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Shifting relationships - Part 1

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World Pipelines,

The fall of the Soviet Union brought about a wide range of difficulties for all of its succeeding states, but it certainly set Russia on the track to emerge as an energy superpower, with large and growing exports of oil, gas and coal, in addition to nuclear technology and uranium. Lacking a significant range of competitive non-energy export items in the post-Soviet era, the loss of its secured markets for such exports in the Soviet bloc made Russia fall back on its vast energy assets as the means for reviving its pre-1991 pre-eminent status.

The export-oriented energy sector has since expanded as the single largest source of export revenue for the Russian government, to promote Russia to the ranks of the world’s first and second largest exporter of gas and oil in 2015, respectively. It is now expanding its operations to Asia, currently focused on China. Such expansion is a long-term imperative for Russia due to Asia’s significance, being the world’s largest energy consumer with a growing energy demand. However, Europe – despite its current undeniable importance for especially Russian gas and oil exports – is heading in the opposite direction.

Cooling relationships

The cooling of Russian-EU relations has only strengthened the wisdom of expanding in Asia, as a strategic objective surfaced well before the recent rows in those relations. Lack of an alternative to Russian supplies in the short term has removed the urgency of finding replacing markets for Russia.

However, the steady lowering of gas has hit Russia like other major oil and gas exporters. Russia’s substantial decline in export revenues has been pushing its economy into a period of shrinkage. In December 2015, Russia’s Economic Development Minister Alexei Ulyukayev estimated a GDP contraction of 3.7% in that year, only to predict in January 2016 an additional shrinkage of 0.8%.

Of course, the freefall of oil prices has been the main culprit. This has been worsened by various US- and EU-imposed economic sanctions on Russia over Ukraine, which cost Russia around US$40 billion in 2015. Russia’s oil and gas exports to the EU have not yet been affected by the latter, in absence of an alternative for Russian supplies. However, various oil and gas development projects have been affected, as the involving Russian companies’ Western partners have pulled out because of the sanctions.

In absence of foreign capital and technology, the resulting cancelled, downsized or postponed development projects, and the limited domestic capital and technology to fill the gap, will certainly damage the Russian oil and gas export capabilities in the foreseeable future.

Surprisingly, the Nord Stream II seems to be set for construction. This is in spite of Brussels’ policy of decreasing the EU region’s heavy dependency on Russian oil and gas. Provided the continuity of the current situation, nothing short of a major deterioration of EU-Russia ties could shelve the project, given the continued commitments of the EU and Russian partners in early 2016.

Depleting cash resources have aggravated the negative impact of the mentioned economic and political factors, by further limiting the availability of funds for energy projects, from field development to pipeline construction. However, international pipeline projects meant for increasing Russian energy exports have not been affected as a result.

Their importance for Russia’s public purse has justified financing them as priorities, despite Russia’s financial difficulties. Consequently, Gazprom will spend around US$1.2 billion in 2016 on its Power of Siberia project.

Nevertheless, certain major international projects have been cancelled or postponed for other reasons. They include South Stream, which Russia cancelled in December 2014 as Moscow deemed the project not feasible due to the EU opposition. Brussels stopped the construction of its Bulgarian segment on technical grounds (i.e. violation of the EU competition rules) and this convinced Moscow as to the futility of continuing the project.

The construction of the West Route gas pipeline, also known as the Power of Siberia II, is uncertain. China is unsure about the demand for its gas (30 billion m3/y) upon its planned completion in 2019, thanks to its lowering economic growth.

Likewise, the construction of the Turkish Stream pipeline is highly unlikely to start this year as scheduled, although neither party to the project has officially cancelled it. As it stands in early 2016, there will need to be a reversal in the ongoing trend of worsening Russian-Turkish relations triggered by Ankara shooting down a Russian military aircraft in November 2015.

Part 2 coming soon!

Written by Hooman Peimani and edited by Stephanie Roker

To read the full version of this article, please download a copy of the March 2016 issue of World Pipelines.

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