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Will 2012 be a Better Year for Russia's Energy Sector

For those worried about the Russian Federation using its energy exports to take over the world, 2011 brought a bit of cheer.

According to the Russian Federation’s Central Dispatching Department of the Fuel Energy Complex State Enterprise (SE CDU TEK), the state body that collects information on the Russian energy industry, in 2011 Russian oil exports to countries of the “far abroad” (outside of the former Soviet Union) totaled 212,213 million tons, or 4,262 million barrels per day, a 3.9 percent decrease over 2010 figures. In December the Russian Federation exported 18,216 million tons of petroleum, 4.307 million barrels per day.

But if Russian energy exports abroad declined, they were more than covered by exports to the former Soviet “near abroad’ countries, as in 2011, Russian oil companies boosted oil exports to the former Soviet countries by 13.7 per cent,  to 29,866 million tons.
The Russian Federation exports to its western and southern neighbors Belarus and Ukraine, across whom its lucrative energy exports to Central and Western European markets transit, were more problematic. In 2011 the volume of supplies to Belarus grew over 2010 volumes by 40.5 percent, reaching 18,095 million tons.

Russian exports to Ukraine in 2011 however dropped by 21.8 percent over 2010 levels to 4,651 million tons.

So, where is the Russian federation to look for growth?

The east, but again, the picture is mixed.

On 1 January 2011 the Russian Federation began supplying oil to China along a branch line from the Eastern Siberian-Pacific Ocean (ESPO) pipeline system. Over two decades, 15 million tons of oil were supposed to be shipped along the ESPO line annually, with Rosneft providing 9 million tons and the Russian Federation pipeline monopoly Transneft an additional 6 million tons, with the two companies receiving in 2009 respectively $15 billion and $10 billion in loans from Chinese banks.

If that was the good news, by March 2011 the arrangement was already beginning to unravel, as State-owned China National Petroleum Corp. (CNPC) decided that it was paying 2-3 percent too much for Russian oil and unilaterally decided to underpay on the contract. China subsequently requested a review of the price formula which led to tense negotiations, with neither side willing to give ground. China's debt grew, and Russia threatened to turn to the London arbitration court.

But at the end of May China somewhat backed down and paid about three-quarters of its outstanding debt for Russian oil supplies, but continued to underpay by $3 per barrel, greatly to the annoyance of Moscow.

The issue was largely resolved in October 2011, when Russian Prime Minister Vladimir Putin visited China, but underlining the sensitivity of the agreements concluded during Vladimir Vladimirovich’s visit, no details of the agreements that were reached were released to the public. Sources close to the discussions, speaking on condition of anonymity, said that the Russian government finally buckled under, agreeing to lower its oil price by $1.50 per barrel but underlining the sensitivity of the issue, virtually all government officials and company representatives have declined to comment on the record, instead issuing bland general statements in effect quoting Benjamin Franklin that it is better to have a “bad” peace than a “good” war.

Putting the best PR spin on the Russian negotiations Energy Minister Sergei Shmatko said, "This is a special art, a special culture to implement such projects on a long-term basis. I think that in 20 years something else could happen. But if we run to a London court every time, nothing good will come of it. Therefore, I am very pleased, both for us and our Chinese colleagues that were able to resolve this."

Shmatko’s sunny comments aside, the Russian Federation’s recent energy imbroglio with China highlights the dilemmas facing Russian energy exports.

With the European Union’s economy in a prolonged recession, energy imports are hardly likely to grow beyond modest amounts, versus China’s, whose booming economy in contrast is projected to grow 8.5 percent in 2012, down from 10.4 percent growth in 2010.

So, ship westwards to flat economic markets, or east, to booming markets which play hardball on a level that would even give Stalin pause?

Tough call.

By. John C.K. Daly of Oilprice.com

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  • Fred Banks on January 06 2012 said:
    I'm afraid that they have got, the energy resources that we have not.Depending of course on whether shale gas is or isn't, to use the words of Jean-Paul Sartre, "a fire without a tomorrow".In any event, if the Russians lay off the vodka at breakfast, keep electing people like Putin and Medvedev, and sell to customers who pay them in dollars and euros instead of Albanian lira, they will not have to run to a London or South Bronx court.

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