Russia’s energy transformation

What a difference eight years can make. In May 1998, when the world’s seven wealthy industrial democracies (the G-7) met in Birmingham, England, to discuss global finance, Russian President Boris Yeltsin (the eighth member of the G-8) was excluded from the meeting because Russia was such a lightweight regarding international trade and finance. The next month the world price of oil fell below $10 per barrel. Three months later, Russia, whose 1998 oil output averaged 5.85 million barrels per day (mbd), defaulted on its $40 billion foreign debt to the Paris Club, composed primarily of the G-7. The Russian economy nearly collapsed.

Fast forward to this weekend, when Russian President Vladimir Putin will host the 2006 G-8 meeting in St. Petersburg. Though still relatively poor and hardly democratic, Russia nonetheless is now a full member. Meanwhile, oil has been selling for more than $75 per barrel recently. Since 1998, world crude-oil production, according to the U.S. government’s Energy Information Administration (EIA), has increased by 6.7 mbd. In March, the latest month in which data is available, Russia’s oil output averaged 9.36 mbd, representing a 60 percent increase over 1998, according to EIA. In fact, Russia is now the world’s largest oil producer, surpassing even Saudi Arabia (9.35 mbd in March). Thus, Russia’s 3.5 mbd increase in oil output since 1998 has accounted for more than 50 percent of the world’s 6.7 mbd rise in crude-oil production during that period.

With oil selling for more than $70 per barrel and Russia exporting nearly seven mbd, its petroleum-related hard-currency income translates into about half a billion dollars per day. No wonder the Paris Club announced in June an agreement in which Russia would soon be making an early repayment of the $22 billion balance it owes.

Exercising the prerogative of the reigning G-8 president, Mr. Putin chose “energy security” as the primary theme for this year’s G-8 meeting. On Jan. 1, Mr. Putin inaugurated his year as G-8 president by shutting off shipments of natural gas to Ukraine over disputes involving price and control of the “Brotherhood” pipeline traversing Ukraine from Russia into the European Union, whose gas shipments from Russia also plunged. Russia, which, according to the authoritative publication, World Oil, controls more than a third of the world’s proved reserves of natural gas, supplies 25 percent of the gas consumed by the European Union, including 40 percent of Germany’s gas imports and a third of Italy’s and France’s. Mr. Putin has also been busy trying to cartelize the natural-gas producers and announcing that Russia’s gas exports to the Asia-Pacific region will increase from 5 percent of Russia’s total gas exports today to 25 percent in 2020. Meanwhile, Gazprom, the gas behemoth controlled by the Russian government, has failed to make major investments, effectively guaranteeing a major Eurasian gas shortfall and price spike as early as 2008. Clearly, Mr. Putin’s idea of “energy security” is vastly different from the ideas of his fellow G-8 members, which should make for a very interesting meeting this weekend.