Russia Must Rethink its Energy Strategy

By Lada Ponomareva, April 22, 2013

WEB EXCLUSIVE, Moscow. When the Russian government first formulated its Energy Strategy to 2020 10 years ago, the Ministry of Energy predicted that the oil industry would be able to produce 350 million tons (2.5 billion barrels) of oil per year by the end of 2020. Today, the industry produces 518 million tons (3.8 billion barrels) of oil per year, according to data published at the end of 2012, far outpacing the ministry’s original forecast. Yet, the ministry relied on serious data available only at the time of the strategy’s publication and not many people foresaw such a period of high oil production growth in Russia.

Vladimir Milov, General Director of the Institute of Energy Policy and leader of the Democratic Choice political party, explained the process of forecasting production rates at the “Russian Fuel and Energy Complex in the XXI Century” conference in Moscow on April 11. “We had a very long period of decline in the late 1980's and early 1990's, after which we entered into a phase of economic stagnation. Our theorists and scientists predicted then that [in light of poor economic conditions] Russia could, perhaps, produce up to 350 million tons of oil in 2020,” Milov said. “Yet, we sat in a meeting with the Minister [of Energy] in December 2001 and were given fresh information saying that even by 2001 production levels would reach 345 million tons (2.53 billion barrels) per year. In fact, recalling the real numbers, it was 348 million tons.” Milov explained that such a rapid increase in production occurred because oil companies intensified their efforts to produce and develop new fields, just as scientists and economists were predicting future production rates and long-term development plans for the sector in Russia’s energy strategy. As a result, according to Milov, researchers “slept through” what was really happening in the oil sector.

Today, the global energy market faces a similar, unpredictable situation. Seven or eight years ago, approximately 12 countries accounted for 6 percent of the world’s GDP and controlled nearly two-thirds of the world’s hydrocarbon reserves, including countries near the Persian Gulf, Russia, Venezuela, and others. A smaller group of countries accounted for 90 percent of the world’s GDP then, but held only 10 percent of global oil and gas reserves. These were the largest economies in the world, including the United States, European Union, India, China, and Japan. Many analysts were certain that the gap between these two groups would only widen over time, largely due to declining oil production and depleting reserves in the larger economies. This scenario would have led to complete global dependence on just a few large energy suppliers and high competition between consumer countries.

Yet, today the outlook has changed dramatically. "[The global energy landscape] will never return to the days when just a few oil and gas majors dominated the market,” according to Vladimir Milov. “Today, if we talk about the outlook for, say, Russia and other oil-producing countries, then they should be thinking on a