Moscow’s oil pricing dispute with the Government of Saudi Arabia, a domestic U.S. oil boom, and a fall in global oil demand since the COVID19 outbreak have damaged Russia’s oil industry. But its influence over the global oil market seems only set to increase, just one of the resource sectors Russia is seeking to dominate in the 21st Century.
Oil: As the worldwide response to the pandemic was heating up in early March 2020, Saudi Arabia and Russia, the world’s two leading oil exporters, launched a pricing war for their oil on international markets. The Kremlin had ignored Saudi demands to OPEC members and other oil-producing/exporting states to cut production to stabilize prices, causing Saudi Arabia to increase its production and send prices lower.
Because Saudi Arabia can produce and export oil for a much lower price than Russia, analysts were left pondering the wisdom behind Russia’s brinksmanship. The Kremlin most likely sought to undermine the U.S. oil industry, which despite surging in recent years, still requires even higher prices to break even. Suffering temporarily at the hands of the Saudis may now allow Russia to steadily recapture international market share.
The complete collapse of oil prices amid the dispute and COVID19 outbreak forced OPEC, Russia, the U.S., and other oil powers to hash out a deal in April 2020 to save the industry itself. But the Kremlin may have the most to gain. Though second in oil exports, third in production and refining, and eighth in reserves, Russia enjoys several advantages over other oil powers; advantages which have established it as the most dominant force in the industry.
Saudi Arabia, for example, is the largest oil exporter, second-largest producer, and has the second-largest reserves. However, it is only ranked eighth in refining, meaning its exports are largely unfinished products that must be refined elsewhere before they can be used.
But more importantly, Saudi Arabia cannot viably defend its infrastructure, made evident in May 2019 when Iran attacked Saudi oil facilities using drones and missiles. The incident temporarily halved Saudi production, casting doubt on Saudi Arabia’s ability to safeguard its facilities and the transportation routes to foreign markets.
Amid increasing Iranian aggression and U.S. disengagement from the region, Saudi Arabia’s longterm oil export capabilities are under threat. Without the guarantee of a steady stream of oil, buyers will naturally look to other suppliers, and Saudi Arabia’s influence over the international oil market risks dwindling significantly.
As one of the world’s foremost military powers, Russia can not only defend its networks but attack those of others; such as in the 2008 Georgia War where its aircraft damaged Georgian oil pipelines. Furthermore, Russia’s enormous size grants it proximity to the most profitable European and Asian markets, simplifying logistics and reducing the need to transport shipments through hostile territory.
While the U.S. is both the top oil producer and oil refiner, helped largely by its shale oil boom, it has just recently become a net oil exporter; but only barely. It consumes the second-most oil after the People’s Republic of China (PRC), and despite the US’ growing energy independence, it cannot sway prices and international supply the same way as larger exporters. Furthermore, it too is far away from the most profitable markets in Europe and Asia.
The Kremlin’s added advantage over Washington is the direct coordination of its political and commercial goals with the state-run oil company, Rosneft. Other Russian oil companies are largely in lockstep with Russian Government policy. U.S. companies are directed by profit margins instead of geopolitical outreach, and often require human rights agreements before deals are inked.
Led by Rosneft, Russia’s oil companies have become a global alternative to the traditional power of the U.S./Western oil companies. They have significantly increased their control over Venezuela’s oil industry, for example, after almost 20 years of increasingly tense relations between Venezuela and the U.S./West. With the world’s largest oil reserves, Venezuela’s political leadership has been strengthened by Moscow’s assistance during its current ongoing crisis, which could eventually reverse its oil fortunes in the future.
The other pillars of the international oil industry face their own setbacks. Military weaknesses, fractured leaderships, undeveloped industries, and economic sanctions are some of the problems that hinder OPEC states. Furthermore, without Saudi Arabia’s ability to periodically flood markets, the organization is largely toothless.
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The PRC is the second-largest oil refiner and fifth-largest producer, but it still imports far more than it can produce domestically. Its major focus is importing enough for domestic use, yet it is unable to protect the global sea lanes that ensure its supply. In part due to this concern, Russia has become the second-largest supplier of oil to the PRC after Saudi Arabia.
Finally, in Canada, there is a lack of political and public will for new pipelines which could increase its capabilities and customer base. Its major buyer, the U.S., has become vastly more self-sufficient in oil, while new pipeline networks into the U.S. have been blocked by U.S. officials on environmental concerns, casting further uncertainty onto Canada’s oil industry.
Natural Gas: Russia’s ability to defend its infrastructure and strong placement in all sectors of the oil industry guarantee it major influence in the future. But oil is not the only resource that Russia seeks to dominate this century. Since the 1970s, technological advancements have made natural gas cheaper to extract, while environmental concerns have made it an increasingly popular substitute for carbon-heavy oil, particularly in Europe.
Russia has an even more commanding position in the international natural gas market. It is first in natural gas reserves and exports, and second in production. Its only real rival is the U.S., which, as with oil, has only recently become a net exporter. Gazprom, Russia’s largest company, has led the Kremlin’s attempts to gain commercial and political benefits from its gas industry.
For example, since the early 1990s, the Kremlin has repeatedly cut off gas to Ukraine to draw concessions from its leadership (and to ensure payment of overdue bills). Though Ukraine has since weaned itself off Russian gas, much of Russia’s gas still passes through Ukraine on its way to Europe. Ukraine’s economy remains partially reliant on the transit fees which the gas flow generates, meaning it is still very much hostage to Russian supply cuts.
The European Union (EU) has often been forced to mediate Russian-Ukrainian gas disputes. Yet since the 2014 Ukraine crisis and in the face of opposition from Eastern European countries, Western European countries have continued to pursue several Russian natural gas pipelines, such as the Turkstream and the Nordstream pipelines. These networks will only increase Russia’s ability to punish Ukraine and Eastern European countries in future years, without jeopardizing its sales to Western Europe.
This has not gone unnoticed in Washington. US presidents George W. Bush, Barack Obama, and Donald Trump have criticized the Nordstream pipeline network in particular. Nonetheless, Germany and other Western EU states have continued to increase their gas imports from Russia, significantly undermining the united economic front projected by Western politicians since the Ukraine crisis in 2014.
The Kremlin has prioritized defending its access to the European market from other gas powers. Qatar and Iran are desperate to make use of their large reserves, yet any Europe-bound pipeline would require passage through Syria. In 2018, Syrian Pres. Bashar al-Assad signed an agreement giving Russia sole rights to gas and oil production in Syria, allowing the Kremlin to keep competition to a minimum.
The PRC’s current use of natural gas is low, covering less than 10 percent of its energy needs But the enormous scale of its energy consumption has still made it the largest natural gas importer. With growing energy needs and an eye on CO2 emissions, the PRC’s appetite for natural gas would, under normal conditions, be likely to increase, assuming the PRC economy retains its viability.
On top of Russia’s existing gas pipelines to the PRC, liquefied natural gas (LNG) is now making it possible for the PRC to receive Russian LNG at its ports. The PRC was, in early June 2020, expected to soon overtake Japan as the largest LNG importer, and the USPRC trade war may prevent U.S. gas suppliers from capitalizing on a major market, leaving Russia with the lion’s share. As LNG helps propel natural gas to a truly global commodity, Russia is already beating the U.S. at this pricing war in Europe, and future gas developments in Russia’s Arctic are promising for its LNG prospects around the world.
Nuclear Power: Russia’s influence is not limited to natural resources. Led by state firm Rosatom, Russia has also seized the initiative following disruptions to the global nuclear industry. After the Fukushima incident in 2011, Japan and Germany, both major nuclear energy powers, began shutting down much of their nuclear facilities. Others, like France, South Korea, and the U.S., have also had faltering industries in recent years.
After the Chernobyl disaster and collapse of the USSR, Russia’s nuclear industry began to pick up again in the late 1990s and has made steady progress in the years since. Though fourth in nuclear power production, Russia is again in a commanding position. Rosatom and its subsidiaries have integrated operations — a huge input in fuel cycle, reactor sales, and reactor maintenance — and have worked to increase their control over uranium deposits from Kazakhstan to the U.S.
Russia appears to be banking on exporting its reactor technology for the future. It has a dozen more orders for nuclear power reactors than its only competitor, the PRC, which it is already working with Rosatom, anyway. Across Europe and Asia, deals for Russian reactors are being implemented or explored. Completing current reactor deals with EU members Hungary and Finland, with their vigorous safety standards, will help Rosatom demonstrate it is ready for more contracts around the world.
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But it is in Africa that Russia sees an opportunity. Nuclear power has been viewed as the answer to the continent’s projected growth in population and energy demand, and Russia is hoping to monopolize the continent’s nuclear industry before it potentially takes off.
In late 2019, Rosatom’s floating nuclear power plant, the Akademik Lomonosov Kuznets, began delivering power to Russia’s Chukotka region in Siberia. Capable of powering a city of 100,000 people, it is the only transportable nuclear power plant in the world. Rosatom’s intention to build seven of them, along with Russia’s nuclear-powered icebreakers, will help the Kremlin bring power to its energy-deficient Arctic. If it does so successfully, Rosatom may be able to revolutionize (and monopolize) transportable nuclear power.
Other: Russia maintains moderate influence in coal, iron, and steel markets. But even in renewable energy, Russia may play a powerful future role in hydropower. It is already the fifth-largest producer of hydropower in the world, and if it can exploit its extensive river networks, Russia could increase its potential even further.
Russia’s renewable energy industry is undeveloped apart from hydropower yet has potential elsewhere. The country’s vast size means it has access to plenty of resources, and while solar power is limited, geothermal and wind energy could be exploited with proper funding. Russia meanwhile has several tidal power stations, and the proposed Penzhin Tidal Power Plant indicates the Kremlin sees potential in this area as well.
Weaknesses and Future: Russia’s resource power is not without its weaknesses. Oil and gas revenue accounts for a majority of government revenue, making Russia vulnerable to drops in demand and prices. And, as many countries (including its important European markets) attempt to reduce their emissions, alternatives to oil and natural gas will increasingly be sought. At the same time, nuclear and hydropower are far from sure bets for the future of global energy use.
Nonetheless, military strength, state-run companies, impressive reserves, production and export capabilities, and proximity to major markets have given Russia an edge in 21st Century resource markets. While this may help fill the Kremlin’s coffers, its true goal is binding countries to current and future Russian resource flows and controlling global supplies.
With few major rivals in multiple markets, this process is already well underway.
By John P. Ruehl
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Russia is the world’s largest crude oil producer (not the United States as the author erroneously mentioned in his essay), the second largest exporter of oil after Saudi Arabia, the largest exporter of natural gas and the top exporter of nuclear reactors. It accounts for 40% of the EU’s gas market and is the largest supplier of oil to China (not Saudi Arabia as the author erroneously stated in his essay) and natural gas. Moreover, its gas market share in the EU is projected to rise to 45% in the next three years with the already completed Turk Stream and the eventual completion of Nord Stream 2 during this year. Furthermore, Russia owns and runs the largest oil and gas pipeline networks in the world connecting its energy exports to the two biggest markets, namely China and the EU.
Now to the errors in the essay. The author claimed that Saudi Arabia can produce and export oil for a much lower price than Russia. Nothing is further from the truth. Saudi Arabia lost the price war against Russia because of the following reasons.
The first is that Russia’s economy can live with an oil price of $25 a barrel for years compared with $85-$91 for Saudi Arabia’s. Moreover, Russia’s economy is highly advanced and well diversified compared with Saudi Arabia’s overwhelming dependence on the oil revenues.
The second reason is that Russia’s lifting cost is $2.5 a barrel compared with Saudi Arabia’s $2.8.
The third reason is that Saudi Arabia doesn’t have the production capacity to flood the global oil market with oil. Saudi Arabia’s production peaked at 9.65 mbd in 2005 and has been in decline since. Saudi Arabia can at best produce some 8.0-9.0 mbd with another 700,000 b/d to 1.0 mbd coming from storage. Current Saudi production comes from five giant but aging and fast-depleting oilfields discovered more than 70 years ago.
Another error in the essay is the claim that Saudi Arabia is the second largest crude oil producer. In fact it is the third behind Russia and the United States.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
We might want to rethink how we conduct global energy supply. Investors get it. The biggest growth in investment funds is in the clean, socially-responsible sector. There's something not quite right about fossil fuel energy. It's going from bonanza to bust.