Order Code RL33212
CRS Report for Congress
Received through the CRS Web
Russian Oil and Gas Challenges
January 3, 2006
Bernard A. Gelb
Specialist in Industry Economics
Resources, Science, and Industry Division
Congressional Research Service ˜ The Library of Congress

Russian Oil and Gas Challenges
Summary
Russia is a major player in world energy markets. It has more proven natural
gas reserves than any other country, is among the top ten in proven oil reserves, is the
largest exporter of natural gas, the second largest oil exporter, and the third largest
energy consumer. Energy exports have been a major driver of Russia’s economic
growth over the last five years, as Russian oil production has risen strongly and world
oil prices have been very high. This type of growth has made the Russian economy
dependent on oil and natural gas exports and vulnerable to fluctuations in oil prices.
Russia’s ability to maintain and expand its capacity to produce and to export
energy faces difficulties. Russia’s oil and gas fields are aging. Modern western
energy technology has not been fully implemented. There is insufficient export
capacity in the crude oil pipeline system controlled by Russia’s state-owned pipeline
monopoly, Transneft. And, there is insufficient investment capital for improving and
expanding Russian oil and gas production and pipeline systems.
The Russian government has moved to take control of the country’s energy
supplies. It broke up the previously large energy company Yukos and acquired its
main oil production subsidiary. In Central Europe, Russian firms with close links to
the Russian government have used leverage to buy energy companies to gain control
over energy supply. Russia continues to maintain energy ties with Central Asian
countries, as many transportation routes in that region are oriented toward European
Russia. In East Asia, Russia is contemplating a pipeline destination that would allow
it to decide to whom its oil gets sold. Also, Russia tried to cut off gas supply to
Ukraine because the latter did not agree to greatly increase what it pays for the gas.
Russia restored supply after other European countries complained. Much of Russia’s
gas exports to Europe pass through Ukraine.
A number of proposals would build new or expand existing Russian oil and
natural gas export pipelines. Some are contentious, and although the Russian
government is faced with a perceived need to expand its oil and gas export capacity,
it also has limited resources. This report discusses several different major proposals.
Given that the United States, as well as Russia, is a major energy producer and
user, Russian energy trends and policies affect U.S. energy markets and economic
welfare in general. An increase in Russia’s energy production and its ability to
export that energy westward and eastward may tend to ease the supply situation in
energy markets in the Atlantic and Pacific Basins. On the other hand, the Russian
government’s moves to take control of the country’s energy supplies noted earlier
may have the effect of making less oil available. Possibly as important as Russian oil
and gas industry developments is the associated potential for U.S. suppliers of oil and
gas field equipment and services to increase their sales and investment in Russia.
However, while they consider the climate to be improving, potential investors
complain that the investment climate in Russia is inhospitable with respect to factors
such as poor intellectual property rights protection, burdensome tax laws, and
inefficient government bureaucracy. This report will be updated as events warrant.

Contents
Oil and Gas Reserves and Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Petroleum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Natural Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Energy Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Major Proposed New or Expanded Pipelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Implications for the United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
List of Figures
Figure 1. Russia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Figure 2. Druzhba and Adria Oil Pipelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Figure 3. Selected Northwestern Oil Pipelines . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Figure 4. Proposed Far East Oil Pipelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Figure 5. Natural Gas Pipelines to Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
List of Tables
Table 1. Oil and Natural Gas Reserves and Production . . . . . . . . . . . . . . . . . . . . . 2

Russian Oil and Gas Challenges
The Russian Federation is a major player in world energy markets. It has more
proven natural gas reserves than any other country and is among the top ten countries
in proven oil reserves.1 It is the world’s largest exporter of natural gas, the second
largest oil producer and exporter, and the third largest energy consumer. Given that
the United States also is a major energy producer and user, Russian energy trends and
policies affect U.S. energy markets and U.S. welfare in general.
Oil and Gas Reserves and Production
Most of Russia’s 60 billion barrels of proven oil reserves (Table 1) are located
in Western Siberia, between the Ural Mountains and the Central Siberian Plateau.
This ample endowment of this region made the Soviet Union a major world oil
producer in the 1980s, reaching production of 12.5 million barrels per day (bbl/d) in
1988.2 Roughly 25% of Russia’s oil reserves and 6% of its gas reserves are on
Sakhalin Island in the far eastern region of the country, just north of Japan.
Russian oil production, which had begun to decline before the Soviet Union
dissolved in 1991, fell more steeply afterward — to less than six million bbl/d in
1997 and 1998.3 State-mandated production surges had accelerated depletion of the
large Western Siberian fields and the Soviet central planning system collapsed.
Russian oil output started to recover in 1999. Many analysts attribute this to
privatization of the industry, which clarified incentives and shifted activity to less
expensive production. Increases in world oil prices, application of technology that
was standard practice in the West, and rejuvenation of old oil fields helped boost
output. After-effects of the 1998 financial crisis and subsequent devaluation of the
ruble may well have contributed. After reaching about nine million bbl/d in 2004
depending upon the estimating source, Russian oil production continued to rise in
the first several months of 2005, but only slightly.
Roughly 25% of Russia’s oil reserves are on Sakhalin island (Figure 1) where
several consortia have begun producing and exporting oil (mainly to East Asia at
present). They also plan to export gas to the United States via pipelines to the
Siberian mainland and liquefied natural gas (LNG) terminals.
1 Oil and Gas Journal, December 20, 2004. Estimates of proven oil and/or gas reserves by
country can differ widely, depending partly on what types of resources are included. Thus,
Russia’s ranking of reserve holdings may differ among organizations that compile such data.
2 BP. BP Statistical Review of World Energy, June 1992. Data for Russia only are not
available for 1988.
3 BP. BP Statistical Review of World Energy 1997, June 1997.


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Figure 1. Russia
Source: Energy Information Administration. Russia Country Analysis Brief, February 2005
[http://www.eia.doe.gov/emeu/cabs/Region_ni.html], viewed December 3, 2005.
With about 1,700 trillion cubic feet (tcf), Russia has the world’s largest natural
gas reserves. In 2004, it was the world’s largest natural gas producer and the world’s
largest exporter. However, its natural gas industry has not done as well as its oil
industry in recent years, as production has increased only a little and exports only
have re-attained their level of the late 1990s.
Table 1. Oil and Natural Gas Reserves and Production
Productiona
Proven Reserves
(mil. bbl/day of oil/
Country or Region
(billions of bbl of oil/trillions of cu. ft. of gas) trillions of cu. ft. of gas
BP
O & G Journal
BP
(End of 2004)
(1/1/05)
(2004)
Russian Federation
72/1,694
60/1,680
9.3/20.8
United States
29/187
22/189
7.2/19.2
Reference North Seab
n.a./n.a.
15/170
5.2c/n.a.
Areas
Saudi Arabia
263/238
259/235
10.6/2.3
WORLD
1,189/6,337
1,278/6,040
80.3/95.0
Sources: BP. BP Statistical Review of World Energy 2005. June 2005; Energy Information
Administration, [http://www.eia.doe.gov/emeu/ipsr/11b.xls] viewed December 5, 2005; Penwell
Publishing Company. Oil & Gas Journal. December 20, 2004.
n.a. - Not available.
a Includes natural gas liquids.
b Includes Denmark, Germany, Netherlands, Norway, and United Kingdom.
c Energy Information Administration estimate.

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Growth of Russia’s natural gas sector has been impaired by ageing fields, near
monopolistic domination over the industry by Gazprom (with substantial government
holdings), state regulation, and insufficient export pipelines. Gazprom, Russia’s
state-run natural gas monopoly, holds more than one-fourth of the world’s natural gas
reserves, produces nearly 90% of Russia’s natural gas, and operates the country’s
natural gas pipeline network. The company’s tax payments account for around 25%
of Russian federal tax revenues. Gazprom is heavily regulated, however. By law,
it must supply the natural gas used to heat and power Russia’s domestic market at
government-regulated below-market prices.
Potential growth of both oil and natural gas production in Russia is limited by
the lack of full introduction of the most modern western oil and gas exploration,
development, and production technology.
Exports
Energy exports have been a major driver of Russia’s economic growth over the
last five years, as Russian oil production has risen strongly and world oil and gas
prices have been relatively high. This type of growth has made the Russian economy
very dependent on oil and natural gas exports, and vulnerable to fluctuations in world
oil prices. On average, a $1 per barrel change in oil prices results in a $1.4 billion
change in Russian government revenues in the same direction.4
Petroleum
Almost three fourths of Russian crude oil production is exported; the rest is
refined in the country, with some refined products being exported. About two-thirds
of Russia’s 6.7 million bbl/d of crude oil exports in 2004 went to Belarus, Ukraine,
Germany, Poland, and other destinations in Central and Eastern Europe. The
remaining one-third of oil exports went to maritime ports and was sold in world
markets. Recent high oil prices have enabled as much as 40% of Russia’s oil exports
to be shipped via more costly railroad and river barge routes. Most of Russia’s
exports of refined petroleum products to Europe are fuel oil and diesel fuel used for
heating.
Russia’s capacity to export oil faces difficulties, however. One stems from the
fact that crude oil exports via pipeline are under the exclusive jurisdiction of Russia’s
state-owned pipeline monopoly, Transneft. Bottlenecks in the Transneft system
prevent its export capacity from meeting oil producers’ export ambitions. Only about
four million bbl/d can be transported in major trunk pipelines; the rest is shipped by
more costly rail and river routes. Most of what is transported via alternative transport
modes is refined petroleum. The rail and river routes could become less
economically viable if oil prices fall sufficiently. The Russian government and
Transneft are striving to improve the export infrastructure.
4 Energy Information Administration. Russia Country Analysis Brief, February 2005
[http://www.eia.doe.gov/emeu/cabs/Region_ni.html], viewed December 3, 2005.

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Unless significant investment flows into improving the Russian oil pipeline
system, non-pipeline transported exports probably will grow. For example, without
a dedicated pipeline, rail routes presently are the only way to transport Russian crude
oil to East Asia. Russia is exporting about 200,000 bbl/d via rail to the northeast
China cities of Harbin and Daqing and to central China via Mongolia. Since Yukos
was the leading Russian exporter of oil to China, there was concern that the breakup
of Yukos by the Russian government (see below under “Energy Policy”) might affect
rail exports to China. However, Lukoil has taken over the role of rail supplier.
Oil transportation in the Black Sea region may be in flux. A large portion of
Russia’s oil presently is shipped by tankers from the Black Sea to the Mediterranean
and to Asia, mostly from the port of Novorossiysk. However, shipments through the
shallow and congested Bosporus Straits are limited by Turkey for environmental and
safety reasons, limiting the effective capacity of lines to Novorossiysk.5 Deliveries
from the Baku-Tbilisi-Ceyhan (BTC) pipeline (expected to start in early 2006) will
be mostly oil produced by Azerbaijan and Kazakhstan, posing competition to Russian
oil. If Azerbaijan ships all of its oil via BTC, exports from Novorossiysk will
decrease. If BTC proves less advantageous than hoped, shipments via Novorossiysk,
other Russian Black Sea ports, and Supsa (which is in Georgia) may not decline.
Eastward, Russia faces competition for China’s oil market from Kazakhstan,
which, with China, completed in late 2005 the construction of a pipeline from Atasu
in central Kazakhstan to Alaskankou on China’s western border. Eventual capacity
will be 190,000 bbl/d.6
Natural Gas
Historically, most of Russia’s natural gas exports went to Eastern Europe and
to customers in countries that previously were part of the Soviet Union. But, in the
mid-1980s, Russia began trying to diversify its export options. By now, Gazprom
has shifted some of its exports to meet the rising demand of Turkey, Japan, and other
Asian countries. If Gazprom is to attain its long-term goal of increasing its European
sales, it will have to boost its production, as well as secure more reliable export
routes to the region.
Issues have arisen with the growth of Gazprom’s sales to Europe. European
Union trade representatives have criticized Gazprom’s dominant market position and
two-tiered pricing system. Russia agreed to grant independent natural gas producers
access to Gazprom’s pipelines. Also, in response to calls for fair pricing, the Russian
government doubled prices to Russian industrial consumers. But the new price level
still is less than half of the prices charged at the German and Ukrainian borders.
5 Concern over limited depth, heavy traffic, and environmental considerations have led
Turkish authorities to restrict travel through the Bosporus. Also, Ceyhan, a Turkish
Mediterranean seaport, can handle very large carriers, while the Supsa and Novorossiysk
ports are restricted to smaller tankers that can transit the Bosporus straits. Also, Ceyhan can
remain open all year, whereas Novorossiysk is closed up to two months per year.
6 Martin Clark. “Beijing Triumphs with Inauguration of Kazakhstani Crude Pipe,” FSU Oil
& Gas Monitor,
December 21, 2005.

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Also, as a major supplier of natural gas to European countries, Russia has some
ability to set prices. For example, it could withhold supply and thereby affect
customer country policies. In 2003, Russian gas accounted for 100% of Slovakia’s
gas consumption, 97% of Bulgaria’s consumption, 79% of the Czech Republic’s
consumption, and 68% of Hungary’s consumption.7 Some observers consider
Gazprom, Russia’s largest earner of hard currency, to be one of Moscow’s main
foreign policy tools.
As with oil, Russia faces potential competition for Asian gas markets from
Kazakhstan, which, with China, is working on a feasibility study for building a
pipeline from the former to the latter to ship Kazakh gas to China.8 Given the
proximity of natural gas producers Turkmenistan and Uzbekistan to Kazakhstan, it
is possible that their gas also would go to China via that route.
Energy Policy9
The Russian government has moved to take control of the country’s energy
supplies. It is arguable that this was partly the motivation behind the government’s
prosecution of Mikhail Khodorkovski, CEO of Yukos, who acquired state-owned
assets during privatization and adopted open and “transparent” business practices
while transforming Yukos into a major global energy company. Yukos is being
broken up, with its principal assets being sold off to meet alleged tax debts.
Yuganskneftegaz, Yukos’ main oil production subsidiary, was sold at a state-run
auction to the Baikal Finans Group (a previously unheard of company), the sole
bidder, for $9.4 billion, about half its market value according to western industry
specialists. Soon after, that group sold the unit to Rosneft, the state oil company.10
In Central Europe, Russian firms with close links to the Russian government
have used leverage to buy energy companies to gain control over energy supply. For
example, Yukos obtained majority control of a Lithuanian refinery by slowing oil
supply to it, and buying it at a reduced price. The Transneft pipeline monopoly cut
off all oil shipments to the Latvian port of Ventspils (diverting the flow to the
7 Energy Information Administration (EIA). Russia Country Analysis Brief, February 2005,
Table 1, several sources cited: EIA, BP, CIS and East European Energy Databook, 2004.
8 “Kazakhstan, China Consider Gas Pipeline Construction,” FSU Oil & Gas Monitor,
December 7, 2005.
9 Nearly all the material in this section is from: CRS Issue Brief IB92089, Russia, by Stuart
D. Goldman; CRS Report RL32087, Russian Oil and Gas Companies and Central and
Eastern Europe,
by Steven Woehrel; and CRS Report RL32466, Rising Energy Competition
and Energy Security in Northeast Asia: Issues for U.S. Policy,
by Emma Chanlett-Avery.
10 It subsequently was revealed that Baikal Finans was a group of Kremlin insiders headed
by Igor Sechin, Deputy Head of the Presidential Administration and close associate of
President Putin. Sechin has been Chairman of Rosneft’s board of directors since July 2004.
The de-facto nationalization of Yuganskneftegaz was declared “the fraud of the year” by
Andrei Illarionov, President Putin’s chief economic advisor. [http://www.mosnews.com/
money/2004//12/28//illarionov.shtml].

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Russian port of Primorsk). Many see Transneft’s move as a tactic to obtain a
controlling share of the firm that operates the Ventspils terminal.11
Another example of Russian steps to have maximum control over energy
supplies is routing of new and planned export pipelines. For example, it has agreed
with Germany, with the support of the United Kingdom (UK), to supply Germany
and, eventually, the UK directly by building a natural gas pipeline under the Baltic
Sea, thus bypassing Poland.
Some have argued that Gazprom may have overreached in its aggressiveness,
however. A large share of Russia’s gas exports to Western Europe pass through
Ukraine, which withdraws a certain amount of gas for its own use at a fraction of the
world market price as payment for its transmission of the gas. Gazprom wants to
raise Ukraine’s price to the market level. Negotiations on the issue failed, and
Gazprom reduced gas pressure and flow through the Ukrainian network on January
1, 2006. Russia alleges that Ukraine took gas from the flow; Ukraine denies it and
says that it obtained gas from other sources. In any event, little gas reached Western
Europe. Gazprom restored supply shortly after, when those countries complained
and pointed out that Russia was risking its reputation as a reliable energy supplier.12
Central Asian countries have extensive energy ties to Russia stemming from the
numerous transportation routes that go through Russia. Russia initially opposed
western investment in Caspian Sea energy projects, insisted that oil from the region
be transported through Russian territory to Black Sea ports, and argued for equal
sharing of Caspian Sea oil and gas. But it has become more agreeable, and even
cooperative with, western projects; and it has signed an agreement with Azerbaijan
and Kazakhstan on Caspian seabed borders essentially based upon shore mileage.
In East Asia, China, Japan, and South Korea, are trying to gain access to the
largely undeveloped energy resources of eastern Siberia, as those countries strive to
meet their increasing energy needs while reducing dependence on the Middle East.
China and Japan appear to be engaged in a bidding war over Russian projects and are
contesting access to Russian rival oil pipeline routes.
11 Ariel Cohen, “Don’t Punish Latvia,” Washington Times, May 5, 2003.
12 “Russia turns up the gas,”Guardian Weekly, December 23, 2005-January 5, 2006, p.41;
Peter Finn. “Russia Reverses Itself on Gas Cuts,” The Washington Post, January 3, 2006,
p. A12; Andrew E. Kramer. “Russia Restores Most of Gas Cut to Ukraine Line,” The New
York Times,
January 3, 2006. [http://www.nytimes.com/2006/01/03/international/europe/03
ukraine.html?pagewanted=print] viewed January 3, 2006.


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Major Proposed New or Expanded Pipelines13
There are a number of proposals to build new or to expand existing Russian oil
and natural gas export pipelines and related facilities. Some proposals are contentious
and, while the Russian government perceives a need to expand its oil and gas export
capacity, it has limited resources. Several selected proposals are discussed below.
With a 1.2-1.4 million bbl/d capacity, the 2,500-mile Druzhba line is the largest
of Russia’s oil pipelines to Europe. It begins in southern Russia, near Kazakhstan,
where it collects oil from the Urals and the Caspian Sea. In Belarus, it forks at
Mozyr. After Mozyr, one branch runs through Belarus, Poland, and Germany; and
the other through Belarus, Ukraine, Slovakia, the Czech Republic, and Hungary
(Figure 2). Work has begun to increase capacity between Belarus and Poland. An
extension to Wilhelmshaven (Germany) would reduce Baltic Sea tanker traffic and
allow Russia to export oil to the United States via Germany.
The Baltic Pipeline System (BPS) carries crude oil from Russia’s West Siberian
and Tyumen-Pechora oil provinces westward to the newly completed port of
Primorsk on the Russian Gulf of Finland (Figure 3). Throughput capacity at
Primorsk has been raised to around one million bbl/d, and, pending government
approval, will be expanded to 1.2 million bbl/d. The BPS gives Russia a direct outlet
to northern European markets, reducing dependence on routes through the Baltic
countries. The re-routing of Russian crude through the BPS has incurred
considerable cost to those countries. Russian authorities have stated that precedence
will be given to sea ports in which Russia has a stake over foreign ones.
Figure 2. Druzhba and Adria Oil Pipelines
Source: Energy Information Administration. Russia Country Analysis Brief.
13 Much of the discussion of Russian oil and gas pipelines is taken from the Russia Country
Analysis Brief
of February 2005, prepared by the Energy Information Administration.


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Figure 3. Selected Northwestern Oil Pipelines
Source: Energy Information Administration. Russia Country Analysis Brief.
Proposed lines would carry oil from Russia’s West Siberian and Tyumen-
Pechora basins west and north to a deepwater terminal at Murmansk or Indiga on the
Barents Sea (Figure 3). This would enable 1.6-2.4 million bbl/d of Russian oil to
reach the United States via tankers in only nine days, much quicker than from the
Middle East or Africa. Liquefied natural gas facilities at Murmansk and Arkhangelsk
also have been suggested, possibly allowing for gas exports to American markets.
The Indiga route would be closer to the Tyumen-Pechora oil fields and shorter; also
Transneft’s CEO has said that the Murmansk project is not economically feasible.
However, in contrast with Murmansk, the port of Indiga ices over during the winter,
a disadvantage that may be reduced or eliminated if Arctic ice melting continues.
The Adria oil pipeline runs between Croatia’s port of Omisalj on the Adriatic
Sea and Hungary (Figure 2). Originally designed to load Middle Eastern oil at
Omisalj and pipe it northward to Yugoslavia and then to Hungary, the pipeline’s
operators and transit states have been considering reversing the flow — a relatively
simple step — giving Russia a new export outlet on the Adriatic Sea. Connecting the
pipeline to Russia’s Southern Druzhba system requires the agreement of Russia,
Belarus, Ukraine, Slovakia, Hungary, and Croatia. These countries signed a
preliminary agreement on the project in December 2002; however, negotiations over
the details (including tariffs and environmental issues) have been slow. Some
analysts expect that the Adria pipeline could transport about 100,000 bbl/d of
Russian crude oil in the first year of reversal, with an ultimate capacity of about
300,000 bbl/d.
The prospective large Chinese market for oil has led to serious consideration of
building a pipeline from the Russian city of Taishet (northwest of Angarsk) to
Nakhodka (near the Sea of Japan) or to Daqing, China (Figure 4). Both routes pass
close to Lake Baikal — a site with environment-related obstacles. The Nakhodka


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route would provide a new Pacific port from which Russian oil could be shipped by
tanker to Japan and other Asian markets and possibly to North America. Japan has
offered $5 billion to finance construction and $2 billion for oil field development.14
The Daqing option is favored by China, although China could obtain exports via the
Nakhodka route. China has pledged to invest US$12 billion in Russia’s infrastructure
and energy sector by 2020.15 From Russia’s point of view, the Nakhoda route would
offer access to multiple markets, whereas a terminus at Daqing would give China
control. The situation is fluid, however; no decision has been made at this writing.
Figure 4. Proposed Far East Oil Pipelines
Source: Energy Information Administration Russia Country Analysis Brief.
The 750-mile Blue Stream natural gas pipeline, 246 miles of which is
underneath the Black Sea, connects the Russian system to Turkey. In February 2003,
natural gas began flowing through the pipeline, which has a design capacity of 565
billion cubic feet annually. In March 2003, Turkey halted deliveries through Blue
Stream, invoking a clause in the contract allowing either party to stop deliveries for
six months. Turkish leaders reportedly were unhappy with the price structure.16
Other factors also may have come into play, including the fact that Turkey had over
committed itself to gas supplies compared with its domestic consumption and
agreements to transship gas to other countries. The two sides came to an agreement
in November 2003 and the natural gas flow to Turkey resumed in December 2003.
14 Mark Katz. “Don’t dismiss China’s Daqing oil pipeline,” Asia Times Online, Oct. 1, 2004.
15 Sergei Blagov, “China’s Russian pipe dream,” Asia Times OnLine, Sept. 28, 2004.
16 Mevlut Katik. “Blue Stream’s Pipeline’s Future in Doubt Amid Russian Turkish Pricing
Di sput e,” Busi n e s s & E c o n o mi c s , J u n e 2, 2003. Eurasianet.org
[http://www.eurasianet.org/departments/business/articles/eav060203a_pr.shtml] viewed
December 18, 2005.


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The Yamal-Europe I pipeline (Figure 5,unidentified northern route in Russia),
which carries one trillion cubic feet (tcf) of natural gas from Russia to Poland and
Germany via Belarus, would be expanded under one proposal by another tcf per year.
However, Poland and Gazprom disagree on the route of the branch that goes through
Poland. Poland wants a route entirely through its own country and then to Germany
(Yamal-Europe on the map), while Gazprom is seeking a route via southeastern
Poland and Slovakia (Yamal II).
Figure 5. Natural Gas Pipelines to Europe
Source: Energy Information Administration, Russia Country Analysis Brief.
A North Trans-Gas pipeline (or North European Gas Pipeline), extending over
2,000 miles from Russia through the Gulf of Finland to Denmark and, ultimately,
to the United Kingdom, via the Baltic and North Seas was proposed in June 2003 by
Russia and the United Kingdom.17 Gazprom and Germany’s BASF and E.ON agreed
on September 8, 2005, to set up a joint venture to build the pipeline. About 700
miles of the pipeline is to pass under the Baltic Sea. The first leg of the pipeline is
scheduled to come on stream in 2010.18 Russia sees a gain by no longer having to
17 Mark A. Smith. The Russian, German, and Polish Triangle, Russian Series 05/61,
Conflict Studies Research Centre, October 2005, p. 2.
18 Ria Novosti. “Factbox: North European Gas Pipeline,” December 9, 2005. [http:en.rian.ru/
(continued...)

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negotiate transit fees with intermediary countries or pay them in natural gas. The
pipeline agreement is criticized by some Europeans who object to the fact that it was
reached without consultation with them, and see the pipeline as an unfair bypass with
political motivation and environmental risk.
Rusia Petroleum — a consortium of TNK-BP, South Korea’s state-owned Korea
Gas Corporation, and the Chinese National Petroleum Company — has announced
plans to construct a pipeline connecting Russia’s Kovykta natural gas field (2 trillion
cubic meters of gas reserves) to China’s northeastern provinces and across the
Yellow Sea to South Korea.19 The plan calls for a pipeline that ultimately would have
a capacity of 40 billion cubic meters per year, delivering roughly half of its natural
gas to China and the rest to South Korea and the domestic market en route.20
Implications for the United States21
Given that the United States as well as Russia is a major energy producer and
user, Russian energy trends and policies affect U.S. energy markets and U.S.
economic welfare in general in a broad sense.
Other things being equal, a considerable increase in Russia’s energy production
and its ability to export that energy both westward and eastward may tend to ease the
supply situation in energy markets in both the Atlantic and Pacific Basins. In the
Atlantic arena, more Russian oil could be available to the United States. In the
Pacific area, there would tend to be more supply available to countries trying to
assure themselves energy supplies, such as China and Japan. This may ease the
global competition for Persian Gulf oil.
On the other hand, the Russian government’s moves to take control of the
country’s energy supplies noted earlier may have the effect of making less oil
available on the world market.
Possibly as important as Russian oil and gas industry developments is the
associated potential for U.S. suppliers of oil and gas field equipment and services to
increase their sales in Russia. Although U.S.-Russian economic relations have
expanded since the collapse of the Soviet Union, as successive Russian leaders have
18 (...continued)
russia/20051209/42408722.html] viewed December 28, 2005. BASF is mainly a chemical
manufacturer, but has a subsidiary that explores for and produces oil and natural gas. E.ON
is an electric power generator and distributor and a distributor of natural gas.
19 TNK-BP. “Kovykta Project,” [http://www.tnk-bp.com/operations/exploration-production/
projects/kovykta]. Viewed December 28, 2005.
20 Selig S. Harrison. “Gas and Geopolitics in Northeast Asia,” World Policy Journal, Winter
2002/03, pp. 22-36.
21 For more discussion and analysis of U.S.-Russian economic relations, see CRS Report
RS21123, Permanent Normal Trade Relations (PNTR) Status for Russia and U.S.-Russian
Economic Ties,
by William H. Cooper.

CRS-12
been dismantling the central economic planning system, including the liberalization
of foreign trade and investment, the flow of trade and investment remains very low.
However, U.S. suppliers of oil and gas field equipment have established a modest
beachhead in Russia. U.S. exports of oil field machinery and equipment accounted
for 9% of U.S. all goods exports to Russia in the first 10 months of 2005, one of the
largest export categories. As noted earlier, potential growth of both oil and natural
gas production in Russia is limited by the lack of full introduction of the most
modern western oil and gas exploration, development, and production technology.
Similar to U.S. trade with Russia, U.S. investments there, especially direct
investments, have increased since the dissolution of the Soviet Union, but the levels
are far below their expected potential. Even so, as of the end of 2003, the United
States was Russia’s second largest source of foreign direct investment, largely
concentrated in energy, communications, engineering, and transportation.22
In this context, however, Russian economic policies and regulations have been
a source of concerns. The United States and the U.S. business community have
asserted that structural problems and inefficient government regulations and policies
have been a major cause of the low levels of trade and investment with the United
States. While they consider the climate to be improving, potential investors complain
that the climate for investment in Russia remains inhospitable. They point to lack of
effective intellectual property rights protection, burdensome tax laws, jurisdictional
conflicts among Russian federal, regional and local governments, inefficient and
corrupt government bureaucracy, and the lack of a market-friendly commercial code
as impediments to trade and foreign investments. And, more specifically, the forced
breakup of Yukos has clouded prospects for private investment.
In addition, Russian energy trends and policies have possible implications for
U.S. energy security. In its oversight role, Congress may have an interest in Russia’s
large role as a supplier to world energy markets in general, in Russia’s role as a
possible major exporter of energy to the United States, and in the changed patterns
of world energy flows that could result from the completion of new Russian oil and
natural gas export pipelines and related facilities or the expansion of existing export
pipelines and related facilities.
22 CRS Report RS21123, Permanent Normal Trade Relations (PNTR) Status for Russia and
U.S.-Russian Economic Ties,
by William H. Cooper.