Despite being hit hard by the international economic recession, Russia remains a leading oil and gas producer, and its state-owned oil and gas companies continue to advance plans for long-distance pipelines that will enable the country to monetize those resources and reach new markets.

Russia holds the world’s largest natural gas reserves and the eighth-largest oil reserves. It is the world’s largest exporter of natural gas, the second-largest exporter of oil, and the third-largest energy consumer. Russia is a major world oil producer, and has even out-produced Saudi Arabia at times in recent years.

As crude oil demand from the Asia-Pacific market continues to grow, Russia has been making plans to serve Japan, China and Korea with a major, long-distance pipeline. And as European demand for Russian gas remains high, Kremlin policy makers are working with European governments and energy companies to build new transmission systems that can safely and efficiently reach continental markets.

Crude oil export pipelines
The growth of Russian crude oil production in coming years will depend on the availability of viable export routes. During 2007, Russia exported almost 4.4 MMbpd of crude oil and over 2 MMbpd of petroleum products.

According to the U.S. Energy Information Administration, roughly 1.3 MMbpd were exported through the Druzhba pipeline to Belarus, Ukraine, Germany, Poland, and other destinations in Central and Eastern Europe, including Hungary, Slovakia, and the Czech Republic. Around 1.3 MMbpd were exported via the new flagship Primorsk port near St. Petersburg; and around 900,000 bpd through the Black Sea.

The majority of Russia’s oil exports transit via Transneft-controlled pipelines, but around 300,000 bpd of oil is transported by rail or ship through various sea lanes. Because of higher world oil prices recently, almost 170,000 bpd of Russia’s oil is transported via railroad. Most of Russia’s product exports consist of fuel oil and diesel fuel, which are used for heating in European countries and, on a small scale, in the United States. In the past few years, OECD Europe’s reliance on Russian crude exports has grown from around 12% of total crude imports to around 29% in 2007.

Map of East Siberia Pacific Ocean pipeline

Welding has begun on the 1,300-mile second stage of the East Siberia Pacific Ocean pipeline, which will carry Russian crude to Asia-Pacific markets.

Russia’s most notable ongoing crude oil pipeline is the East Siberian Pacific Ocean (ESPO) project. Until 2004, Russian energy officials were unwilling to commit to one of two oil transit pipelines to eastern Asia. That year, President Putin announced that Russia would commit to building a long-distance, large-diameter pipeline from the Russian city of Taishet to Kozmino Bay, southeast of Nakhodka. Developed first by Yukos and then Transneft, the project came to be called the East Siberia Pacific Ocean (ESPO) pipeline.

Plans call for the ESPO pipeline to run more than 3,000 miles with 48-in pipe, to be built in two phases. The 1,713-mile first stage runs from Taishet to Skovorodino and the 1,300-mile second stage will run from Skovorodino to Kozmino. From Skovorodino, a 43-mile branch pipeline will serve Chinese markets by running through Mohe to reach Daqing. Work on the first phase of the project began in 2006 and wrapped up late last year. Welding began on the second section in January, according to Russia’s Vostochnaya oil company.

The initial stage of the ESPO pipeline will get significant volumes of sweet crude from the TNK-BP-led East Siberian Verkhnechonsk field, in which Rosneft is a partner, and from Surgutneftegas’ Talakan field. Also, significant volumes, up to 270,000 bpd, could come from Rosneft’s Vankor field. Production from the three fields alone should be able to fill the pipe by around 2011. When the overall pipeline is completed in late 2014 or early 2015, it will realize an annual oil capacity of 50 million tons.

Gas transmission systems
Several analysts estimate that Russia holds the world’s largest natural gas reserves, with 1,680 trillion cubic feet (Tcf) – nearly twice the reserves of Iran, the next-largest gas reserve-holding country. In 2006 Russia was the world’s largest natural gas producer (23.2 Tcf), as well as the world’s largest exporter (6.6 Tcf). According to official Russian statistics, production during 2007 totaled around 23.1 Tcf, of which 85% (19.4 Tcf) was produced by Gazprom. Russian government forecasts expect gas production to total 31.1 Tcf by 2030.

Despite this vast potential, Gazprom’s natural gas production forecast calls for growth of 1-2% per annum in coming years. Russia’s relatively modest natural gas production growth reflects its ageing fields, state regulation, Gazprom’s monopolistic control over the industry, and insufficient export pipelines. Although the company projects increases in its natural gas output between 2008 and 2030, most of Russia’s natural gas production growth will come from independent gas companies such as Novatek, Itera, and Northgaz.

In June 2007, Italy’s Eni and Gazprom signed a memorandum of understanding to conduct a feasibility study for the underground and first component of the proposed $20-billion South Stream project. The first component plans to move natural gas from Beregovaya on the Russian Black Sea coast and run for 560 miles across the Black Sea, in waters down to 6,500 feet. The second, onshore component will cross Bulgaria with two alternatives: one directed towards the northwest, crossing Serbia and Hungary and linking with existing gas pipelines from Russia; and the other directed to the southwest through Greece and Albania, linking directly to the Italian network. Russia and Bulgaria signed an intergovernmental agreement on the pipeline in January 2008, and the Bulgarian parliament recently ratified the agreement. The governments of Russia and Hungary have also announced plans to create a joint venture to work on the Hungarian section of the pipeline. The project is scheduled for a 2015 completion.

A northern natural gas pipeline from Russia to Finland and the United Kingdom via the Baltic Sea was first proposed in June 2003, and was later renamed Nord Stream by project developers in 2006. Nord Stream calls for the construction of two 750-mi, 48-in. pipelines in the Baltic Sea, running from Vyborg, Russia, to Greifswald, Germany. Despite some controversies and delays in offshore routing, the project is now approved to run through the territorial waters of Russia, Finland, Sweden, Denmark and Germany. The construction of the first offshore pipeline began in April, and the Nord Stream consortium plans to start transporting gas through this first pipeline in late 2011. Saipem says it will use two pipelay vessels to complete the laying of the first line in the first half of 2011. Technip was recently awarded a contract to work on four tie-ins on the project. The Nord Stream consortium includes Russia’s Gazprom, Germany’s E.ON Ruhrgas, Wintershall Holding (a unit of BASF), and the Dutch company Gasunie. The project is expected to cost more than $11 billion (or 7.4 billion euros, two times as much as originally planned) and to ultimately transport approximately 0.9 to 1.0 Tcf of natural gas via the two parallel pipelines.