accounting for 45%. Furthermore, the world’s growing population, which by 2030 will reach 8 billion, will play a considerable role in this process, with developing nations accounting for 97% of population growth.

Such trends will have a substantial economic impact, with the world community having to spend considerable additional financial resources in the foreseeable future to address the problems brought on by declining production and increasing demand. By the most optimistic estimates, energy development through 2030 will cost $22 trillion—more than 1% of the total world GDP over that period.

According to most leading experts, the continuation of current trends in world economics and energy policy, combined with a failure to take proactive steps to improve energy efficiency, could have critical consequences. Furthermore, neither advances in renewable forms of energy nor the revival of nuclear power or a coal renaissance alone can solve the problem of the growing unsustainability of energy markets and the energy deficit.

Thus, the priority for the immediately foreseeable future continues to be the production and discovery of conventional types of hydrocarbon resources: oil, coal, and especially gas.

Yet this is not without its own unique challenges. The effect of nonlinear globalization processes is that at its current stage of development, the world energy market is encountering a whole series of problems, the most important of which are high, unstable oil prices, the growing dependence of many countries on energy exports, the depletion of major hydrocarbon fields, and a lack of investment resources to develop hard-to-reach crude hydrocarbon reserves and other unconventional fuel sources.

At present, the instability of the global oil market is a direct threat to the economy of most countries of the world and the world economy as a whole—and this is why, as the G-8 leaders have repeatedly stressed, the problem of ensuring global energy security is at the top of the world community’s agenda. It is in this respect that mankind now badly needs breakthrough ideas capable of setting a basic course of action into the future in order to outline at least intermediate phases and criteria for assessing this complex process. Several years ago, Russia advanced a real plan for energy security, intended to combine the interests of producers, consumers, and transit states. Like any call for reconciliation, the plan was built on compromise, and strove to ensure transparency, stability, and predictability of national oil and gas market regulation systems. However, there are now serious obstacles on the path to realization of this plan, which unfortunately remain strong in world trade, undermining the principles of globalization.

The leading nations of the world have recently begun actively implementing new energy strategies, which are primarily aimed at protecting national interests and limiting the scale of external impacts. In other words, energy protectionism and nationalism have become the main theme of many countries’ political policy, despite declarations and professed understanding of the need to solve global energy problems together.

The appearance of such attitudes inevitably exacerbates the situation in international relations, forming new international blocs and reinforcing existing ones on whose basis energy interests rest or are integrated. Ideas and plans for “energy alternatives” can often be found in the press and in statements by various political figures. But these proposals are generally unconstructive due to the one-sidedness of the proposed initiatives and sometimes are simply downright utopian.

Today, special responsibility for the world’s fate rests with the Russian Federation, which not only produces a large share of the world’s energy, but also participates actively in international energy cooperation and thereby makes a substantial contribution to ensuring global energy security. Russia currently produces 10.5% of the world’s primary energy and exports about half of its own fuel production.

What is more, our country continues to hold first place in the world in oil production, with 9.91 million barrels a day in July 2009, which incidentally is a record for the past decade.

As a major player on the world oil and gas markets, Russia occupies a key position in the international energy security system. For example, annual deliveries of Russian energy resources to the European Union are equivalent to more than 440 million tons of oil, or nearly a third of EU energy consumption.

Russia’s geographic position, energy potential, and powerful oil and gas transportation system enable it to develop cooperation both with traditional partners in the West and with the countries of central Asia and the Far East, as well as the US and Canada.

It is not a stretch to say that Russia’s transit potential plays an important role in shaping the world’s energy architecture. Today, our country’s trunk pipelines extend nearly 139,000 miles, including 29,000 miles of oil pipelines, 97,500 miles of gas pipelines, and 12,000 miles of petroleum products pipelines. The trunk pipeline system carries 100% of Russia’s produced gas, 99% of its produced oil, and over 50% of its refined petroleum products. The trunk oil pipeline system includes 387 pumping stations, and the petroleum products pipeline system has 100.

At present, deliveries of crude hydrocarbons to Europe and the Central Asian and Caspian regions all pass through Russian territory. Our country is essentially becoming a unique locomotive of the world energy market and a backbone for further development of the global economy and adherence to the principle of sustainable development throughout the world.

We should note that Russia’s growing prestige today in the world arena is due primarily to well-considered policy, domestic political and social stability, and good opportunities for growth of the country’s economic potential.

However, like most of the world, the consequences of the present global financial crisis have subjected the Russian economy to a very serious strength test. Yet, beginning in March 2009, clear signs of economic and financial stabilization have become apparent.

In late July 2009, the Russian government approved the basic outlines of national budget policy for 2010–2012. In this plan, the successful realization of the “Strategy for Development of the Russian Federation Through 2020” will guarantee that our country will overcome the consequences of the world crisis and soon adopt a path of sustainable development. Essentially, unlike a purely technocratic approach concentrating solely on questions of scientific and technical development and economic efficiency, the innovative strategy through 2020 aspires to a fundamentally new type of development. It is decisively based on a transition from a raw-material economy to an innovation-based economy, with comprehensive stimulation of innovation. Russia’s strategy for developing innovation also relies on one of our main competitive advantages—the realization of human potential, the most effective use of our people’s knowledge and skills, to continuously improve technology, economic performance, and our society’s life as a whole. This is a crucial breakthrough strategy that Russian society must implement with updated “human capital.”

It is a well-known truth that in order to move forward it is necessary to look to the past. The book you hold in your hands—Oil of Russia: Past, Present and Future—does just that. It presents a comprehensive history of the origins and development of the Russian oil industry, a history that is being made available in English for the first time. It is my belief that the numerous examples and experiences of Russia’s oil pioneers contained in this text will no doubt prove instructive for today’s readers and industry leaders.

And if, as I genuinely hope, the reader of this book manages to gain an understanding of the role that historical forces have played in the Russian oil and gas industry and in turn the enormous responsibility this industry bears to the world community, the author will consider his modest mission to have been accomplished.

Vagit Alekperov

President

LUKOIL Oil Company

December, 2010